If I Owe More Taxes After an IRS Audit, Do I Have to Pay Interest on It?

Sometimes the IRS will reduce what you owe through an "offer in compromise."
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Internal Revenue Service policies on taxes due following an audit are relatively easy on the taxpayer. For example, the IRS does not charge interest on a balance due following an audit, provided that the taxpayer pays promptly. In other circumstances, the IRS may even reduce the amount due. However, if you do not promptly pay the amount owed following an audit, the IRS usually charges both interest and a penalty.

When Interest is Added

Regardless of when you actually pay your taxes, the IRS usually begins adding interest to the amount owed on April 15 of the year following the tax year under consideration. You can file for a six-month extension by filing IRS form 4868 and explaining why you can't file by April 15. Almost any reason is acceptable, including a lack of organization. Just be aware that if you pay the taxes in full when you file on October 15, the last day of your extension, the IRS will still charge you six months' interest on the amount due.

An Exception to the Rule

One exception to the general IRS policy that interest accrues from the April 15 due date, regardless of when taxes are paid, is the recalculation of taxes due following an audit. This process usually begins when you get an IRS CP21E notice. This notice begins, "As a result of your recent audit, we made changes to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of these changes." The notice then explains the changes and taxes due. The CP21E notice also includes a dated coupon to send in with your payment. Interest on the unpaid balance begins on the date on the coupon. More information is available in IRS Bulletin 746: "Information About Your Notice, Penalty and Interest."

Good News, Bad News

The good news about the IRS policy related to the CP21E notice is that you are not suddenly faced with interest that has accrued since the original due date for the tax year audited. If, as sometimes happens, the audited tax year is several years in the past, the interest accrued could have been substantial, so this is a substantial break. The bad news is, unless you pay everything owed on the CP21E notice by the coupon date, the IRS not only charges you interest, but a substantial penalty as well. Under certain circumstances, some relief from interest and penalties may be available for the 2012 tax year. IRS Tax Notice 2013-24 covers this subject briefly, but you should consult your tax adviser for further details.

Bargaining With the IRS

If you owe a significant amount following an audit, in most cases you can work out a payment plan with the IRS. You'll probably continue to be liable for the taxes, interest and penalties due. However, in some cases where hardship or special circumstances are involved, the IRS sometimes eliminates some or all of the penalty -- and occasionally even interest and taxes -- provided that the taxpayer fulfills the terms of the payment plan. The Nolo legal website lists several ways a taxpayer can reduce the total amount due, including an offer in compromise. You can negotiate the offer yourself, although it's often better to get help from a tax professional.

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