The reason that the IRS conducts tax audits is to uncover inaccurate tax returns. If your tax return contains inaccurate information, you may be subject to an audit. During the audit, the IRS will determine if there is any reason to penalize you for inconsistencies on your filing or return.
During the audit, the IRS will request documentation that supports your tax information claims. Make sure that you provide the auditors with accurate information. Be prepared to explain your claims and answer various questions regarding your business practices and finances.
Make sure to follow the IRS tax audit procedure. During the audit, the IRS will determine if your return is subject to the following penalties.
- Additional interests. If you filed your tax return late, you may be subject to penalties and fines. Or, if you do not pay your taxes on time, you will have to pay the due-amount plus interest. The amount of interest you have to pay depends on the amount owed, and how far past due it is.
- Civil penalty. If you have made any mistakes or provided incorrect information on your tax form, you may be subject to a fine. A large discrepancy on your tax return may require you to pay a penalty fee of up to 20% of your underpayment (plus the rest of the money you owe). If you can prove that the mistake is not due to fraudulent acts, you may be able to simply pay the due amount and not receive any penalties.
- Civil fraud penalty. If you have been involved in any fraudulent activity, the IRS will require you to pay a penalty fee of up to 75% of the amount that you owe. This type of penalty usually occurs only if you knowingly and purposely underpaid your taxes.
- Criminal penalties. Your audit may result in a criminal penalty if you are convicted of tax evasion, fraud or similar crimes. You may receive large penalty fees and even jail time if you are convicted of these crimes. Criminal penalties only occur if you have committed a crime.
The IRS has three years to conduct their audit, but in most cases, they finish within one year. You can appeal the audit and/or penalties.
How to appeal
If you believe that you have received the audit as a mistake, you can call the IRS to find out more. If you want to contest your audit, you may file an audit reconsideration request. You should not pay any fees or taxes until your request is approved or denied. If you are concerned about the audit or what the implications may be, or you would like guidance through the complex process, you can hire a tax audit specialist or legal representation.