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Tax penalties and audits

Michigan taxpayers face tax audits from the IRS for a number of reasons. And as the consequences of a tax audit can be severe, it is important to understand the reasons why audits occur.

An audit may be the result of someone ignoring IRS rules. It may result due to attempts to commit tax fraud or tax evasion. It can result from underreporting of tax income, the tax liabilities one owes, or misstating the value of property and gifts. A tax audit can even result from an honest mistake.

The kinds of penalties that can result from an audit

While it does not necessarily lead to consequences, the assessing of fines and penalties is more likely to occur following an audit. There are four specific penalties that can result:

  • Payment of additional interest: This particularly applies to individuals who file late paperwork. The interest one pays varies depending upon the timing of the underpayment and the amount owed.
  • Civil penalties: Such penalties apply to errors on tax returns. A substantial discrepancy in returns can lead to a fine of up to 20 percent of the amount underpaid.
  • Civil fraud penalties: Any underpayment due to fraud can result in significant penalties of up to 75 percent of the amount underpaid. Failure to pay taxes within 21 days following an audit can lead to further assessment of penalties.
  • Criminal penalties: A conviction for tax evasion can lead to severe civil penalties, fines connected with the crime and imprisonment.

While no one willing wants to go through the audit process, sometimes audits occur in any case. Attorney representation during the audit process in many instances can lead to reducing or eliminating penalties. An attorney can also provide advice and guidance that may prevent an audit from occurring to begin with.

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