What Happens if You Fail an IRS Audit? A Comprehensive Guide to Penalties and Resolution Options

An IRS audit can be a daunting experience, especially if you’re not prepared for the potential consequences. Failing an audit can result in a tax bill, penalties, and even criminal charges in severe cases. This guide will provide a comprehensive overview of the penalties you may face if you fail an IRS audit and the options available to you for resolving the issue.

Understanding Audit Penalties

The IRS can impose various penalties on taxpayers who fail an audit. The specific penalties you face will depend on the nature of the errors or omissions on your tax return. Some of the most common penalties include:

Accuracy-Related Penalty:

  • 20% of the understated tax if you were negligent about following the tax code or if you substantially understated your income by the greater of $5,000 or 10%.

Substantial Valuation Misstatement Penalty:

  • 40% of the underreported tax if you misstate the value of property by 150% or more.

Substantial Overstatement of Pension Liabilities Penalty:

  • 20% penalty for companies that overstate pension liabilities by 200% or more and a 40% penalty if you overstate pension liability by 400% or more.

Future Loss of Credits:

  • If you claimed a credit you weren’t allowed to claim, the auditor could assess a 20% penalty. Additionally, you may be banned from claiming the credits in the future.

Fraud Penalties:

  • In cases of fraud, the auditor can assess a penalty of 75% of the underreported tax.

Late Payment or Late Filing Penalties:

  • Failure-to-file penalty: 5% of the tax due, applied monthly from the later of the due date or the filing date until you pay the tax.
  • Failure-to-pay penalty: 0.5% of the unpaid tax per month, but it can increase to 1%.


  • Interest will be back-dated to the later of the due date or the filing deadline and will continue to accrue until the tax liability is paid in full.

Additional Scrutiny on Past Returns:

  • Failing an audit doesn’t just affect the tax return that was audited. If the auditor found significant errors in your returns, they may decide to audit tax returns from past periods.

Options for Resolving Audit Penalties

If you fail an audit and disagree with the changes made to your tax return, you have several options for resolving the issue:

Request a Managerial Review:

  • Explain your side of the story to the auditor’s supervisor, who may make changes to the audit determination.

Alternative Dispute Resolution (ADR):

  • Meet with the auditor and an impartial third party to discuss the audit findings and attempt to reach an agreement.

File an Appeal:

  • Submit a formal appeal to the IRS, outlining your objections to the audit determination.

Request Penalty Abatement:

  • Ask the IRS to waive or reduce the penalties assessed against you.

Innocent Spouse Relief:

  • If you are held liable for a tax debt due to your spouse’s actions, you may be eligible for innocent spouse relief.

Can You Go to Jail for Failing an Audit?

In most cases, failing an audit will not result in jail time. However, if the IRS discovers evidence of criminal tax fraud, you could face criminal charges and potential imprisonment.

Failing an IRS audit can be a stressful experience, but it’s important to remember that you have options for resolving the issue. By understanding the potential penalties and the available resolution options, you can navigate the audit process effectively and minimize the impact on your finances. If you need assistance with an IRS audit, it’s advisable to consult with a qualified tax professional for guidance.

What Happens If You Are Audited And Fail?


What to do if you fail an audit?

Recovering from a failed audit is not complicated. You only need to take time to perform a corrective action. The certification body will provide you with enough time to correct the areas pointed out by the audit and find proof of the corrections made.

What are the consequences of audit failure?

Audit failure occurs when an auditor issues an incorrect opinion on a company’s financial statements following their audit. The consequences of not preventing audit failure can be severe, including financial losses, reputational damage, and regulatory scrutiny.

What happens if you don’t pass audit?

For most people who fail an audit, the result is a bigger tax bill. Not only will you owe more taxes than you thought — you’ll also owe interest on those taxes. This can make the bill quite high, but remember: You definitely won’t get sent to prison for being unable to pay your additional taxes.

What is the penalty for audit failure?

If any taxpayer is required to get the tax audit done but fails to do so, the least of the following may be levied as a penalty: 0.5% of the total sales, turnover or gross receipts. Rs 1,50,000.

What happens if an audit fails?

So it’s understandable to feel the pressure. That being said, an audit failure need not be a catastrophe. In fact, there’s usually an opportunity for remedial action built into the process and the nature of an audit is that it will provide a clear roadmap for strengthening internal processes. The best medicine, of course, is prevention.

What happens if you fail an IRS audit?

Sure, it’s rough to fail an IRS audit. And paying the bill they’ll probably stick you with is going to hurt. But unless you’re refusing to pay taxes or purposefully trying to defraud the government, you won’t be facing jail time. Let’s take a look at what happens for the typical taxpayer who ends up on the wrong side of the IRS.

What should you do if you fail an audit?

Focus on areas of failure so you know what to fix Failing an audit can be stressful but anyone who has responsibility for its success should see it as an opportunity. A light will be shone on weaknesses in your control system and identify areas that could lead to your business being non-compliant.

What happens if the IRS challenges my return during an audit?

This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship. If the IRS challenges your return during an audit, you may incur a tax bill plus penalties. Learn how to appeal audit findings and deal with penalties.

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