Can IRS Audit Lead to Jail?

What happens if you fail an IRS audit? People sometimes fail to accurately file their tax returns for various reasons, which can lead to tax penalties.

Once your tax return is being audited, there’s a higher chance of receiving penalties if you fail to give accurate information or follow proper directions.

Read on to learn about the potential tax audit penalties and consequences.

What Happens if You Fail an IRS Audit?

Failing an IRS audit means facing a larger tax bill than anticipated, along with accruing interest on the owed taxes. 

While this can lead to financial strain, it’s essential to understand that failing an audit doesn’t result in imprisonment for inability to pay.

If you find yourself in this situation, there are options available to help manage the additional tax burden. 

One approach is to negotiate a payment plan directly with the IRS, spreading the payments over a more manageable timeframe. 

Also, individuals may explore the possibility of an Offer In Compromise, where they can settle their tax debt for less than the full amount owed, based on their financial circumstances.

Is Jail a Possibility During an IRS Audit?

No, you won’t end up in jail just because of an IRS audit. To face jail time, you’d have to be found guilty of fraud or tax evasion beyond a doubt.

First, the IRS would need to bring your case to the attention of the Justice Department. Then, the Justice Department would assess if it’s worth pursuing based on the facts. 

Only if there’s clear evidence of breaking the tax code or another law would they take action.

Even then, there would need to be a trial where the court decides if you’re guilty and if jail time is the appropriate punishment. But this whole process is complicated and doesn’t happen often.

Why Do Taxpayers Receive Tax Audit Penalties?

There are several different reasons for receiving tax penalties that result from a tax audit. Here’s a list of some of the most common reasons why taxpayers face tax audit penalties:

• Ignoring the IRS rules and regulations: Failure to follow the IRS rules and regulations, such as failing to file your tax return.
• Underreporting Your Taxes: You will face penalties if you underreport your income by $5,000 or by 10 percent of the actual income.
• Misstating the Value of Your Property: Either overvaluing the property or undervaluing depreciating property will result in tax penalties.
• Not Paying Your Taxes by the Deadline: The IRS will charge you with a failure-to-pay penalty, which is normally half of one percent of your unpaid taxes. The amount of failure-to-pay penalty will apply monthly until your taxes are fully paid.
• Understating a Gift or Estate: If you understate the value of a gift or estate by more than $5,000, you will have to pay civil fraud penalties.
• Understating Other Reportable Transactions: When you understate any other tax liabilities, such as inadequately disclosing tax shelters.

How Do I Dispute an Audit

Disputing the outcome of an audit with the IRS can feel daunting, but if you genuinely believe there’s been an error in their decision, you have options.

 Here’s how to dispute an audit:

1. Formal Written Protest

After receiving the IRS’s written report on the audit findings, you have 30 days to file an appeal.

Do not sign the audit report if you disagree with its findings.

Instead, write a letter of protest within the given timeframe. The IRS will provide instructions on where to send your protest.

2. Small Case Request

If the total amount you owe, including interest and fees, is under $25,000 for the specified tax period, you can opt for a small case request.

Fill out Form 12203 within 30 days of receiving the audit report and submit it to the IRS for review. This is a less formal option for appealing.

3. Innocent Spouse Relief

In cases where one spouse may not be aware of incorrect taxes filed jointly, innocent spouse relief is an option.

While it won’t protect joint income, it can save individual income and self-employment taxes if approved.

Remember, innocent spouse relief doesn’t necessarily affect the status of your marriage.

How to Respond to a Mail Audit

The IRS does most audits by mail. Mail audits (also called correspondence audits) focus on a few items on your return. The IRS wants you to provide proof of those items.

Often, this is income you may have left off your return or income that doesn’t match other information the IRS has about you.

The IRS will give you a deadline (often 30 days) to respond with documentation, or proof, of your position on your return. You can ignore it, or you can respond.

Here’s what happens if you ignore the notice:

• The IRS will make changes to your return (like adding income or removing deductions and/or credits).
• The IRS will propose taxes and possibly penalties, and you’ll get a “90-day letter” (also known as a statutory notice of deficiency).
• You’ll have 90 days to file a petition with the U.S. Tax Court.
• If you still don’t do anything, the IRS will end the audit and start collecting the taxes you owe. You’ll also waive your appeal rights within the IRS.

How to Respond to an Office Audit

Handling an office audit requires careful attention, as these audits are thorough and involve face-to-face meetings with IRS representatives. 

Ignoring the audit can lead to increased taxes, penalties, and forfeited appeal rights. Seeking assistance from a tax professional is advisable to navigate the process effectively. 

They can represent you, advise on documentation, and potentially eliminate the need for your attendance. 

Clear, complete, and truthful responses to the auditor’s questions are important whether you attend or not. 

Involving a tax professional and working together with the audit process boosts individuals’ confidence and improves the chances of a positive result in an office audit.

If you’re facing an IRS audit, it can feel overwhelming. But it’s important to stay calm and be proactive. Know that there could be consequences if things don’t go well. 

However, by understanding what might happen and taking action to fix any problems, you can handle the audit more confidently and lessen any financial troubles that might come up