What if You Get Audited for an Honest Mistake?

by Julie Davoren
Mistakes on tax returns can be costly.

Filing tax returns is a complicated procedure, and many filers make mistakes. Auditors often ignore minor errors and might let you off with a 20 percent penalty, but if they find you guilty of deliberate tax evasion, you might have to pay penalties of up to 75 percent. While auditors are experts at detecting fraud, sometimes an honest mistake can seem like evasion. Thus, it's wise to get a professional to review your return before you file it. If it's a simple error, you might just need to explain it to the IRS and accept the proposed changes.

Audit Notification

The IRS typically informs you by mail when you or your business is under scrutiny. If the issue is minor, it might just ask you to submit any relevant documents regarding the expense or income in question. For more detailed issues, it might ask you to report to the IRS office, or an agent assigned to your audit might visit you or your business. If you hire legal representation, the IRS representative might examine your documents in the lawyer’s office. The IRS informs you of the documents they need and lets you set a date when you should have them ready. If you need more time, inform them in advance. They’ll also inform you if they intend to contact a third party, such as your employer, workers or banks, regarding your return.

Gather Documentation

The IRS can conduct an audit on a tax return anytime within three years after you file it, so preserve all important documents for that time. These documents might include bank statements, cancelled checks, income and loan records, mortgage papers, and receipts for travel and entertainment. When you meet the IRS agent, have the necessary paperwork ready for your audit, and answer questions honestly and to the point. You might also want to keep audio or written records of your interaction for possible future reference.

Make Required Changes

When the IRS representative explains to you or your lawyer the changes they need in your return, make sure you understand completely why they are proposed. If, you agree that the changes are valid, you’ll need to sign an agreement and pay any additional taxes. You might also need to pay accrued interest on the additional tax. If you disagree with the changes, you can appeal.

Appealing Proposed Changes

If you and the agent don’t reach a consensus, you can speak to a supervisor. If you continue to disagree, you can appeal. The IRS sends you a letter that explains the results of the audit. It also outlines the appeal process. You’ll need to advise the IRS whether you agree with the proposed changes or if you wish to appeal, and you must respond within 30 days of receiving the letter. If you appeal and your issue is not resolved, you can pursue the matter in a tax court within 90 days. If you can’t pay the tax you owe, you can ask for an Offer In Compromise, which allows you to pay a reduced amount either in one lump sum or in installments.

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