What Are IRS Audit Penalties?

As a taxpayer, you must file taxes each year, and your tax return results in paying additional taxes or requesting a refund. For most people, that’s the extent of tax season. But for some taxpayers, there’s an extra step—an audit. 

If the IRS requests an audit of your taxes, you must provide additional information and prove that your tax return is correct. If you don’t, you can face IRS audit penalties, which add up quickly. 

Here’s everything you need to know about IRS audits, including how to prepare for one and how the penalties work.

What triggers an IRS audit? 

The IRS decides which tax returns to audit based on inconsistencies in tax returns and random selection. Here’s how it works. 

• Tax return inconsistencies: The IRS uses an automated system to compare tax returns against standardized norms. You might be selected for an audit if your tax return does not show what it should. 
• Random selection: The IRS randomly selects tax returns for audits each year. 

You can’t control if the IRS randomly selects your tax return. But you can ensure the IRS does not flag your return for inconsistencies. For example, you can save tax documents each year to ensure accuracy, work with a qualified tax professional for complex issues, and use free tax software from the IRS to avoid mistakes.  

The IRS receives more than 213 million total tax returns from individuals and corporations each year. From those tax returns, around 30 million are recommended for audits, but only a handful of taxpayers actually receive one. The percentage of individual taxpayers who receive an audit is even smaller at 0.25%. 

The IRS also runs the Automated Underreporter Program and the Automated Substitute for Returns. These programs result in nearly 12 million additional correspondences from the IRS, which can lead to other penalties if taxpayers do not respond. The IRS tries to resolve the tax issues first, though. Here’s how it works:

• Automated Underreporter Program: The IRS uses this program to automatically match individual tax returns to documentation from employers and other sources to confirm accuracy. If it shows that you owe more than you claimed, the IRS sends you a notice with the next steps. 
• Automated Substitute for Returns: If you don’t submit a tax return, 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. 

Does an audit mean I’ve done something wrong?

Even though receiving an audit from the IRS can be stressful, it doesn’t necessarily indicate that you’ve done something wrong. 

The IRS randomly selects taxpayers to audit each year, which does not mean your tax return is inaccurate. The audit can conclude without changes if you provide additional information and substantiate the return. 

Types of IRS audits

Even though there is only one type of IRS audit, the interview portion can happen via mail or in person. The IRS begins the process by sending a letter in the mail, which explains how to proceed. Depending on the instructions and your needs, the audit can occur in one of three ways.

• Correspondence audit: If you can supply the necessary documentation via mail, you can conduct the entire process through correspondence. It is usually the quickest and most effective way to complete an audit. But it might not always be possible to do so. 
• Office audit: If the IRS needs to interview you in person, you might need to report to an IRS office. The information about where to go is in your initial letter. 
• Field audit: There are times when the IRS conducts field interviews. In those cases, the interview takes place at your home, place of business, or tax preparer’s office. 

What does an IRS audit look like?

An IRS audit always begins with a letter in the mail. You will never receive a telephone or any other form of communication. 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 often mail the documents. But you can request an in-person meeting if there are too many to send. If you must meet in person for an interview, your letter will provide the necessary information.
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. 
4. Taxpayer response: You can agree or disagree once you review the findings. Depending on your response, you might set up a payment plan, file an appeal, or request penalty relief. 

What to do if you receive an audit notice

You can seek assistance if you receive an audit and need help responding.

• If you work with a tax preparer: Contact your tax professional and seek advice about how to proceed. Most CPAs and enrolled agents can help with audits, and the fee you paid when you filed might include audit assistance.  
• If you need help: If you need help or don’t understand the notice, you can contact the Taxpayer Advocate Service for advice. 
• If you’re not sure how to respond: If you’re not sure what to do, start by calling the phone number at the top right of your tax notice. A representative from the IRS can explain the next steps.

Ask the expert

Erin Kinkade

CFP®

To decide if you need an expert to help handle IRS audit penalties, consider if you have time to address the audit promptly, and if 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, then 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

You must pay accuracy-related penalties if you claim deductions or credits you are not qualified to claim. If you under-report your income and owe 10% or $5,000 more than the amount your tax return shows, you can also face this penalty. 

But here’s the thing—the tax code is confusing. Because of that, the IRS differentiates between an honest mistake and negligence or disregard. If you intentionally disregard tax laws or do not attempt to follow the rules when you file, you must pay the penalty. 

The penalty charge is 20% of the amount underpaid due to negligence or disregard. For example:

• Imagine your tax return shows that you owe $1,000, and you pay that amount. 
• However, an audit reveals that you owe a total of $5,000. 
• You would pay a 20% penalty on the $4,000 you did not pay. 

The IRS also charges interest on the amount you owe, which adds up.

Erroneous claim for refund or credit penalty

If you claim that the IRS owes you a refund or credit for an excessive amount, the IRS charges an erroneous claim penalty. Before doing so, the IRS evaluates if the claim is an accident or honest mistake. If there’s a reasonable cause for the incorrect claim, the penalty might not apply. 

But if there isn’t, the IRS charges a 20% penalty on your claim amount. For example, imagine you claim the IRS owes you $10,000, and it’s not true. You would pay a 20% penalty on the $10,000 you claimed, which is $2,000. The IRS also charges interest on the amount you owe. 

Late filing and payment penalties

​​If you owe money and do not file your taxes on time, you have to pay the failure-to-file penalty, which is 5% of the amount you owe, up to 25%. Depending on how late you file the return, the penalty can increase. 

For example, if your return is more than 60 days late, the minimum penalty is $435 or 100% of the tax amount required on your return. It depends on the circumstances, but the IRS does not need to conduct an audit to charge this penalty. The penalty—plus interest—is applied if you do not file by the due date. 

Similarly, if the IRS conducts an audit and determines that you owe money, you must pay in full by the due date or establish a payment plan. If you don’t, you could face the failure-to-pay penalty, which is 0.5% of the unpaid taxes, up to 25%. You can avoid this penalty by paying on time. 

Tax evasion or fraud

Tax evasion and fraud are crimes. Even though it’s rare, the IRS sometimes concludes that there was an attempt to evade or defeat taxes. There are two types of evasion—a willful attempt to avoid the assessment of taxes and a deliberate attempt to evade the payment of taxes. 

If the IRS charges you with evasion or fraud, you must pay applicable penalties and interest charges. You can also face felony charges. If convicted, you might be required to pay up to $100,000 in fines and serve up to five years in jail. 

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 are expensive. Even though you can’t avoid randomized audits, there are ways you can make the audit process more manageable and avoid penalties. Here’s how: 

• Double-check your tax documents. Before you submit your tax return, check your income information and other aspects of the form. You can also ask a trusted family member or friend to check for you. 
• Use verified tax software. If your gross income is less than $73,000 per year, you can use free guided tax preparation software from the IRS. Regardless of income, you can utilize commercial tax software to ensure accuracy. 
• Consult a tax professional. Working with a qualified tax professional, like a CPA or enrolled agent, is one of the best ways to ensure accuracy.

If you receive an audit from the IRS, make sure to respond right away. Remember, an audit does not indicate that you’ve done something wrong. It simply means that the IRS wants to confirm your tax information. Here are steps to take as you respond to an audit: 

• Gather the proper documentation. Once you receive an audit, finding the correct documentation to submit to the IRS is essential. You typically need verification for all types of income. 
• Openly communicate with the IRS. Contact the IRS to find a solution if you encounter issues throughout the audit process. 
• Follow the directions. The IRS tries to make the audit process as straightforward as possible. The directions on your form can guide you. 

How to contest IRS audit penalties

If you receive charges for an IRS audit penalty and disagree, you can contest them. Contesting a penalty means that you want to remove the charges. Even though there are options to do so, you must have a valid reason and complete the necessary steps. 

Abatement for first-time penalties

You can apply for abatement or forgiveness if it’s your first time owing a penalty. Only three types of penalties are eligible: failure to pay, failure to deposit, and failure to file. 

To qualify, you must have a history of filing taxes for the past three years and not have any previous penalties during that time. You can apply for an abatement by calling the phone number in the top right corner of your tax notice. Or you can submit the request in the mail. 

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. You can only utilize reasonable cause for accuracy-related 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.

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 a form or written request instead.

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 a form or written statement to the IRS. 

Seek additional help

IRS audit penalties and interest charges can add up quickly. 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 okay to need additional help. Tax relief companies or tax professionals, like enrolled agents and CPAs, can guide you through the necessary steps. 

Ask the expert

Erin Kinkade

CFP®

To hire professional help when you face IRS audit penalties, review companies’ reviews and accreditation on the Better Business Bureau. Focus on business near where you live. Talk with trusted family members and friends to receive 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 not likely to receive an audit from the IRS. Only 0.25% of individual taxpayers receive an audit each year. But you might have a slightly higher chance if you’re a very 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 usually lasts a few months. It can take longer if there are delays, 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?

The IRS usually audits tax returns from the last three years. But if there are significant discrepancies or errors, the IRS can go back further. However, the IRS does not usually go further back than the last six years.

What are the red flags that trigger audits?

The IRS uses an automated system to compare your tax return against the standardized “norms” for similar returns. If there are substantial differences, the IRS flags your return for further review. The IRS also randomly selects some tax returns for review.

What happens if I ignore the audit?

If you ignore an audit, the IRS charges penalties and interest. Eventually, the IRS will file a lien and levy your assets to collect payment. Levies are stressful and can add financial strain, so responding to an audit as instructed is essential.

Can I appeal an IRS audit decision?

If you disagree with an IRS audit decision, you have options. You can request a meeting with an IRS manager, request mediation, or file an appeal. Contact the Taxpayer Advocate Service for free help if you can’t find a solution.