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IRS Tax Audit Penalties

August 01 2023 •
Tax Audits

Receiving an audit letter from the IRS notifying you of a tax investigation can be a daunting experience. And unless you’re a tax expert, you will more than likely be left with a lot of questions. If the IRS selects you for an audit, the chances of getting through the process without owing additional taxes and other IRS audit penalties are slim. The IRS scarcely spends its resources on an audit that won’t produce results and revenue.

Fortunately, there are some ways to abate and avoid some of these tax audit penalties with help from the right professionals. In this post, we’ll answer and discuss the following questions and topics:

What are IRS Audit Penalties?

IRS audit penalties are fees and/or criminal consequences the IRS imposes on taxpayers who have made mistakes when filing their taxes, or didn’t file at all.

What are the Different Types of Tax Audit Penalties?

Depending on what triggered your audit—late filing, not paying your taxes on-time, negligence, etc.—there are several IRS penalties you may face. Let’s break down these IRS tax audit penalties by filing error.

Filing your taxes late

If you fail to file your taxes before the April 15th deadline and the IRS runs an audit, you face one of these IRS audit penalties:

  • For each month you do not file, you’ll be charged a fee equal to 5% of the taxes owed, up to 25%, plus:
  • If you file your tax return more than 60 days past the due date, the IRS says you’ll be required to pay either $210 or 100% of the unpaid tax, whichever is of lesser value.

Note: There is no penalty for filing late if the IRS owes you a tax refund, but you won’t get your refund until you file your taxes. You have three years from the original deadline to file your taxes and receive your refund.

Community Tax Tip: To avoid a failure-to-file penalty, file a tax extension with the help of our tax professionals.

Paying your taxes late

If you do manage to file your taxes on-time, but don’t pay your tax bill by the federal deadline, you will be charged a monthly late fee of 0.5% of taxes owed, up to 25% of your tax bill.

Filing and paying your taxes late

Contrary to popular belief, the IRS does show some mercy when the calendar’s caught up to you. If you don’t file or pay your taxes on-time, you’ll only be liable for the tax audit penalty for late filing, and the 0.5% penalty for late payment will be waived.

Underreporting your income

What happens if you get audited and find a mistake? It depends on the severity of your case. If you substantially underreported your income, the IRS could consider this negligence which may result in a tax audit penalty fee of 20-40% of the taxes owed.

Whether your miscalculation is serious or a simple mathematical error, the team at Community Tax can help! Contact us today to learn more about how we can help with IRS tax audits.

Underpaying estimated tax

Certain taxpayers such as independent contractors and small business owners are required to pay estimated taxes throughout the year, rather than just on the April 15th deadline. If you pay less than the amount due, you may be subject to the IRS’ audit penalty for underpaying estimated taxes: 6% of taxes due in addition to your tax bill.

Submitting tax forms late

As an employer, you have certain tax liabilities you need to meet in order to keep your business up and running in accordance with federal tax standards. One of these responsibilities is issuing the proper tax paperwork to your employees (W-2 forms and 1099s for contractors).

If you do not issue these forms by the January 31st deadline, you may face a tax audit penalty of:

  • $50 per W-2 if you file within 30 days of the due date, $100 per W-2 thereafter
    • Maximum fine is $536,000 per year, $187,500 per year for small businesses
  • $50 per 1099 if filed within 30 days of the due date, $100 per 1099 thereafter
    • Maximum fine is $536,000 per year for large businesses, $187,500 per year for small businesses

Miscalculating employee taxes

Another tax responsibility you have as an employer is filing and remitting payroll taxes on behalf of your staff. If you miscalculate taxes owed for your employee taxes, the IRS can impose a 100% penalty on employee taxes left unpaid.

The most common scenarios that contribute to miscalculated employee taxes are when an employer doesn’t report wages through their payroll provider, or when tips are not reported.

Can you go to jail for IRS audit?

Depending on the error(s) found during an audit, offenders could face criminal penalties in addition to penalty fees. Criminal offenses include tax evasion and fraud.

If you are convicted of filing a fraudulent return you could face up to 3 years in prison and up to 100000 dollars in fines

Interest on IRS Audit Penalties

Failing to pay your IRS audit penalties on top of your past due taxes could lead to a myriad of serious problems, one of which is interest. Like every other past due balance with the IRS, audit penalties will accrue from the day the return was due (including extensions) interest if left unpaid. Interest won’t accrue if the penalty is paid off in 21 days or less from the requested date of the payment if the penalty is less than $100,000 (10 days otherwise).

Keep in mind, your previous debt will continue to accrue interest in addition to your unpaid penalties—your penalty interest will not replace your debt interest. There is an IRS statute of limitations when it comes to collecting what you are owed, and if you can successfully wait out the required time, you may be able to avoid paying altogether. You should present all of the information from the IRS to a tax professional before attempting to wait out the IRS statute of limitations.

Audit Reconsideration

In the event that the federal government finds that you owe them additional taxes and IRS audit penalties as a result of your audit, you may qualify for an audit reconsideration. A reconsideration must be submitted before you pay the IRS for any tax debt, penalties or interest that you intend to dispute. If you fail to do so and you still wish to recover some of your money, you may file for a tax refund.

Documentation required for audit reconsideration

You should submit the following documents to the same office that your audit was held in:

  • Form 12661, Disputed Issue Verification is recommended
  • Audit documents supplied by the IRS
  • A statement describing the reasons why you are requesting a reconsideration
  • Form 1099, any new documentation that supports your reasoning such as canceled checks and bank statements
  • Copies of correspondence with the IRS and previously supplied materials

According to the IRS’ publication on Audit Reconsideration, you can expect a response within 30 days after your request has been submitted.

Final Notes

Being notified of an IRS audit can be intimidating and alarming situation, especially knowing the various IRS audit penalties that can be exercised if an error is found. If you want to avoid facing these penalties, filing your taxes accurately and on-time is essential!

While we can never predict an IRS audit, our team can certainly help you fulfill your taxpayer duties according to IRS and state tax agency standards. If you’re dealing with an IRS audit and need help navigating the process, give us a call for a free tax consultation today.