- Days left

How to avoid tax penalties after an audit

×
The good news: You survived an audit. So what now?

If you are audited and the result is that there are no adjustments to your return (or if you get a refund), it decreases your odds of being audited in subsequent years. If you are audited on the same items two years in a row with no additional taxes due, the IRS manual actually recommends that you not be audited for the same items for another year.

But what if you are audited and the IRS finds that you owe additional tax? You'll want to resolve those outstanding tax liabilities as soon as possible in order to avoid further interest and penalties.

If you can afford to pay the tax due in full, you'll prevent any future penalties and interest from piling up. If you can't afford to pay the tax due in full from your regular operating account, consider dipping into savings accounts or money markets. It may even be advantageous to consider a home equity loan, since penalties and interest for your taxes are likely more than the interest rate on a home equity loan.

If you can't afford to pay the tax due in full and you have no resources available, you may want to consider a payment plan with the IRS. If you owe less than $25,000 in combined tax, penalties and interest, you can enter into an Online Payment Agreement (OPA). You can also download a form 9465, Request for Installment Agreement .

If you owe more than $25,000 in combined tax, penalties and interest, you must file the form 9465 and an additional form 433F. In addition to making installment payments on time, the terms of an installment agreement require that all necessary tax returns be filed and payments made timely. You should be aware that penalties and interest will continue to be charged on the unpaid portion of the debt throughout the duration of the installment agreement/payment plan. However, those penalties and interest will be less with an installment agreement than taking no action at all.

If you cannot afford an installment plan, you may consider an offer in compromise (OIC) as a last resort. With an OIC, the IRS and the taxpayer agree to settle the taxpayer's debt for less than the amount of taxes owed, even after an audit. With an OIC, the total amount of tax, including penalty and interest, may be reduced, which sounds great. Unfortunately, the IRS is not accepting a large number of OICs right now; the rejection rate is about 75%.

Finally, you may also request that penalties and interest be removed if you have reasonable cause for your payment problems. The IRS considers reasonable cause as: "when a taxpayer exercises ordinary business care and prudence in determining their tax obligation, but is unable to comply with those obligations due to circumstance beyond their control." This is a higher standard than simply not having the funds available; an example may be a serious illness.

To request an abatement of penalty, you must send a written request to the Service Center asking the IRS to remove the penalty (you'll see the address on your notice of payment). If the Service turns you down, you'll receive a Notice of Disallowance, which will explain your rights of appeal. Filing the appeal does not automatically stop penalty and interest from accruing; that will not stop unless your appeal is granted.

Moving forward, the best way to avoid penalties is to file and pay on time. If you've been assessed for additional tax following an audit, chances are, you'll hear from Uncle Sam again. So, be smart. File on time and make payments on time. You'll save money in the long run.

Increase your money and finance knowledge from home

How Financial Planners go Grocery Shopping

Learn to shop smart and save.

View Course »

Intro to different retirement accounts

What does it mean to have a 401(k)? IRA?

View Course »

TurboTax Articles

Tax Tips for the Blind

Anyone whose field of vision falls at or below 20 degrees, who wears corrective glasses but whose vision is 20/200 or less in his best eye, or who has no eyesight at all, meets the legal definition of being blind and is eligible for certain tax deductions.

What is Form 4255: Recapture of Investment Credit?

When is a tax credit not a tax credit? When the IRS takes it back. If you're in the situation where you have to file IRS Form 4255, you might have to pay back a tax credit you've earned in prior years. This process, known as recapture, occurs if you claim a credit -- in this case, a credit for a specific type of business investment -- and then no longer qualify for that credit.

The Most Important Tax Forms for ALEs (Applicable Large Employers)

In 2015, some parts of the Affordable Care Act specifically apply to businesses, in particular, large employers. The Employer Shared Responsibility provisions affect companies with 50 or more full-time employees or an equivalent of part-time or seasonal workers. These companies are called Applicable Large Employers, or ALEs. 2015 is considered a transition year as everyone gets used to the new normal for workplace health plans.

Employer Sponsored Health Coverage Explained

The Affordable Care Act, also known as Obamacare, is simpler than some people may give it credit for. The basic rule to remember is that everyone must carry Minimum Essential Coverage (MEC) or pay a penalty. Employers with 50 full-time employees or more are obligated to sponsor plans for their workers to help them meet this requirement.

How to Report RSUs or Stock Grants on Your Tax Return

Restricted stock units (RSUs) and stock grants are often used by companies to reward their employees with an investment in the company rather than with cash. As the name implies, RSUs have rules as to when they can be sold. Stock grants often carry restrictions as well. How your stock grant is delivered to you, and whether or not it is vested, are the key factors when determining tax treatment.

Add a Comment

*0 / 3000 Character Maximum