The mention of an audit by the Internal Revenue Service (IRS) often sends shivers down the spine of taxpayers. The process can be intimidating and the potential outcome overwhelming. This fear is often amplified by the possibility of being found guilty of tax evasion or fraud. So, what happens if you are audited and found guilty? The outcome depends on the nature of the issue and how it is handled. It’s important to remember that being audited does not automatically equate to being guilty.
- Audit Assessment:
When you’re audited, the IRS reviews your financial records to verify that your tax return is accurate. If the IRS concludes that there are discrepancies and underpayments, it will assess what you owe and add on penalties and interest. Usually, an audit simply leads to a tax bill, and the majority of audits are due to unintentional errors, not criminal conduct.
- Penalties:
If the IRS finds that you’ve underpaid your taxes, the penalty generally depends on why you underpaid. If it’s simply due to an honest mistake, the IRS may impose a 20% penalty on the amount you underpaid. However, if you substantially underreported your income — at least 10% of the correct tax or $5,000, whichever is higher — you might face a “substantial understatement” penalty.
- Fraud Vs. Negligence:
One of the most important distinctions to make when dealing with an audit is whether the taxpayer was negligent or deliberately fraudulent. The IRS does not punish honest mistakes harshly, but tax fraud is a different story. If the IRS finds that you’ve committed tax fraud, penalties can be severe, including a penalty of 75% of the underpayment attributed to fraud.
- Criminal Charges:
In the most extreme cases, if you’re audited and found to have intentionally committed tax evasion, the IRS may bring criminal charges against you. This generally happens when someone intentionally fails to file a return, willfully fails to pay taxes due, intentionally does not report all income received, makes fraudulent claims, or prepares and files a fraudulent return. Convictions may result in significant fines, imprisonment, or both.
- Legal and Financial Ramifications:
Beyond fines and potential jail time, being found guilty of a significant tax misstep can have other serious consequences. These might include an impacted credit score if you’re unable to pay the assessed amount, and damage to your professional reputation, especially if you work in certain industries like finance or law.
Conclusion:
Being audited by the IRS and found guilty of tax fraud can have severe implications. However, it’s essential to remember that an audit does not necessarily imply guilt and often results from minor errors or discrepancies. If you’re unsure about your tax filings or if you’ve been notified of an audit, it’s always advisable to consult with a tax professional or attorney. They can provide expert guidance and help navigate the often complex process, providing you with the best defense possible.
In the end, the best way to avoid an IRS audit’s negative consequences is to be diligent and accurate in your tax preparations. Remember, honesty is always the best policy when dealing with the IRS.
