What Are IRS Audit Penalties?

Your odds of being selected for an IRS audit are generally low, but never zero. If your return is flagged for closer review, you may be subject to IRS audit penalties if you owe additional taxes. Some penalties can be severe if an audit reveals evidence of tax evasion or fraud.

Even if you think you’ve filed your taxes correctly, an audit should be taken seriously. Knowing what to expect if you receive an IRS audit notice—and what penalties may apply—can help you navigate the process with less stress.

What triggers an IRS audit? 

The IRS selects returns to audit for various reasons. Broadly speaking, there are three scenarios when an audit may occur:

1. There’s an inconsistency with your return that requires further examination.
2. Your return involves issues or transactions with other taxpayers whose returns have been selected for audit.
3. You’re chosen at random, based on how your return compares to a statistical sample of similar returns. 

For perspective, the IRS audited 0.44% of individual returns filed for tax years 2013 through 2021. And in the second and third scenarios, you have virtually no control over whether you’re chosen. 

However, your chances of being selected may increase if your return includes one or more inconsistencies. Examples of things that could trigger an IRS audit include:

• Underreported or unreported income
• Deductions that are unusually high for your income
• Claiming deductions and tax credits for the same expenses
• Claiming deductions or tax credits that you are not eligible for
• Mathematical errors
• Drastic increases or decreases in income year over year
• Reporting significant business losses on Schedule C
• Early withdrawals from retirement plans or 401(k) loans that are treated as taxable distributions
• Reporting transactions involving cryptocurrency

You can also be audited if you don’t submit a tax return and are required to file. The IRS uses a computerized system to gather information about your taxes and create a tax return. The return does not include deductions or tax credits, so it might show that you owe more than you otherwise would. 

The IRS tries to audit returns as soon as they’re filed and can include returns filed within the last three years in an audit. If there’s a substantial error on your return, the IRS can go back six years to take a closer look at your tax records. 

Does an audit mean I’ve done something wrong?

Getting an audit from the IRS can be stressful, but it doesn’t always indicate that you’ve done something wrong. 

The IRS randomly selects taxpayers to audit each year, based on a statistical formula. Your return is compared against “norms,” which are based on audits of a sampling of other returns. The IRS uses data from random audits to update and improve the random selection method. 

If you’re selected for a random audit, and you can substantiate all the information in your return, there should be no IRS audit penalties to worry about. If an error occurred unintentionally you’ll have an opportunity to correct it and pay any additional tax owed. 

How IRS audits work

Once the IRS selects a return for audit, they’ll send the taxpayer a written notice. The IRS will never contact you by phone, email, or text. If you get a call or email from someone claiming to be with the IRS, you’re likely being targeted for a tax scam. 

Here’s how the audit process works: 

1. Documentation request: The audit begins with a request for records. You might need to supply income statements or other tax documents. You can provide photocopies and retain your original documents. 
2. Examination of records: Once the IRS receives your documentation, auditors review the information and determine whether there are any inaccuracies in your tax return. 
3. Final determination: After reviewing the records, the IRS notifies you of the findings. Either your tax return is accurate, or it’s not. 

The audit can occur in one of three ways, depending on the instructions in the notice and your needs.

	How it works	When it’s used
Correspondence audit	You provide the IRS with photocopies of your documentation by mail and complete a questionnaire.	Correspondence or mail audits are most common for returns involving simple errors.
In-person (office) audit	You meet with an IRS auditor at a local office to share copies of your documentation and answer questions about your return.	In-person audits may be requested when you have too many records to submit by mail.
Field audit	You meet with an IRS auditor at your home, place of business, or tax preparer’s office to share documentation and answer questions about your return.	Field audits may involve more complex returns for wealthier taxpayers or businesses and/or situations where the IRS suspects tax fraud or evasion.

What happens after the audit is complete? You’ll receive a notice from the IRS detailing its findings. There are three ways the IRS can resolve an audit:

1. No change. No change means you’ve substantiated the claims in your return, and no additional tax is required.
2. Agreed. The IRS finds a change is necessary to your return and you understand and agree with the findings.
3. Disagreed. The IRS finds a change is necessary to your return and you understand the findings but disagree with them. 

If you owe additional tax and agree with the changes, you can pay the amount in full or set up a payment plan. The IRS offers short and long-term payment plans. Interest and penalties accrue with either plan until the balance owed is paid in full. 

How to prepare for an audit

If you receive an audit notice, it’s important to prepare–not panic. You can do that by organizing the documents you’ll need, understanding what the audit will cover, and familiarizing yourself with your rights. 

In terms of what you’ll need for an audit, the IRS may request copies of:

• Receipts
• Bills
• Canceled checks
• Legal papers, including divorce agreements, property acquisition paperwork, or documents relating to criminal and civil matters
• Loan agreements
• Logs or diaries, such as mileage logs if you deducted business travel expenses
• Tickets
• Medical and dental records
• Documents relating to a theft or loss, such as a copy of an insurance claim
• Employment documents

Next, review the audit process so you know what to expect. If you’re corresponding by mail, be aware of deadlines for sending in documentation and double-check the address to ensure it gets where it needs to go. Confirm the date, time, and place if you’re meeting in person. 

You can seek assistance if you receive an audit and need help responding. If you work with a tax preparer, they can advise you on how to proceed. If you don’t have a tax professional on standby, you can contact the Taxpayer Advocate Service for advice. 

If you’re meeting with an auditor in person, treat them courteously and politely. Answer questions honestly but briefly—don’t volunteer information or ask the auditor questions about tax issues they have no control over. If you’re worried about saying the wrong thing, consider having a CPA or tax attorney speak on your behalf. 

Erin Kinkade

CFP®

To decide whether you need an expert to help handle IRS audit penalties, consider: Do you have time to address the audit promptly, and do you have the knowledge, competence, and confidence to handle it on your own? If the audit is complex or you don’t have the time or knowledge, I recommend hiring an enrolled agent or certified public accountant.

IRS audit penalties and consequences

If the IRS audits your tax return and concludes that you owe more money, you can expect to pay penalties on the amount you owe. The penalties range from 0.5% to 20%, but the amount varies depending on the type of penalty. Here are the most common penalties that result from IRS audits. 

Accuracy-related penalties 

Accuracy-related penalties are assessed if you underpay the taxes shown on your return. The IRS can assess this penalty if the underpayment is due to:

• Negligence or disregard, which can happen if you file your return without following tax laws
• Understatement of income, meaning you don’t report all your income for the year (applies if you understate your tax liability by 10% of the tax required to be shown on your return or $5,000, whichever is greater)

The penalty for both is 20%, and it’s assessed against the amount of underpaid tax owed. 

So if you paid $1,000 in taxes but an audit reveals you owe $5,000, you’d pay a 20% penalty on the remaining $4,000 due. The IRS can also charge interest on the amount owed. 

Erroneous claim for refund or credit penalty

Erroneous claim penalties apply when you submit a claim for a refund or tax credit for an excessive amount, and you have no reasonable cause to do so. The penalty is 20% of the excessive amount claimed. 

The IRS defines an excessive amount as “the amount of the claim for refund or credit that exceeds the amount allowable for any taxable year.” So, if you were to claim a tax credit for $5,000 but were only eligible for $1,000 in credit, you’d owe the penalty on the difference.

Late filing and payment penalties

Failing to file your return by the tax deadline triggers the failure-to-file penalty. This penalty is 5% of the amount you owe, assessed each month or part of a month that your return is late. The penalty is capped at 25% of your unpaid taxes. 

You’ll also owe the failure-to-pay penalty, which is 0.5% of the unpaid tax due. This is assessed each month or part of a month payment is late, maxing out at 25% of unpaid taxes. If you owe both penalties in the same month, the failure to file penalty is reduced by the amount of the failure to pay penalty. 

For example, say that you owe $5,000 in taxes. Instead of filing in April, you wait until September to file and pay the taxes due. Here’s what you’d owe:

• $1,125 late filing penalty
• $125 late payment penalty
• $206.55 in interest

Your $5,000 tax debt has become $6,456.55 because you didn’t file or pay on time. Note that the IRS doesn’t need an audit to charge these penalties.

Filing an extension gives you more time to file your return and avoid the failure-to-file penalty, but it doesn’t give you more time to pay. You would still be subject to the failure-to-pay penalty and interest. 

Assuming you owe the same $5,000 but submit your return and payment by the October extension deadline, here’s what you’d pay in penalties and interest:

• $150 late filing penalty
• $202.28 in interest

Even though it doesn’t eliminate added costs entirely, filing an extension would save you just over $1,100 since you avoid the failure-to-file penalty. 

In addition to filing an extension to minimize penalties, you could try other strategies such as:

• Paying something toward the debt to reduce the amount owed
• Requesting an abatement of penalties
• Entering into a short-term payment plan if you owe a relatively small amount
• Considering a long-term payment plan to manage larger amounts of tax debt

You could also explore penalty relief options, which we’ll break down in more detail further on. 

Tax evasion or fraud

Tax evasion and fraud are serious crimes. Tax evasion occurs when you deliberately attempt to avoid paying the taxes you owe. Tax fraud happens when you misrepresent information on your return in an attempt to reduce your tax liability. 

The penalty for tax fraud and tax evasion is a fine of up to $100,000 and up to five years of jail time. Penalties increase to $500,000 for corporations. You can face additional fines and jail time if a federal tax fraud or evasion case triggers state charges. 

Hiring an expert to help with the audit process should provide value by helping you resolve the audit efficiently while also educating you about the process.

Erin Kinkade

CFP®

How to minimize IRS audit penalties

IRS audits are stressful, and the penalties can be expensive. The best way to minimize penalties if you owe additional tax following an audit is to pay the balance off as soon as possible. 

If that’s not possible, consider a payment plan that allows you to pay what you owe in the shortest amount of time. Remember, penalties continue accruing until the balance is paid in full. 

You can also reduce the possibility of incurring IRS audit penalties by double-checking your tax documents for errors before you file, using verified tax software, or working with a professional tax preparer. If you’re selected for an audit, know your rights. 

You have the right to:

• Be treated professionally and courteously by IRS employees
• Have your tax information kept private and confidential
• Know why the IRS is asking for your information, how it’s used, and what will happen if you don’t provide it
• Be represented, either by yourself or an authorized representative
• Appeal the audit outcome with the IRS and in a court of law

Remember, an audit does not indicate that you’ve done something wrong. It simply means that the IRS wants to confirm your tax information. Responding promptly and with all of the required information can save time and potentially help with minimizing penalties if you owe additional tax. 

How to appeal an audit

You can appeal an IRS audit and the penalties you incur. To appeal an audit, you’ll need to file Form 12203, Request for Appeals Review, and list the proposed changes to your return that you disagree with and why you’re appealing. You’ll submit it to the address shown on the IRS notice explaining your appeal rights. 

The IRS office that made the initial tax assessment will consider your protest and attempt to resolve the dispute with you. If it’s unable to do so, your case is forwarded to Appeals. You have the right to represent yourself at the appeal or have an attorney, CPA, or enrolled agent speak for you. 

Note that:

• Appeals only consider arguments that are based on tax laws. 
• The IRS doesn’t consider appeals that involve religious, moral, political, constitutional, conscientious, or similar objections to the debt owed. 
• A statute of limitations applies to appeals. The IRS can ask you to extend the time frame for an appeal but if you opt not to, Appeals will not accept your case. 

If the IRS upholds the audit findings, you’ll have to make arrangements to pay what’s owed. You could, however, attempt to seek relief for some of the penalties stemming from the audit. 

How to contest IRS audit penalties

If you’d like to contest or appeal audit penalties, you’ll first need to determine what kind of penalty abatement you qualify for. Once you’ve done so, you can submit a request for relief to the proper IRS department. If your request is denied, you can submit an appeal to have the IRS reconsider. 

The IRS accepts requests for penalty relief over the phone. You’ll need to reference the penalty notice you received, the penalty you want relief from, and why you should be approved. 

Penalty relief can take the following forms. 

Abatement for first-time penalties

You can apply for abatement or forgiveness if it’s your first time owing a penalty. This type of abatement applies to failure-to-file and failure-to-pay penalties. To qualify, you must:

• Have filed the same type of return for the previous three years before the penalty was assessed
• Have not received any tax penalties in the previous three years

You can request a first-time abatement even if you haven’t paid the taxes due yet. The failure-to-pay penalty continues to increase until the balance is paid in full. You can apply for an abatement by phone or by sending in a written request using Form 843.

You’ll need to tell the IRS:

• The type of tax the penalty was assessed against
• The type of penalty you’re seeking relief from
• Your reason for the request
• The type of tax return you originally filed

If you don’t qualify, the IRS will consider you for a Reasonable Cause penalty relief. 

Reasonable cause

You might qualify for penalty forgiveness if you acted in good faith when you filed your taxes and have a reasonable cause for a mistake. Relief is available for failure-to-file penalties, failure-to-pay penalties, accuracy-related penalties, and information return penalties. 

To determine eligibility, the IRS considers the following factors: 

• If you tried to report the correct tax information. 
• The level of complexity related to your tax issue. 
• The amount of tax education and experience you have.
• If you attempted to understand your taxes or get professional help. 

If you worked with a tax professional, the IRS considers whether you provided all the necessary information and their level of competence.

Here are some examples of when you might qualify for a reasonable cause penalty relief:

• You were unable to file your taxes on time because you were affected by a natural disaster or a fire that damaged your home.
• A death in the family prevented you from filing or paying taxes in a timely manner. 
• There was an error on your return, but you made a good faith effort to correct it. 
• You requested an extension to have more time to get your return in.

You can request penalty relief due to reasonable cause by calling the toll-free number at the top right of your tax document. You can also submit Form 843 to request relief. 

Statutory exception

You might be eligible for a statutory exception if your tax returns were late or inaccurate due to qualified factors outside your control. The exception waives your penalty charges, but eligibility is limited.

If you meet one of the following requirements, you can apply:

• You received incorrect written information from the IRS.
• You mailed your tax return on time. 
• You were living in a federal disaster area.
• You were in military operations in a combat zone.

Call the phone number at the top right corner of your tax document to request penalty relief. You can also submit Form 843 to the IRS to request relief. 

What happens if I ignore the audit?

If you ignore an audit, it won’t just go away. Here’s what can happen if you fail to respond to an IRS audit notice. 

• The IRS can review your return without any supporting documentation from you and decide what you owe if anything. 
• If you owe taxes and penalties, you’ll get a CP3219N notice of deficiency.
• Once you receive this notice you’ll have 90 days to file a petition with the Tax Court to challenge the amount the IRS says you owe.
• If you don’t appeal, the IRS can start collecting the taxes and penalties owed and you waive all rights to an appeal. 

The IRS has several methods it can use to enforce a tax claim against you if you ignore an audit and owe back taxes.

You could be subject to bank account levies and wage garnishments, both of which could directly impact your ability to pay the bills and cover living expenses. The IRS could also place a tax lien against your property or garnish certain payments you receive from federal agencies. 

A lien can prevent you from selling the attached property until the tax debt is satisfied. If you plan to sell your home but the IRS places a lien on it, that could throw a wrench in your plans. It’s best to respond to an IRS audit notice right away to avoid these kinds of consequences. 

Where to get audit help

IRS audit penalties and interest charges can add up fast. If you’re going through an audit, it’s important to follow the steps outlined by the IRS and communicate if you experience challenges. 

It can be an overwhelming process, and it’s OK to need additional help. Tax relief companies or tax professionals, like enrolled agents and CPAs, can guide you through the necessary steps. 

What our expert suggests before hiring a professional

Erin Kinkade

CFP®

To hire professional help when you face IRS audit penalties, take a look at companies’ reviews and accreditation on the Better Business Bureau. Focus on businesses near where you live. Talk with trusted family members and friends to obtain references. Shop at least three different tax relief experts before making a decision.

FAQ

How likely am I to get audited by the IRS?

As an individual taxpayer, you’re unlikely to be audited by the IRS. Only 0.25% of individual taxpayers are audited each year, but you might have a higher chance if you’re a high earner. Taxpayers earning over $5 million account for the highest number of audits.

How long does an IRS audit typically last?

IRS audits usually occur within one year of submitting your tax return. There’s no concrete or guaranteed timeline, but the process tends to last a few months. It can take longer in cases of delays, issues with availability, or complex tax situations. 

What if I can’t afford to pay the IRS audit penalties?

If you can’t afford the IRS audit penalties, you can establish a payment plan with the IRS. The IRS offers short-term and long-term payment plans, allowing you to extend the timeline and pay in smaller amounts. 

Can I go to jail for IRS audit discrepancies?

You can only go to jail for tax evasion or fraud. If you are found guilty of evasion or fraud, you might be required to pay up to $100,000 in fines and serve up to five years in jail. It is not a crime if you try to file correctly or have reasonable cause for a mistake.

Can the IRS audit past tax returns?

Yes. The IRS usually audits tax returns from the last three years. But if it finds significant discrepancies or errors, it can go back further. The IRS doesn’t often look beyond the last six years.

What is the difference between a tax audit and a tax review?

An IRS review means your return was flagged because an internal scoring method suggests you underreported income. If you’re subject to a tax review, the IRS will send a CP05 notice asking you to verify your income, tax withholding, and tax credits. A tax audit is a more in-depth examination of your return to determine whether additional tax is due.

How can I reduce my chances of being audited?

There’s no way to avoid random selection for an audit but there are some things you can do to avoid being intentionally chosen for one. Reporting all your income, claiming only the deductions and credits you’re eligible for, and reviewing your return for errors before submitting it to the IRS can reduce your odds of being audited. 

What happens if I don’t have the documents requested in an audit?

Without the requested documentation, the IRS can’t substantiate the claims made on your return. You may be subject to additional tax or penalties if you can’t prove that your return is accurate.