What Happens if You Get Caught Taking Deductions You Shouldn't in a Tax Audit?

Deductions reduce the amount of taxes you pay. The Internal Revenue Service regulations detail all kinds of legal deductions, from mortgage interest and property taxes for homeowners to office supplies and utility bills for businesses. With so many deductions available and only so much time to calculate them, you may be tempted to fudge a bit and estimate some deductions or take deductions you aren't legally entitled to take. If you're audited and can't prove the deductions are legit, you'll have to face the consequences.

Preparing For an Audit

If you're audited, gather all the supporting documentation for your tax return, including receipts, canceled checks and other paperwork to justify your deductions. Your audit letter will detail the items the auditor wants to see and the time period covered. The California law firm Birnbaum and Umeda advises clients to cooperate but to avoid volunteering any information outside of the areas the IRS lists on the audit notice you received in the mail.

Disallowing Deductions

If you're unable to justify your deductions the auditor will disallow them and adjust your taxes to reflect this. In cases where the auditor feels the deductions were taken out of ignorance or negligence, you'll owe the additional tax and a penalty of 20 percent. You may also owe interest, computed from the day your tax return was filed until the day you pay up, though the IRS may waive the interest charges if you pay the amount owed within 21 days and the amount you owe is less than $100,000.


If the IRS determines you willfully took deductions you weren't entitled to, that is, in an attempt to defraud the government, you'll be subject to much stiffer penalties. In addition to the tax you owe, you could be assessed a penalty of 74 percent of this amount, plus interest payments figured from the day you filed your taxes. Serious fraud in large amounts could lead to your being charged with tax evasion. You could do time in prison and/or have your property confiscated by the government.


Plan ahead. If you are going to take deductions on your tax return, save the records and receipts to prove the validity of the deduction. For example, document your mileage figures if you take a deduction for business use of your car, including where you traveled to and from, the purpose of the trip and how it relates to your business. If you deduct business meals, keep receipts and note who you dined with and the business you discussed. If you can present supporting documentation at the audit, the auditor has no choice but to let legitimate deductions stand. If you're not sure whether you're entitled to a deduction, consult a tax professional to help you prepare your taxes. If you're worried about the outcome of an audit, you have the right to seek the advice of an attorney or your accountant or other tax professional, who may accompany you to the audit or speak to the IRS on your behalf.