Correct the Oversight
If the unreported income was due to an oversight, you will want to inform the IRS that you agree with the proposed tax liability increase and plan to pay the new liability. It is important to show good faith. Some situations may allow for a potential reduction of penalties, due to first time error or reasonable cause (although you will still be liable for any additional taxes owed, plus interest.)
Consider Professional Representation
Audits involving unreported income can be complex and may carry severe penalties, especially if the IRS suspects intentional tax evasion. Hiring a tax professional, such as an enrolled agent, CPA, or tax attorney, can help you navigate the audit. A tax professional can:
- Represent you before the IRS
- Help organize your documentation
- Negotiate with the IRS on your behalf to reduce penalties or arrange payment plans
Prepare for Possible Penalties
Unreported income usually results in penalties, which is typically accuracy-related penalties (up to 20% of the unpaid tax.) You may be able to reduce these penalties by demonstrating reasonable cause or through First Time Abatement if eligible.
Communicate Promptly with the IRS
Timely communication is crucial. Respond to all requests for information within the deadlines provided by the IRS. Failing to do so can lead to additional penalties and interest, and it may signal to the IRS that you are not cooperating.
Negotiate or Appeal the Results
Once the IRS completes its audit, you’ll receive a report detailing any adjustments to your return, including the taxes owed and penalties. If you agree with the findings, you can pay the amount due or set up a payment plan.
If you disagree, you have the right to appeal the decision through the IRS Office of Appeals, which acts as a neutral party. You can also take the case to U.S. Tax Court if unable to find resolution in the IRS Office of Appeals.
Plan for Future Compliance
After the audit, ensure that future income is reported accurately and timely to avoid further issues. Maintain detailed records of all income sources and deductions to support your filings.
By addressing unreported income early and seeking professional guidance, you can minimize the impact of the audit and protect yourself from more severe penalties.
