7 IRS Audit Penalties When You Have Tax Return Errors and Mistakes

7 IRS Audit Penalties When You Have Tax Return Errors and Mistakes

When the IRS audits a tax return and corrects one or more errors, they will charge a penalty if a taxpayer owes back taxes after corrections have been made. More serious or deliberate errors will result in harsher penalties and interest on taxes owed to the IRS.

What are the Penalties for Failing an IRS Audit?

1. Accuracy-Related Penalty

The IRS assesses accuracy-related penalties when a taxpayer underpaid taxes according to tax audit findings. For example, not reporting all your income or claiming credits and/or deductions that you did not qualify for may result in receiving a 20% accuracy-related penalty from the IRS for the underpaid tax.

2. Civil Fraud Penalty

Civil fraud penalties are issued by the IRS when an audit shows a taxpayer knowingly failed to file tax returns and pay taxes. In cases where the IRS considers understated taxes to have been fraudulent, they will charge a 75% penalty.

In addition to a penalty, the IRS will continue adding interest to back taxes until the total of taxes plus interest and penalties is paid in full.

3. Dishonored Check Penalty

If you owe taxes after an audit and your bank declines a tax payment request due to lack of funds, the IRS may issue a dishonored check penalty based on the amount you attempted to pay.

For example, if a bad check payment amount is less than $1,250 the IRS adds a $25 penalty to the amount you still owe.

4. Erroneous Claim for Refund or Credit Penalty

Claiming a credit or refund that you are not eligible to receive may result in the IRS issuing penalties and interest on the credit or refund amount. After an audit, the IRS will send a letter in the mail warning a taxpayer that a penalty has been issued for 20% of the excessive refund or credit amounts.

You must return the full amount of the refund or credit and pay the penalty before the IRS deadline. Otherwise, interest will be added to the tax and penalty amounts you owe.

5. Failure to Deposit Penalty (Employee/Payroll Tax Penalty)

If an audit finds that an employer failed to deposit employment tax on time, or they deposited the wrong amount, that employer could be issued a failure to deposit penalty. Employment taxes include Medicare, Social Security, unemployment, and income.

Penalty amounts range from 2% to 15% depending on how many days until the correct amount is deposited.

6. Failure to File Penalty

Failure to file audit penalties are assessed to individuals who did not file a federal tax return on time and owe taxes to the IRS. The penalty is 5% of unpaid taxes each month until the back taxes are paid in full.

An FTF penalty will never exceed 25%, but interest will be added to this penalty as well.

7. Failure to Pay Penalty

Taxpayers who owe the IRS after an audit must pay in full or set up a monthly payment plan if they need more time. The failure to pay penalty can be between 1% and 25% of the IRS tax debt.

In addition to an FTP penalty, failing to pay taxes after the IRS has mailed several balance due notices may result in the IRS issuing a tax lien on property, garnishing wages, or levying bank accounts and investments.

Does the IRS Assess a Penalty for Simple Math Errors Discovered During an Audit?

If the IRS thinks you made an unintentional math error, they will simply correct the error and send a notice explaining what they changed.

While it is not unusual for the IRS to find a math error on returns during an audit, finding multiple math errors that result in a taxpayer receiving a large refund could mean a bigger penalty.

Can You Appeal or Reduce IRS Audit Penalties?

You can appeal or reduce IRS penalties from audits. Note that if you file an initial appeal and receive a denial letter from the IRS, you have just 30 days to request a follow-up appeal hearing.

Failing to request a hearing may result in you not being able to dispute an audit penalty.

Do IRS Audit Penalties Have Interest?

As mentioned for each of the different audit penalties, the IRS will add interest to the tax balance due until paid in full. This includes interest added to each penalty amount.

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