What happens if an error is found during a tax audit?

2023-02-10

According to the IRS, an audit is “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”

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The agency audited four out of every 1,000 returns filed for tax year 2021. According to Syracuse University, the poorest taxpayers were five times more likely to be audited than everyone else. But no matter their income, it’s hard to imagine that a single one of the 659,003 people the IRS audited last year enjoyed the process.

The word alone summons images of confusing paperwork, scary letters, long holds on frustrating phone calls, expensive penalties and maybe worse if the process reveals any mistakes.

Although it can get expensive, the reality is usually less dramatic and less consequential. Here’s what you need to know about tax audits.

What To Expect During an Audit

The IRS uses random selection, computer screening and related examinations to decide who to audit, and if you win the agency’s unlucky lottery, they’ll conduct your audit either by mail or in-person interview.

The notice that you’re being audited will always come by mail.

Either way, you can request an extension if you need more time. During the process, you have the legal right to confidentiality, to know why the IRS needs the documents it requests and the right to be treated with courtesy and professionalism.

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So, What Happens If an Audit Turns Up an Error?

The most important right of all is your right to challenge the agency’s findings to both the IRS itself and the courts. So the first thing that happens if an audit reveals an error is that you decide whether to accept or challenge the IRS’ findings. If you choose to contest the audit’s results, you can request a conference with an IRS manager, seek mediation or file an appeal.

According to W Tax Group, you typically have 90 days from the time you receive the audit to take action.

Will I Go To Jail?

Audits can be scary and intrusive, but making mistakes on your taxes is not a crime — and the IRS doesn’t prosecute tax crimes, anyway. The Justice Department does. In order to face any criminal consequences, the IRS would have to refer your case to the DOJ, which would then have to decide if there’s clear evidence that you intentionally committed a crime like tax fraud or evasion.

According to Keeper Tax, that almost never happens. Even so, while prison is the most severe and least likely outcome, it’s hardly the only potential consequence.

What Are the Likely Penalties?

The best case scenario is that your audit reveals an error that results in the IRS owing you a refund. More likely, the money will flow in the other direction.

The IRS doesn’t prosecute crimes, but it can file charges that result in civil penalties.

But according to W. Tax Group, the IRS classifies most errors as honest mistakes — but that doesn’t mean you’re off the hook. If an audit finds that you underreported income, claimed credits you weren’t owed or otherwise didn’t satisfy your tax obligation, you’ll owe what’s due plus any interest that accrued.

On the other hand, if the IRS determines that the error was more than an honest mistake, it could assess civil penalties, which make things much worse.

According to Keeper Tax, there are three kinds of civil penalties:

Negligence: You intentionally disregard IRS rules — things like omitting records to prove deductions or leaving 1099 income off of your Schedule C.
Understatement: You misrepresent the value of your assets or falsify your holdings to minimize capital gains taxes or maximize depreciation deductions.
Failure to pay: The IRS can penalize nonpayment with penalties of up to 25% of your bill. Eventually, it can seize your assets and garnish your wages to enforce payment.

Any one of these can develop into serious charges if the judicial system finds proof that you acted with criminal intent. More likely, you’ll be hit with a penalty of between 20%-75% of your unpaid tax bill.

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