What kind of penalties can an audit result in?

How likely am I to go through an audit without owing any money to the IRS?

The IRS doesn’t audit someone if they don’t think there’s money to be made. Other than to ensure that taxpayers are abiding to the U.S. tax code, the main purpose of an audit is to provide funds to the IRS through penalties and interest. That being said, your chances of getting away scot-free or even receiving a refund are slim. Less than 25% of taxpayers audited by the IRS end up owing nothing to the IRS. There are a variety of reasons why you can be audited, but whatever reason it may be you will likely have to fork over a large sum of cash to the IRS.

It’s important to file your taxes accurately on and time. The penalties the IRS can place on you plus interest rates pile up quickly and can lead to you owing substantial amounts of money.

There are a variety of penalties you can face depending on the nature and severity of the error on the tax return.

Accuracy Related Penalties

If your tax return is inaccurate, the IRS can impose a penalty of 20% on the total tax understatement. If your taxes are severely understated, this penalty can double to a massive 40%. The following are the types of inaccuracies that can result in penalties.

  • Negligence or Disregard of Regulations: You can face penalty if you do not conform to the Internal Revenue Code, such as not submitting a tax return or not keeping records.
  • Substantially Understating Your Taxes: If you under-reported your income by more than 10% or $5,000, whichever is greater, you will face penalties.
  • Substantially Misstating the Value of Property: Penalties are placed on you if you substantially overvalue property donated or you substantially undervalue property that is depreciating.
  • Substantially Overstating Pension Liabilities: You will face penalty if you overstate pension liabilities by 200% or more.
  • Substantially Understating a Gift or Estate:  You will be fined if you undervalue property claimed on an estate or gift tax return by 65% or less resulting in an understatement of tax of $5,000 or more.
  • Understatements Related to Reportable Transactions: If you understate tax liabilities due to a reportable or listed transaction you can be fined.

Failure to Pay Penalty

If you file your tax return on time but you do not pay all the taxes due, you will have to pay a penalty for late payment. This penalty is 0.5% for each month that increases each month up to a maximum of 25%. This penalty covers all unpaid tax from the date the return was due until the penalty is fully paid.

Failure to File Penalty

If you do not file your tax return on time, the IRS places a penalty of 5% of the tax owed for each month that your return is late, up until a maximum of 25%. If you file your tax return over 60 days late, there is an additional penalty of $205 or 100% of the tax owed, whichever is less. This can be avoided if you can prove that you had reasonable cause for filing late.

Civil Fraud Penalty

If during the audit the IRS determines that any part of the underpayment is fraudulent, the entire underpayment will be treated as fraudulent and a 75% penalty will be imposed. It is the burden of the taxpayer to prove the return is not fraudulent.

Fraudulently Failing To File a Federal Tax Return

If the IRS determines that you intentionally filed your tax return late in order to evade taxes, you will be subject to a penalty of 75%.

Criminal Penalties

If the IRS finds that you intentionally commit tax evasion, tax fraud, fail to pay your taxes in general, and/or not keep records for your business, you can be charged criminally. Depending on the severity of the crime, punishments range from misdemeanors to felonies. You can face fines up to $100,000 and up to 5 years in prison for tax fraud according to the Internal Revenue Code. If you are being investigated by the IRS, it is absolutely crucial that you contact an attorney immediately.  Here at the Law Offices of Jef Henninger, Esq., we combine professional experience with unwavering determination to produce the best possible outcome for our clients.

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