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What are the penalties of a tax audit?

There’s only one thing that everyone loves more than paying taxes—being audited.

All right, maybe not. Still, because the IRS frequently uses randomization to determine which returns to audit, every taxpayer faces the possibility of an audit each year. Being audited is not necessarily a bad thing. Many people believe that they could face jail time or other criminal penalties because of an audit, but this is usually not the case. Audits do sometimes have consequences, but most of these are not severe. In this post, we’ll take a look at the possible penalties that could result from a tax audit.

What are the reasons for tax audit penalties?

There are several reasons why someone may have to pay tax audit penalties. Some people make honest mistakes on their tax returns; in other cases, someone may have deliberately tried to commit tax evasion. Whether accidental or deliberate, some of the most common actions that incur penalties include:

  • Ignoring IRS rules
  • Underreporting taxes
  • Misstating the value of property
  • Not paying taxes on time
  • Understating the value of a gift or estate
  • Understating other tax liabilities

What are the types of tax audit penalties?

Tax audits can result in four different types of penalties:

1. Additional interest

Taxpayers who file their paperwork late may have to pay additional interest on their taxes, depending on the current interest rate and the amount of back taxes owed.

2. Civil penalty

Civil penalties apply to tax returns that have mistakes—if it turns out that someone has underpaid, the IRS may charge a fine of up to 20 percent of the underpayment.

3. Civil fraud penalty

Any underpayment due to fraudulent activity could be subject to a civil fraud penalty. Usually, this means monthly charges of 5 to 25 percent of the underpayment. In some cases, a fee of 75 percent of the unpaid taxes could be added to the outstanding balance.

4. Criminal penalty

Finally, a criminal conviction or tax-related crimes could result in criminal penalties. The most severe of all possible tax audit penalties, criminal penalties could include hefty fines and even a jail sentence.

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