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What are the consequences and penalties of a Tax Audit?

What are the consequences and penalties of a Tax Audit?

Tax audit penalties are punishments imposed by the IRS on taxpayers who, for whatever reason, refuse to correctly file their tax returns or pay the amount that they owe in taxes.

Taxpayers are expected to file a proper tax return documentation that includes: their income, expenses, and other financial information as required by the IRS. However, some taxpayers due to ignorance, negligence, or criminal behavior fall into a tax misconduct category that attracts a tax audit penalty.

Before a tax audit penalty is imposed, the IRS carries out a proper tax audit by examining the tax return information provided by the taxpayer to ensure accuracy in the information provided. Sometimes this tax audit can be carried out randomly by the IRS on the tax return of any taxpayer and this doesn’t necessarily mean a penalty will be prescribed. A penalty will only be given if a discrepancy is found in the tax return after the audit. Also, a tax audit can be carried out intentionally by the IRS on any tax return that seems suspicious, dishonest, or inaccurate.


Actions of taxpayers that will attract a tax audit penalty

There are several actions that taxpayers frequently engage in that usually attracts a tax audit penalty by the IRS. However, the gravity of the penalty imposed is dependent on the level of inaccuracy found after a tax audit. Minor and unintentional errors attract fewer penalties, unlike the harsh penalties attracted by grossly inaccurate tax returns or fraudulent activities.

Some major reasons why taxpayers will receive tax audit penalties after a tax audit include:

  1. Failure to file tax returns by the taxpayer
  2. Disregard for the IRS rules and regulations when filing a tax return
  3. Refusing to pay taxes when they are due.
  4. Understatement of income by the taxpayer
  5. Understatement of tax liabilities
  6. Understatement of the value of any property claimed as a gift or estates tax returns.
  7. Misstatement of taxpayer’s property value (undervalued or overvalued).
  8. Overstatement of pension liabilities.


The IRS usually examines (randomly or intentionally) some tax returns in order to detect errors, fraudulent activities, and discrepancies. Penalties are then administered based on the report from the tax audit that was carried out. The penalty given for misconduct is dependent on the gravity of the inaccuracy discovered in the tax return.

Various types of penalties imposed by the IRS include:

  1. Payment of minor additional interests on tax by taxpayers who refuse to pay up their tax or file a tax return in due time.
  2. Payment of a civil penalty of up to 20% of the underpayment in tax caused by minor errors and inaccuracies in a tax return.
  3. Payment of a civil fraud penalty which involves being charged with payment between 25% to 75% of the understatement of tax caused by fraudulent activities.
  4. Payment of a criminal penalty as a result of tax evasion, fraud, or other criminal activities. The criminal penalty would involve the payment of a huge amount of civil penalty charges and sometimes could include a prison sentence.


How to handle tax audit penalties

A taxpayer charged with tax audit penalties can either accept the penalty given and accept the consequences or decide to challenge the audit results.

Accepting the results of the audit and the tax audit penalty given means the taxpayer has decided to pay up the additional interest or charges as requested in the penalty before the deadline given. However, some taxpayers usually choose to challenge the results of the audit and fight the tax audit penalty.

Challenging a tax audit penalty

  1. Firstly, after receiving a tax audit penalty that you would like to challenge, ensure you do not pay yet any part of the penalty. In case any payment has been made a refund should be requested.
  2. The taxpayer should request an audit reconsideration for the tax audit penalty given while stating properly the reasons for the request of reconsideration. The request for reconsideration is not always guaranteed but it will be considered only if your reason for the request is deemed acceptable for reconsideration. A few reasons why a request may be deemed acceptable include an error by the IRS on determining the tax owed, the taxpayer not appearing for audit, or the taxpayer not receiving notice for audit due to address change. All of these make up valid reasons for the approval of your reconsideration request.
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