What Happens If You are Audited and Found Guilty?

You filed late, or maybe you forgot something. Then the IRS letter showed up: you are being audited.

Calm down. You are not in trouble, but if the IRS finds mistakes you cannot explain or back up, you could owe more than you expected. 

This post is for you if you are facing an audit. You will learn what you can do before things get worse.

Why the IRS Audits Tax Returns

The IRS does not audit every tax return. Most audits happen because the IRS finds something unusual or inaccurate in the return you filed.

The IRS uses automated systems to compare your tax return with information it receives from banks, employers, and other third parties. If the numbers do not match or seem inconsistent, your return may be flagged for review.

Side note: If you have a connection to someone else being audited, like a business partner or spouse, your return may be reviewed, too.

Here are some common audit triggers:

• If you received a 1099 or W-2 that you did not include in your return
• If you failed to report income, like freelance jobs, crypto, or unexplained bank deposits
• If your expenses seem too high for your income level or industry
• Repeated self-employment losses may make the IRS question whether it is really a business.
• If you claimed personal expenses as business ones
• Sudden changes in income or deductions 
• If you did not report foreign accounts or assets as required

How Far Back Can the IRS Audit You?

The IRS usually audits returns from the last three years. However, if they find a significant error (such as underreporting income by more than 25%), they may go back up to six years. In cases involving fraud or failure to file a return at all, there is no time limit.

What Happens If You Are Audited by the IRS

If the IRS audits your return, they will notify you by mail. The letter will explain what part of your return they are reviewing and what documents you need to provide.

There are three types of audits:

• Correspondence audit: The IRS sends you a letter asking for more information or proof about something on your return.
• Office audit: You are asked to meet an IRS agent at their local office and bring documentation.
• Field audit: This is the most in-depth type. An IRS agent visits your home or business to review in person. These are less common and usually involve complex financial cases.

What happens if you are audited by the IRS depends on how well you can support the information you submitted. If everything checks out, the audit will close with no changes. But if you cannot verify your claims, you may owe additional taxes, interest, and penalties. 

How Long Does an IRS Audit Take?

It depends on the type and complexity of your case. Below is a general timeline:

What Happens If You Fail an Audit

During an audit, the IRS reviews your return to see whether the information you provided is complete and accurate. If they find issues you cannot explain or prove, they may adjust your return and hold you financially responsible.

Honest Mistakes vs. Intentional Misreporting

The IRS distinguishes between two types of errors:

• Unintentional mistakes: These include math errors, forgotten 1099s, or misclassified deductions. If the issue appears to be accidental, the IRS may simply fix it and send you a notice with the corrected balance and any added interest.
• Intentional misstatements: If there is a pattern of underreporting or false claims, or the IRS sees signs of deliberate deception, they may treat it as fraud or negligence. In these cases, they will impose heavier penalties.

The IRS looks at several factors to determine intent:

• Has this happened on your previous returns?
• Did you ignore past notices or requests for records?
• Do your documents appear altered or incomplete?
• Are multiple parts of your return inconsistent or suspicious?

Civil consequences (most common):

• You may owe additional taxes.
• The IRS may apply penalties, often 20% of the unpaid tax, if they find negligence or disregard of rules.
• Interest starts accruing from the original due date.

Criminal consequences (less common):

• These situations involve intentional violations of tax law, such as fraud or hiding income.
• Criminal cases can lead to fines or even jail time, but they are rare and require a separate investigation by the IRS Criminal Investigation Division.

IRS Audit Penalties: Types and Rates

If the IRS finds you owe more tax after an audit, the final bill often includes more than just the tax balance.

Accuracy-Related Penalty: This applies if you were careless or did not follow tax rules.

• Rate: 20% of the underpaid tax
• Example: Underpaying $5,000 may result in a $1,000 penalty.

Tax Evasion or Fraud Penalty: If the IRS believes the mistake was intentional, the penalty jumps significantly.

• Rate: Up to 75% of the unpaid tax
• Example: A $10,000 understatement could mean a $7,500 penalty.

Failure-to-File and Failure-to-Pay Penalties: These apply if you did not file or pay on time, even before the audit.

• Filing late: 5% per month, up to 25% of the unpaid tax
• Paying late: 0.5% per month, up to 25%
• If both apply: maximum combined 5% per month

FBAR and Foreign Asset Penalties: If you failed to report foreign bank accounts or assets, the penalties are steep.

• Non-willful FBAR violation: $16,536 per year (2025)
• Willful FBAR violation: Greater of $165,353 or 50% of account balance
• Failure to file FATCA Form 8938:
  • $10,000 for not filing
  • Up to $50,000 for continued noncompliance after IRS notice

Interest on Unpaid Taxes: Interest starts from the original due date and compounds daily.

• Criminal cases can lead to fines or even jail time 7% annually, compounded daily
• Applies in addition to penalties

What Happens If I Get Audited and Do Not Have Receipts? 

You may not automatically fail the audit, but you will be at a disadvantage. Without backup, even legitimate expenses can be rejected. You are expected to prove every deduction or credit you claim. But that does not always mean you are out of options.

What the IRS Accepts as Alternative Proof

The IRS prefers original papers, but they also accept other forms of documentation if they clearly support your claim. These may include:

• Bank or credit card statements
• Canceled checks
• Invoices from vendors or suppliers
• Mileage logs or travel records
• Appointment calendars for business use
• Written summaries, if prepared in a timely and consistent way

The IRS needs to see a clear connection between the expense and the business purpose (or other allowable reason).

However, what can you do if important documents are lost or destroyed? 

• Contact vendors or service providers for copies
• Download digital records from your bank or credit card provider
• Use accounting software, email trails, or invoices to track down amounts
• Submit affidavits or written explanations in certain cases

From this point on, the process can be challenging, but the IRS expects to see that you have made a reasonable effort.

But what if you still cannot prove an expense? Then the IRS will likely disallow it. This means:

• You will owe more in taxes
• You may face penalties for underpayment
• You will also owe interest from the original due date

What Happens If You Get Audited and Owe Money?

If an audit ends with a tax bill you cannot afford (say you owe more than $10K), the IRS will not expect payment immediately, but they will expect a response.

First, you will receive a notice: The IRS sends a formal letter, such as a CP3219N, showing what changed and how much you owe (including penalties and interest).

Next, you have options: 

• Pay in full to stop additional charges.
• Set up a payment plan (short or long term)
• Request an Offer in Compromise if you qualify to settle for less.

If you ignore it, the IRS will finalize the assessment and may begin collection:

• IRS may take your refunds
• Garnish your wages
• Placing a lien on your property
• Freeze or levy your bank accounts

What Are Your Legal Rights During and After an IRS Audit?

US taxpayers are protected by a clear set of rights under the Taxpayer Bill of Rights. These include:

Right to representation: You have the right to be represented by a tax professional, such as a CPA, enrolled agent, or tax attorney. You do not have to speak to the IRS alone. If the audit feels overwhelming, hire a representative early. You can authorize them using Form 2848 (Power of Attorney).

Right to appeal: If you disagree with the audit result, you can challenge the IRS decision. The process usually works like this: 

1. Audit Report: You will receive a written explanation of the changes, often on Form 886-A.
2. Disagree?: Send a written protest or use Form 12203 (Request for Appeals Review), depending on your case.
3. IRS Office of Appeals: A neutral body within the IRS will review your case.
4. Still disagree?: You may take your case to the US Tax Court, and potentially even to federal court.

Right to be treated with respect: You are entitled to fair treatment, privacy, and confidentiality throughout the process. The IRS must explain your options and give you time to respond.

3 Simple Ways to Avoid IRS Audit Problems in the Future

• Always save receipts, invoices, bank statements, and logs. Make sure they match what you report on your return.
• Late filings often lead to higher penalties. It is better to file and arrange payment later than miss the deadline entirely.
• Especially if you are self-employed, own a small business, or have multiple income sources, working with a qualified tax expert can help prevent costly mistakes.

A little preparation each year can save you stress if you are ever audited.

Should You Hire A Tax Lawyer?

An IRS audit (even if you are found guilty) does not mean you are in serious trouble. But if you ignore the result, it can become one.

So, when should you get professional help?

If your case involves complex finances, large amounts of tax debt, or if you are facing allegations of fraud, working with a tax attorney or enrolled agent can make a big difference. These professionals know how to communicate with the IRS, challenge errors, and negotiate resolutions.

Get in touch with us. The right support early on can make all the difference.