If an IRS audit determines that you intentionally misreported income or claimed improper deductions, leading to a finding of "guilty" in the context of tax evasion or tax avoidance, the consequences can be severe, potentially involving substantial financial penalties and criminal charges.
Understanding "Found Guilty" in an Audit
Being "found guilty" in an IRS audit can range from discovering simple errors in your tax return to uncovering deliberate attempts at tax evasion or avoidance. While minor discrepancies often result in corrected returns and payment of additional taxes plus interest, more serious findings can lead to significant penalties and legal repercussions. The severity of the outcome largely depends on the nature of the discrepancies found and the IRS's determination of intent.
Serious Consequences for Tax Evasion or Avoidance
For cases where an audit uncovers tax evasion or tax avoidance, the implications are much graver. Individuals found guilty of these offenses may face fines of up to $100,000. Crucially, such actions can also result in being guilty of a felony, as outlined under Section 7201 of the tax code, which deals with attempts to evade or defeat tax. This means potential jail time in addition to financial penalties.
Other Potential IRS Penalties
Even without criminal intent, significant errors or failures to comply with tax laws can incur various penalties. These penalties are designed to encourage compliance and compensate for lost tax revenue.
Here's a breakdown of common penalties you might face after an audit:
| Penalty Type | Description | Rate/Consequence |
|---|---|---|
| Accuracy-Related | Substantial understatement of income, negligence, or disregard of rules. | 20% of the underpayment. |
| Civil Fraud | Deliberate attempt to evade taxes (without criminal prosecution). | 75% of the underpayment. |
| Failure to File | Not filing your tax return by the due date. | 5% of unpaid taxes for each month or part of a month the return is late, maximum 25%. |
| Failure to Pay | Not paying the tax due by the due date. | 0.5% of the unpaid taxes for each month or part of a month the taxes remain unpaid, maximum 25%. |
| Criminal Penalties | Deliberate tax evasion or avoidance (e.g., under Section 7201). | Fines up to $100,000 (for individuals) and possible felony conviction (jail time). |
| Interest | Charged on any unpaid taxes from the original due date, even if granted an extension to file. | Varies quarterly, based on the federal short-term rate plus 3%. |
It's important to note that penalties can accumulate, and interest is generally applied to both the underpaid tax and the penalties themselves.
What Happens After the Audit Findings?
After an IRS audit concludes and if you are found to owe additional taxes or penalties, a specific process unfolds:
- Notice of Proposed Changes: The auditor will typically explain their findings and propose changes. You'll often receive a 30-day letter (Form 5701 or 5702), outlining the proposed adjustments and your appeal rights.
- Appeals Process: If you disagree with the audit findings, you have the right to appeal the decision with the IRS Appeals Office. This is an administrative process where an independent appeals officer reviews your case. You might negotiate a settlement here.
- Statutory Notice of Deficiency: If you don't agree with the appeals decision or choose not to appeal, the IRS will issue a 90-day letter (Statutory Notice of Deficiency). This notice gives you 90 days to file a petition with the U.S. Tax Court if you wish to dispute the deficiency in court.
- Collection Actions: If no appeal or Tax Court petition is filed, or if the court rules in favor of the IRS, the IRS will begin collection actions. This can include:
- Tax Liens: A legal claim against your property.
- Tax Levies: Seizing your wages, bank accounts, or other assets.
- Referral to Collections: Your case may be sent to the IRS Collections unit.
Practical Insights & Solutions
If you find yourself in an audit situation, especially where significant discrepancies are identified, consider these practical steps:
- Respond Promptly: Never ignore IRS correspondence. Respond to all notices by the specified deadlines.
- Gather Documentation: Organize all relevant financial records, receipts, and supporting documents. The more prepared you are, the better you can address the auditor's questions.
- Seek Professional Help: Consulting with a tax attorney or Enrolled Agent (EA) is crucial. These professionals can represent you during the audit, explain your rights, negotiate with the IRS on your behalf, and help you navigate the appeals process or potential legal action.
- Cooperate, but Protect Your Rights: While it's important to cooperate with the IRS, you also have rights. Do not provide information beyond what is requested, and ensure you understand what you are signing.
- Correcting Errors: If errors are found, cooperating with the IRS to correct these errors and pay any outstanding balances, including interest, can mitigate further penalties.
- Payment Options: If you owe a significant amount and cannot pay it all at once, the IRS offers various payment options, such as:
- Installment Agreements: Allowing you to make monthly payments over time.
- Offer in Compromise (OIC): Allowing certain taxpayers to resolve their tax liability with the IRS for a lower amount than what they originally owe, based on their ability to pay.
Understanding the potential consequences and taking proactive steps can help mitigate the impact of an IRS audit outcome.
