If you get audited and owe money, the IRS will either ask you to sign off on the additional tax or send you a letter that starts a short clock to appeal. Whichever path you take, the final balance will include the tax shortfall itself, a penalty (usually 20% of the underpayment), and interest compounded daily back to the original due date of the return. From there, you can fight the amount, pay it, or arrange to pay it over time. Ignore it, and the IRS moves to liens and levies.
The choices that follow have hard deadlines. Miss the 90-day window to petition the U.S. Tax Court, and the proposed deficiency becomes final with almost no recourse.
The First Letter and What It Means
If you agree with the auditor, the IRS asks you to sign Form 870, a waiver that consents to immediate assessment and collection.1Internal Revenue Service. Form 870 – Waiver of Restrictions on Assessment and Collection of Deficiency in Tax Once you sign, a bill follows. There is no appeal after that.
If you disagree, you’ll get a 30-day letter. It spells out the proposed changes and gives you 30 days to request a conference with the IRS Independent Office of Appeals.2Taxpayer Advocate Service. Letter 525 Audit Report/Letter Giving Taxpayer 30 Days to Respond
Ignore the 30-day letter (or fail to settle with Appeals), and the IRS sends a Notice of Deficiency. This is the document that matters most. It gives you 90 days to petition the U.S. Tax Court, or 150 days if you’re outside the country.3Internal Revenue Service. Understanding Your CP3219N Notice Let those 90 days pass and the deficiency is assessed as a final, collectible debt.
How the Bill Adds Up
The final number has three parts, and each one keeps growing until the balance is paid.
Accuracy-Related Penalty
The most common audit penalty is 20% of the underpayment tied to the audit findings.4Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments It applies when the IRS finds you were negligent, disregarded tax rules, or substantially understated your income. On a $10,000 deficiency, that’s another $2,000 before interest.
Failure-to-File and Failure-to-Pay
If the audit uncovers a return you filed late or never filed, separate penalties stack on. Failure-to-file runs 5% of unpaid tax per month, capped at 25%. Failure-to-pay runs 0.5% per month, also capped at 25%.5Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax When both apply in the same month, the failure-to-file amount is reduced by the failure-to-pay amount. Fraudulent failure to file jumps the rate to 15% per month, capped at 75%.
Interest
Interest runs on both the unpaid tax and the assessed penalties, compounded daily, starting from the return’s original due date. The rate resets quarterly at the federal short-term rate plus three percentage points.6Internal Revenue Service. About IRS Notices and Bills, Penalties, and Interest Charges For the first quarter of 2026, the individual underpayment rate is 7%.7Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026 Unlike penalties, interest generally cannot be waived. The IRS treats it as compensation for the time it went without the money.
Fighting the Amount
Appeals
The 30-day letter is your first chance to push back without going to court. A conference with the Independent Office of Appeals is free, and Appeals officers can settle based on the realistic chances each side would win at trial.8Internal Revenue Service. Letters and Notices Offering an Appeal Opportunity You submit a written protest laying out the facts and legal arguments. For disputes under $25,000, a brief letter requesting Appeals review is enough. Many audits settle here without ever reaching a courtroom.
Tax Court
If Appeals doesn’t resolve the dispute, or you skip Appeals entirely, the Notice of Deficiency opens the door to the U.S. Tax Court. You have 90 days from the date on the notice to file a petition.3Internal Revenue Service. Understanding Your CP3219N Notice Filing costs $60.9United States Tax Court. Court Fees The advantage of Tax Court is that you don’t have to pay the disputed amount first; once your petition is filed, the IRS cannot assess or collect until the court decides.
For disputes of $50,000 or less per year, the court offers a simplified small tax case procedure that’s less formal and doesn’t require a lawyer.10United States Tax Court. Which Case Procedure Should I Choose? The trade-off: small-case decisions can’t be appealed by either side.
Refund Suit
You can also pay the assessed amount in full and then sue for a refund in U.S. District Court or the Court of Federal Claims.11Office of the Law Revision Counsel. 28 USC 1346 – United States as Defendant District court offers a jury trial, which some taxpayers prefer. But paying the entire disputed tax upfront makes this route impractical for most people.
Getting Penalties Reduced
Penalties aren’t set in stone. The IRS can remove or reduce them if you show reasonable cause, meaning circumstances beyond your control kept you from complying. Serious illness, a natural disaster, and reliance on incorrect professional advice are the usual examples.12Internal Revenue Service. Penalty Relief You’ll need documentation, not just an explanation.
The IRS also offers first-time penalty abatement. If you had a clean compliance history for the three tax years before the penalty year (no penalties, all required returns filed), the IRS will often waive failure-to-file and failure-to-pay penalties for a single period. Request it by phone or in writing. The 20% accuracy-related penalty does not qualify for first-time abatement; for that one, you need reasonable cause or a showing of good faith.
Paying What You Owe
Full payment stops interest and penalties from growing and is always the cheapest outcome. If you can’t pay in one shot, the IRS has formal alternatives.
Short-Term Plan
If you can pay within 180 days, the IRS offers a short-term plan with no setup fee.13Internal Revenue Service. Payment Plans; Installment Agreements Interest and the failure-to-pay penalty keep running until you’re at zero, but you skip the fees that come with longer arrangements.
Installment Agreement
For balances that need more time, the IRS allows monthly installment agreements of up to 72 months for individuals who owe $50,000 or less in combined tax, penalties, and interest.14Internal Revenue Service. IRS Payment Plan Options – Fast, Easy and Secure You apply using Form 9465 or the IRS online payment agreement tool.15Internal Revenue Service. Instructions for Form 9465 At or below $50,000, you qualify for a streamlined process that skips the detailed financial disclosure required for larger debts.16Internal Revenue Service. IRM 5.14.1 Securing Installment Agreements
Setup fees changed on March 3, 2026. Applying online with direct debit costs $22. Without direct debit, applying online costs $69, and applying by phone or mail costs $178. Low-income taxpayers, defined as those with adjusted gross income at or below 250% of the federal poverty level, pay nothing for a direct debit agreement and $43 for other setups.13Internal Revenue Service. Payment Plans; Installment Agreements Interest and the failure-to-pay penalty keep accruing during the plan, so the total paid over 72 months will exceed the original balance.
Offer in Compromise
An Offer in Compromise lets you settle for less than the full amount. The IRS looks at your income, expenses, assets, and future earning potential to calculate the lowest amount it expects to collect. That number, the reasonable collection potential, is the floor for any accepted offer.17Internal Revenue Service. Offer in Compromise
You apply with Form 656 and detailed financial statements on Form 433-A (individuals) or Form 433-B (businesses).18Internal Revenue Service. About Form 656, Offer in Compromise The application fee is $205, and you must include an initial payment unless you qualify for the low-income certification that waives both.19Internal Revenue Service. Form 656 Booklet – Offer in Compromise Expect the review to take six months or longer, and you must stay current on filing while the IRS considers your offer. The IRS rejects offers from people who can clearly afford to pay in full.
Currently Not Collectible
If paying anything would prevent you from covering basic living expenses, the IRS can classify your account as Currently Not Collectible. Active collection stops. The debt does not go away, penalties and interest keep accruing, and the IRS reviews your finances periodically to decide whether to resume collection.
The 10-Year Collection Clock
The IRS has 10 years from the date a tax is assessed to collect it through a levy or court action.20Office of the Law Revision Counsel. 26 USC 6502 – Collection After Assessment After that date, the Collection Statute Expiration Date, the remaining balance is unenforceable.
The clock doesn’t run continuously. Requesting an installment agreement, submitting an Offer in Compromise, filing for bankruptcy, requesting a Collection Due Process hearing, and filing for innocent spouse relief all suspend it while the IRS processes the request.21Internal Revenue Service. Time IRS Can Collect Tax You can look up your specific expiration date through the IRS Online Account portal, by requesting a transcript with Form 4506-T, or by calling the IRS.
What Happens If You Ignore It
The IRS doesn’t jump straight to seizing property. The escalation runs in a predictable order.
Federal Tax Lien
A federal tax lien is a legal claim against everything you own, including real estate, vehicles, and financial accounts, plus anything you acquire later. It doesn’t take anything from you directly, but it appears in public records and blocks your ability to sell property, get credit, or refinance a mortgage.
Levy
A levy is the actual seizure. Before the IRS can levy, it must send a Final Notice of Intent to Levy along with notice of your right to a Collection Due Process hearing, giving you 30 days to respond.22Internal Revenue Service. Collection Due Process (CDP) FAQs Levies can reach bank accounts, wages, retirement accounts, and money owed to you by clients or customers.
When the IRS levies a bank account, the bank freezes the funds as of the day it receives the notice and holds them for 21 days before turning the money over to the IRS.23Internal Revenue Service. Information About Bank Levies That 21-day window exists to give you time to contact the IRS, correct errors, or set up a payment arrangement before the money is gone.24eCFR. 26 CFR 301.6332-3 – The 21-Day Holding Period Applicable to Property Held by Banks
Collection Due Process Hearing
Requesting a CDP hearing within 30 days of the final levy notice is your last formal chance to propose an alternative before the IRS takes property. The hearing is held by the Independent Office of Appeals. You can propose an installment agreement, argue the tax was already paid, or challenge whether the IRS followed proper procedures.25Taxpayer Advocate Service. Notice of Intent to Levy If you disagree with the outcome, you can petition the Tax Court. Miss the 30-day deadline and you can still get a hearing, but you lose the ability to take the result to Tax Court afterward.
Passport Restrictions
Federal law requires the IRS to notify the State Department when a taxpayer has a “seriously delinquent” tax debt, defined as legally enforceable unpaid federal tax (including penalties and interest) totaling more than $66,000, a threshold adjusted annually for inflation.26Internal Revenue Service. Revocation or Denial of Passport in Cases of Certain Unpaid Taxes Once certified, the State Department can deny a new passport, decline to renew an existing one, or in some cases revoke a current passport.
The IRS won’t certify your debt if you have an installment agreement or Offer in Compromise in place and are paying on time, your account is Currently Not Collectible, you’ve been identified as a victim of tax-related identity theft, you’re in bankruptcy, or you’re in a federally declared disaster area. Entering a qualifying payment arrangement reverses a certification already made.
If the Errors Were Your Spouse’s
If the audit turned up unreported income or inflated deductions that came from your spouse or former spouse, you may not be stuck with the bill. Innocent spouse relief separates your liability on a joint return when the understatement came from your spouse’s erroneous items and you had no actual knowledge of the errors.27Internal Revenue Service. Innocent Spouse Relief
Request it by filing Form 8857 within two years of receiving an IRS notice of the audit-related tax due. The IRS considers whether a reasonable person in your situation would have known about the errors, along with factors like your education, involvement in household finances, and whether your spouse was evasive or deceptive.28Internal Revenue Service. Equitable Relief If you signed the return under duress, you may qualify even if you knew about the errors.
If It Was a Business Payroll Audit
Business owners face a different risk after a payroll audit. If the IRS finds that employment taxes were withheld from workers’ paychecks but never sent to the government, it can hold individual officers, partners, or anyone with control over the business’s finances personally liable for the full amount of unpaid trust fund taxes plus interest.29Internal Revenue Service. Trust Fund Recovery Penalty This is the Trust Fund Recovery Penalty, one of the few situations where the IRS collects directly from an individual’s personal assets.
“Willfully” is defined broadly. If you had authority to pay the taxes but paid other business expenses instead, that counts. You don’t need to have intended to defraud the government; prioritizing rent or vendor payments over payroll tax deposits is enough. Multiple people at the same company can each be held liable for the full amount, and the IRS often assesses the penalty against everyone with signature authority over the bank account.