What Happens If You Get Audited and Owe Money?

An Internal Revenue Service (IRS) audit examines an individual’s or organization’s financial records to verify the accuracy of information reported on a tax return. The IRS conducts audits to ensure compliance with tax laws and confirm the correct amount of tax has been paid. If an audit uncovers discrepancies, it can lead to an assessment of additional taxes owed.

The IRS typically notifies taxpayers of an audit by mail, not by phone. Audits can be conducted by mail (correspondence audit), in person at an IRS office (office audit), or at the taxpayer’s home or business (field audit). In any audit, the IRS may determine additional tax is due.

Understanding the Audit Findings and Notice

After an audit concludes with a determination that additional taxes are owed, the IRS sends official communications detailing these findings. One such communication is the Notice of Deficiency, also known as IRS Letter 3219 or a 90-day letter. This letter formally notifies the taxpayer of proposed changes to the filed tax return, which will increase the tax liability.

The Notice of Deficiency outlines the amount of additional tax assessed and the reasons for these adjustments. It also specifies the deadline for response or payment, which is typically 90 days from the date on the notice. For taxpayers located outside the United States, this period extends to 150 days.

This notice is significant because it provides the taxpayer with the legal right to challenge the proposed adjustments in the United States Tax Court without first paying the proposed deficiency. If a taxpayer does not file a petition with the U.S. Tax Court within this 90-day window, they lose the right to challenge the assessment in that court. Subsequently, the IRS will formally assess the tax, any penalties, and interest, and then issue a bill for the total amount due.

How to Pay Your Tax Bill

Once the amount owed is confirmed, several methods are available to pay the tax bill. These include online payments, payments by mail, and through the Electronic Federal Tax Payment System (EFTPS).

One popular online payment method is IRS Direct Pay, which allows payments directly from a checking or savings account without processing fees. Taxpayers can also pay using a debit card, credit card, or digital wallet through authorized third-party processors, though these services typically charge a processing fee.

Paying by mail with a check or money order is another option. Payments should be made payable to the “U.S. Treasury” and include the taxpayer’s name, address, Social Security number, and the tax year. Include Form 1040-V, Payment Voucher, with mailed payments for proper crediting. The Electronic Federal Tax Payment System (EFTPS) is a free service from the U.S. Department of the Treasury for electronic federal tax payments. Enrollment is required for EFTPS, which can take five to seven business days to process. EFTPS allows users to schedule payments up to 365 days in advance and view up to 15 months of payment history.

What If You Cannot Pay

If a taxpayer cannot pay the full amount of tax owed immediately, the IRS offers several programs for financial hardship.

An Installment Agreement (IA) allows taxpayers to make monthly payments over time. Individuals owing $50,000 or less in combined tax, penalties, and interest may qualify for a long-term installment agreement, allowing up to 72 months for repayment. Businesses with a total balance of less than $25,000 can also qualify for long-term plans, with payments typically extending up to 24 months. Taxpayers can apply for an installment agreement online through the IRS Online Payment Agreement application, by filing Form 9465, or by phone. Setting up an installment agreement may involve a user fee, which varies based on the application method and whether direct debit is used; for example, an online agreement with direct debit has a fee of $31, while a regular agreement by mail or phone costs $225.

Another option is an Offer in Compromise (OIC), which allows certain taxpayers to settle their tax liability for a lower amount than what is owed. To qualify for an OIC, the IRS considers factors such as the taxpayer’s ability to pay, income, expenses, and asset equity. The IRS will generally approve an OIC if it determines there is doubt as to collectibility (the taxpayer cannot pay the full amount), doubt as to liability (there is a legitimate question as to whether the assessed tax is correct), or effective tax administration (collecting the full amount would cause economic hardship or be unfair). The application process for an OIC involves submitting Form 656 along with detailed financial information on Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. A non-refundable application fee, typically $205, and an initial payment are usually required, unless the taxpayer meets low-income certification guidelines.

For taxpayers experiencing severe financial hardship, the IRS may place their account in “Currently Not Collectible” (CNC) status. This status temporarily pauses active collection efforts, meaning the IRS will not pursue levies or garnishments. While in CNC status, the debt does not disappear, and interest and penalties continue to accrue. The IRS will periodically review the taxpayer’s financial situation and can resume collection activities if their financial condition improves. To request CNC status, taxpayers typically need to contact the IRS directly and provide evidence of their inability to pay, often through IRS Form 433-F, Collection Information Statement.

Penalties and Interest

When additional tax is owed after an audit, the IRS commonly assesses penalties and interest, which increase the overall amount due. Penalties are applied for various reasons, including failure to pay on time.

The failure-to-pay penalty is generally 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, up to a maximum of 25% of the unpaid taxes. This rate can increase to 1% per month if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. If a taxpayer has an approved installment agreement, the failure-to-pay penalty is reduced to 0.25% per month during the agreement’s term.

Accuracy-related penalties may also be assessed if the underpayment of tax is due to negligence or a substantial understatement of income tax. Negligence involves a failure to make a reasonable attempt to comply with tax laws, such as not maintaining accurate records or failing to report all income. A substantial understatement of income tax occurs for individuals if the understated tax exceeds the greater of 10% of the tax required to be shown on the return or $5,000. The accuracy-related penalty is typically 20% of the portion of the underpayment attributable to these issues. In more severe cases, such as gross valuation misstatements or undisclosed foreign financial asset understatements, this penalty can increase to 40%.

Interest accrues on any unpaid tax from the original due date of the return until the date of full payment. The interest rate is determined quarterly and is typically the federal short-term rate plus three percentage points. For the first two quarters of 2025, the interest rate for underpayments for individuals is 7% per year, compounded daily. This interest is applied to both the original tax due and any assessed penalties.