Are you bothered by the thoughts of what happens when you get audited? Or what happens if you are audited and found guilty? Well, you don’t have to worry at all because the ways through which the Internal Revenue Service (IRS) conducts a tax audit are nowhere close to a scary nightmare unless there’s a chance of misplaced or erroneous financial records of your organization.
The IRS draws a fine line of clear-cut distinction between civil penalty and civil fraud penalty, which serves justice by deeply investigating the intentions between intentional or unintentional mistakes. Problems such as miscalculation or filing late for tax returns may expose you to pay moderate civil penalties. On the other hand, civil fraudulent penalties result from issues such as intentionally misstating the value of the property or significantly understating your annual income.
For instance, if you are subjected to an audit and found to pay additional taxes and have agreed to the IRS agent, you’ll usually be allowed a duration of 3 weeks to pay the dues. In case you fail to fulfill the penalties before the deadline, the additional costs to spend will keep increasing.
Read more about what happens if you get audited and don’t have receipts.
Reasons Behind IRS Taxation Audit
Want to know what happens if you are audited and found guilty? It largely depends on the complexity of your case and what has been assessed in your records. Normally, the IRS flags one return for audit but is not authorized to audit returns from the past several years. Typically, the previous three years can be audited for tax returns. However, if additional discrepancies are discovered, the record of the past six years can be assessed to draw conclusions.
If you’re found guilty of deceitful attempts in taxation, you’re likely to face any of the following penalties till the charges have been dropped from you.
1. Neglecting IRS Audit
Some people still believe that ignoring the notices from the IRS will save them from auditing their tax returns. No matter how hard you try to shoo away, the official authorities are going to do the job either easy or hard way. Your efforts aren’t going to further away the problem but will add to it unless you respond before the deadline.
Constantly ignoring these notices could make you lose your right to dispute the audit in court. The IRS will begin the investigation, and if found guilty, you’ll be liable to pay the additional taxes imposed with hefty amounts of interest and penalties.
Click here to learn about do you get your tax refund if you get audited.
2. Underestimating the Amount of Tax Due
In many cases, understanding what happens if you are audited and found guilty is crucial because the audit report will observe that you owe additional taxes to the IRS, which occurs when you underreport your income, pretend excessive deductions, or claim accreditation you aren’t entitled to. If you’re found to be on an unintentional mistake, you’ll be liable to pay the tax with interest. However, if shreds of evidence suggest counterfeit attempts to evade tax, you’ll have to settle civil fraud penalties which will keep adding if you fail to do so within the deadline.
3. Unjustifiable Deductions
IRS audit penalties are applied if you have made deductions that you are not able to justify, which involves business deductions, above-the-line personal deductions, or itemized deductions. When overstating the deductions, it implies that you’re attempting to understate the tax that you owe to the IRS.
What Happens If You Are Audited and Found Guilty?
Most audits resolve through tax changes or no change in a person’s taxes – criminal or civil investigation is just the beginning when suspected of tax evasions, accompanied with serious consequences, dragging you towards paying huge fines or finding yourself behind bars – however, the chances are seldom.
1. Civil Investigation
If you’re found guilty, you’ll be charged with civil fraud penalties in which you’re compelled to make complete payment of the tax that you didn’t pay, with an additional cost of 75% unpaid tax. However, the officials must prove your deceitfulness if you begin to challenge their findings.
2. Criminal Investigation
The process of criminal investigation is more severe than that of civil, drawing you closer to huge fines and time in prison. A particular investigator or agent is specially appointed for the task and has the authority to use invasive tactics to get the required information out from you. They also have the right to contact their family, friends, and colleagues.
3. IRS Audit Penalties
Depending on your situation, if proven guilty or innocent, the primary consequence of the IRS audit penalties is the payment of unpaid taxes with additional interest. Moreover, the auditors can retrieve the data from several years back to check the previous taxation records and can add at least 20% of an IRS penalty on top of this.
Appeal for payment plans or get your lawyer to set up the installment agreement for monthly payments.
Learning about what happens if you are audited and found guilty can be overwhelming because the outcome can be of several types, even if you know that there are no errors in your records. Even if you fail an audit, it doesn’t mean that it would be an end to your life because you never get to learn anything unless you experience repelling situations. You won’t be asked to leave your house or country. All you have to face would be an additional payment of taxes and penalties, accompanied by paying interest to the IRS. However, you may suffer even serious consequences if proven guilty of fraudulent tax evasions.