What are the Penalties and Consequences related to a Tax Audit?
Sometimes, it happens that people fail to accurately file their tax returns. The reasons for this failure can be varied. Some do it intentionally, in order to deceive the government by underreporting their income, and others do it accidentally, such as a gambler forgetting to include his winnings in annual tax returns. For those cases that may seem suspicious, IRS picks them out and proceeds to carry out a tax audit on them. While a tax audit is being carried out, the chances of receiving penalties from the IRS increase of discrepancies are found in your reports.
The Tax Audit Penalties
If you are chosen for an IRS tax audit, it does not necessarily mean you will be automatically charged with tax audit penalties. IRS choses an individual for an audit intentionally and randomly. They will examine your tax returns to see if there are any existing errors, unpaid balance of taxes or any other related problems. Depending on their findings, you can be subjected to additional tax interests, fraud, civil or criminal penalty. The severity of penalties depends entirely upon the severity of discrepancies found in your tax returns.
Common Reasons for Tax Audit Penalties
Following list covers most common reasons why taxpayers receive IRS tax audit penalties;
I) When individuals ignore the IRS rules and regulations. Either through stubbornness or some sort of misplaced rebellion phase makes them ignore these rules while damning the tax consequences. Some also fail to follow through these rules because of ignorance. Their penalties are relatively tame as compared to those who willfully ignore them.
II) When taxpayers intentionally underreport their income in order to avoid paying larger amounts of taxes. The penalties vary for such individuals. If they underreport their income by a few thousands, the penalties are either tame or nonexistent. But for the upper class, who underreport their income by hundreds of thousands or millions receive much harsher penalties.
III) When the property owners misstate the value of their property. They either overvalue or undervalue the relative property in order to gain maximum benefit in tax paying.
IV) When individuals miss the deadlines. If their reasons are deemed reasonable, such as a mortal injury or death, the IRS gives them a break, but in absence of a reasonable excuse, their penalties are that much harsher.
V) When individuals understate a gift or an estate intentionally. For instance, a young woman receives some antique coins and jewelry from her deceased uncle, and intentionally reports it as just common junk hoping to avoid a closer scrutiny by IRS will receive harsh penalties when the truth is discovered in an audit.
Types of Tax Audit Penalties
When IRS uncovers discrepancies in your reports and decides to impose penalties upon you, these penalties are usually among the following types;
I) Additional Interests. The additional interest addendum is applied to those tax payers who file their tax returns after the respective deadlines have passed. The penalty charged in such a case will be in the shape of additional interests, whose rate depends upon the magnitude of the amount owed and the time lapsed for the underpayment.
II) Civil Penalty. The civil penalty applies to the individuals who make mistakes or errors in a tax return. These mistakes may result in a major discrepancy in the Tax Returns. Depending upon the severity of discrepancy, the individual may end up paying up to 20 percent of the underpayment as part of their civil penalty. However, this penalty is not absolute. It can be avoided if the individual makes an argument presenting a reasonable cause which resulted in said mistake, his or her penalty is reduced or outright nullified, depending upon the circumstances.
III) Civil Fraud Penalty. The civil fraud penalty differs from the ordinary civil penalty, as the ones charged by it are those individuals who underpay their due taxes by getting involved in some sort of fraudulent activity. Being involved in a civil fraud will result in not only being charged severe amounts leading up to 75 percent of the underpayment, but it may also result in the fraudster to be charged with a criminal case in the state or federal court, depending upon the fraud’s nature.
IV) Criminal Penalties. Those individuals who are charged with crimes, such as tax evasion, are the ones who suffer from criminal penalties. This is the most severe form of penalty imposed by IRS, that an individual can face during the tax audit process. The severity of the penalties can be quite harsh depending upon the severity of the crime. If the individual has committed tax fraud, tax evasion or something else similar, they can face civil penalty, additional fines and even jail time.
What are Your Legal Options?
If you are facing any of the above penalties as a result of the audit then you have two options: you can either accept the penalties and interests charged OR you can deny the result of the audit.
I) If you decide to accept the audit conclusion of IRS, then you must pay the amount by the deadline or suffer harsher IRS tax consequences.
II) If you wish to challenge the results of the audit, you can file a request for an audit reconsideration. You must not pay any taxes, penalties, or interests that you intend to dispute. If you've already paid any of those taxes, penalties, or interests, then you must request a refund. After that, you need to submit the relative documents for an audit reconsideration, such as;
III) A statement that explains why you are requesting a reconsideration
IV) A Form 1099
V) Copies of supported documents
VI) Copies of the IRS letters
The IRS will grant or deny the request depending upon your situation falling within limited qualifying circumstances, such as you did not receive proper notice, the IRS made an error, or you did not appear for an audit for a genuine reason.