If you get audited and owe money, the IRS will send you a bill covering the extra tax plus penalties and interest, and from that point you have a set of choices with firm deadlines: agree and pay, dispute the findings through Appeals or Tax Court, request penalty relief, or arrange to pay over time. The total can run well above the original shortfall once a 20% accuracy penalty and daily-compounding interest are added, so the sooner you act, the smaller the final number.
What You’ll Receive After the Audit Closes
What arrives in the mail depends on whether you accept the auditor’s conclusions.
If you agree, the IRS asks you to sign Form 870, a waiver consenting to immediate assessment and collection of the additional tax.1Internal Revenue Service. Form 870 – Waiver of Restrictions on Assessment and Collection of Deficiency in Tax Once you sign, the balance is added to your account and a bill goes out. The debt is final at that point.
If you disagree, you’ll get a 30-day letter. It lays 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 it, or fail to settle at Appeals, and the IRS escalates to a Notice of Deficiency.
The Notice of Deficiency is the most important document in this process. It gives you 90 days (150 if you’re outside the country) to file a petition in the U.S. Tax Court.3Internal Revenue Service. Understanding Your CP3219N Notice Let those 90 days pass and the IRS assesses the deficiency. From then on, your ability to contest the amount is sharply limited.
What’s Actually in the Bill
Three things stack on top of each other: the tax shortfall, penalties, and interest.
The 20% Accuracy-Related Penalty
The most common post-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 the rules, or substantially understated your income tax. On a $10,000 deficiency, that’s an extra $2,000 before interest.
Failure-to-File and Failure-to-Pay Penalties
If the audit uncovers a return filed late or never filed, separate penalties stack on. Failure-to-file runs 5% of unpaid tax per month, up to 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 penalty is reduced by the failure-to-pay amount. Fraudulent failures to file jump to 15% per month, capped at 75%.
Interest
Interest runs on both the unpaid tax and the penalties, compounded daily from the original due date of the return. The rate is set quarterly at the federal short-term rate plus three 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 Interest generally cannot be waived.
How to Dispute What the IRS Says You Owe
Request an Appeals Conference
The 30-day letter is your first chance to push back without filing anything in court. An Appeals conference is free, and the officers are authorized to settle cases based on the realistic odds each side would win at trial.8Internal Revenue Service. Letters and Notices Offering an Appeal Opportunity You submit a written protest covering the facts and your legal arguments. For disputes under $25,000, a brief letter requesting Appeals review is enough. Many cases settle here and never see a courtroom.
File a Tax Court Petition
If Appeals doesn’t resolve it, or you skip Appeals, 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. Filing costs $60.9United States Tax Court. Court Fees The critical feature: you don’t have to pay the disputed amount first. Once you file, the IRS cannot assess or collect the tax until the court rules. For disputes of $50,000 or less per year, a simplified small tax case procedure is available that doesn’t require a lawyer, but decisions in those cases can’t be appealed.10United States Tax Court. Which Case Procedure Should I Choose?
Pay and Sue for a Refund
You can also pay the full assessed amount and sue for a refund in U.S. District Court or the U.S. Court of Federal Claims.11Office of the Law Revision Counsel. 28 USC 1346 – United States as Defendant District court gives you a jury option, but paying the full tax upfront puts this out of reach for most people.
The deadlines on all of these are unforgiving. Miss the 30 days and Appeals is off the table before assessment. Miss the 90 days and the proposed deficiency becomes final debt.
Getting the Penalties Knocked Down
Penalties are not fixed. The IRS can remove or reduce them if you show reasonable cause, meaning circumstances beyond your control prevented compliance. Serious illness, a natural disaster, and reliance on incorrect professional advice are the usual examples.12Internal Revenue Service. Penalty Relief Bring documentation.
There’s also what the IRS calls first-time penalty abatement. If you have a clean compliance record for the three tax years before the penalty year, meaning no penalties and all required returns filed, the IRS will often waive failure-to-file and failure-to-pay penalties for a single period. You request it by phone or in a letter. It works more often than people expect. The 20% accuracy-related penalty does not qualify for this administrative waiver; for that one, you need reasonable cause or good faith.
If You Can’t Pay It All at Once
Paying in full stops interest and penalties cold, and it’s always the cheapest outcome. If that’s not possible, the IRS offers formal alternatives.
Short-Term Payment Plan
If you can clear the balance within 180 days, the short-term plan has no setup fee.13Internal Revenue Service. Payment Plans; Installment Agreements Interest and the failure-to-pay penalty keep running until you hit zero, but you dodge the setup fees that come with longer arrangements.
Installment Agreement
For balances you need longer to pay, the IRS allows monthly installment agreements of up to 72 months for individuals owing $50,000 or less in combined tax, penalties, and interest.14Internal Revenue Service. IRS Payment Plan Options – Fast, Easy and Secure You apply with Form 9465 or through the IRS online payment agreement tool.15Internal Revenue Service. Instructions for Form 9465 At or under $50,000, you qualify for a streamlined process that skips the detailed financial disclosure the IRS requires for larger debts.16Internal Revenue Service. IRM 5.14.1 Securing Installment Agreements
Setup fees took effect March 3, 2026. Applying online with direct debit costs $22. Online without direct debit is $69. By phone or mail, it’s $178. Low-income taxpayers (adjusted gross income at or below 250% of the federal poverty level) pay nothing for a direct debit agreement and a reduced $43 for other setups.13Internal Revenue Service. Payment Plans; Installment Agreements Interest and the failure-to-pay penalty keep accruing during the agreement, so the total paid over 72 months will exceed what you started with.
Offer in Compromise
An Offer in Compromise settles the debt for less than the full balance. The IRS calculates your reasonable collection potential from your income, expenses, assets, and future earning capacity, and that figure is effectively the floor for any accepted offer.17Internal Revenue Service. Offer in Compromise You apply with Form 656 plus detailed financial statements on Form 433-A or 433-B.18Internal Revenue Service. About Form 656, Offer in Compromise The application fee is $205 and an initial payment goes with the offer, unless you qualify for the low-income certification that waives both.19Internal Revenue Service. Form 656 Booklet – Offer in Compromise Review takes six months or longer, and you must stay current on all filings during that time. The IRS rejects offers from people who can clearly pay in full, so this isn’t a bargaining tool.
Currently Not Collectible Status
If paying anything toward the debt would stop you from covering housing, food, and utilities, the IRS can mark your account Currently Not Collectible. Active collection stops. The balance doesn’t shrink, penalties and interest keep accruing, and the IRS reviews your finances periodically to see if collection should resume.
What Happens If You Ignore the Bill
The IRS doesn’t jump to seizing property, but the escalation is predictable.
Federal Tax Liens
A federal tax lien is a legal claim against everything you own, including real estate, vehicles, and financial accounts, and it attaches to things you buy later. It doesn’t take anything from you directly, but it appears in public records and damages your ability to sell property, get credit, or refinance.
Levies
A levy is the actual seizure. Before the IRS can levy, it has to 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.20Internal Revenue Service. Collection Due Process (CDP) FAQs Levies can hit 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 in the account on the date it receives the notice and holds them for 21 days before sending the money to the IRS.21Internal Revenue Service. Information About Bank Levies That 21-day window exists so you can contact the IRS, fix any mistake, or get a payment arrangement in place before the funds leave.22eCFR. 26 CFR 301.6332-3 – The 21-Day Holding Period Applicable to Property Held by Banks
The Collection Due Process Hearing
Requesting a CDP hearing within the 30-day window after 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, and you can propose an installment agreement, argue the tax was already paid, or challenge whether the IRS followed procedure.23Taxpayer Advocate Service. Notice of Intent to Levy You can petition the Tax Court if you disagree with the Appeals decision. Missing the 30 days doesn’t eliminate hearing rights entirely, but it costs you the ability to take the matter to Tax Court afterward.
The 10-Year Limit on Collection
The IRS has 10 years from the date a tax is assessed to collect it through a levy or court action.24Office of the Law Revision Counsel. 26 USC 6502 – Collection After Assessment After that Collection Statute Expiration Date, the remaining balance becomes unenforceable.
The clock doesn’t always run continuously. Requesting an installment agreement, submitting an Offer in Compromise, filing for bankruptcy, requesting a CDP hearing, and filing for innocent spouse relief all suspend the 10-year period.25Internal Revenue Service. Time IRS Can Collect Tax If an OIC takes eight months to review and gets rejected, those eight months plus another 30 days don’t count. Bankruptcy suspensions last through discharge or dismissal, with an extra six months added.
You can look up your own expiration date through the IRS Online Account portal, by requesting a transcript using Form 4506-T, or by calling the IRS.
A Few Situations That Change the Picture
If the audit turned up income or deductions that came from a spouse or former spouse, you may qualify for innocent spouse relief, which separates your liability on a joint return when the understatement was caused by your spouse’s errors and you had no actual knowledge of them.26Internal Revenue Service. Innocent Spouse Relief You file Form 8857 within two years of the IRS notice. Victims of spousal abuse may qualify even if they knew about the errors but signed under duress.
If the audit involved business payroll taxes, be aware that the Trust Fund Recovery Penalty can reach through the business to collect from individual officers, partners, or anyone with control over the business’s finances when withheld employment taxes weren’t sent to the government.27Internal Revenue Service. Trust Fund Recovery Penalty “Willful” is defined broadly: paying rent or vendors instead of making a payroll tax deposit is enough. Multiple people at the same company can each be liable for the full amount.
And if your combined tax, penalties, and interest cross roughly $66,000 (the figure adjusts annually for inflation), federal law requires the IRS to notify the State Department, which can deny, decline to renew, or in some cases revoke your passport.28Internal Revenue Service. Revocation or Denial of Passport in Cases of Certain Unpaid Taxes An installment agreement, Offer in Compromise with timely payments, Currently Not Collectible status, bankruptcy, identity-theft victim status, or location in a federally declared disaster area blocks or reverses the certification.