Each year, increasingly efficient automated systems generate most IRS audits.

The IRS can normally audit returns filed within the last three years. Additional years can be added if substantial errors are identified or fraud is suspected. Although there is no way to entirely avoid an audit, preparing an accurate tax return is a taxpayer’s best defense.

Significant penalties may apply for taxpayers who file incorrect returns including:

• 20 percent of the disallowed amount for filing an erroneous claim for a refund or credit.
• $5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.” A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.
• In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75 percent of the amount owed if the underpayment on the return resulted from tax fraud.

Taxpayers may be subject to criminal prosecution and be brought to trial for actions such as:

• Tax evasion
• Willful failure to file a return, supply information, or pay any tax due
• Fraud and false statements
• Preparing and filing a fraudulent return, or
• Identity theft.

Criminal prosecution could lead to additional penalties and even prison time.