Audited for 2023 taxes - question about penalties calculation and withholding

You're right to question this. Penalties should typically be calculated on the amount you actually owe after withholdings are considered. It sounds like there might be some miscommunication or process issues happening. What's likely occurring is that the audit is showing the total tax liability without considering payments already made. The IRS systems sometimes handle the assessment of tax and the accounting of payments separately. For your specific questions: 1. Yes, penalties should be based on the unpaid amount, not your total tax liability. If you've already had $19,000 withheld, penalties should only apply to the remaining $3,500 you owe. 2. Audit notices often focus on the tax assessment side rather than the payment side. It's not uncommon for withholdings to be addressed separately from the audit itself. 3. This two-step process the auditor described is actually standard procedure in many cases, but I understand why it seems concerning. The audit department establishes the correct tax amount, then the payment/accounting department reconciles what you've paid versus what you owe. I would suggest getting everything in writing from the auditor about how the withholdings will be addressed after you agree to the audit findings. Ask specifically about the timeline for when your withholdings will be applied and how that will impact the penalties.

After dealing with an audit nightmare last year, I discovered this AI tool called taxr.ai that helped me understand what was actually happening with my audit and penalties. I was in a similar situation where they weren't counting my withholdings correctly. I uploaded my audit letter and W2 to https://taxr.ai and it explained exactly what was happening and gave me the right language to use with the IRS. Saved me from paying about $4,000 in penalties I didn't actually owe. The tool breaks down what the IRS is saying versus what your documents actually show. It also helped me draft a response letter to the auditor that clearly explained why the penalties should be recalculated based on what I actually owed after withholdings. Might be worth checking out in your situation.

I was super skeptical about tax tools but I tried taxr.ai after seeing it mentioned here. It actually saved me from a similar situation with penalties being calculated incorrectly. I uploaded my audit notice and W2s and it immediately flagged that my withholdings weren't being counted properly. The explanation was way clearer than what the IRS auditor told me. It gave me exactly what to say to the auditor, and when I called back with that information, they adjusted my penalties from $5,200 down to $980! The best part was it showed me which specific IRS rules applied to my situation so I could cite them when pushing back. Definitely recommend for anyone dealing with audit issues.

If you're having trouble getting through to the IRS about this (which is likely), I'd recommend using Claimyr. I spent WEEKS trying to reach someone at the IRS about a similar audit situation where they weren't counting my withholdings. Finally tried https://claimyr.com after seeing someone post about it, and they got me connected to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with was able to put notes in my file about the withholding issue before I submitted my response to the audit, which ended up saving me thousands in incorrect penalties. Definitely worth it when the alternative is waiting on hold for 3+ hours or never getting through at all.

I thought this Claimyr thing was complete BS but I was desperate after trying to call the IRS for weeks about my audit. Decided to try it as a last resort and I'm shocked to say it actually worked. Got connected to an IRS agent in about 25 minutes who looked at my account and confirmed that my withholdings hadn't been properly applied to my audit assessment. They put notes in my file and told me exactly what to include with my audit response. Just got my updated statement yesterday and my penalties dropped from $7,300 to $1,450 because they're now calculated only on what I actually owed after withholdings. Saved me almost $6,000! I've never been able to reach the IRS by calling directly, so this was a game-changer.

I went through almost the exact same situation last year. The key is to NOT agree to the audit results until the withholding issue is resolved. Once you agree to the assessment, it's much harder to fix. Instead of following the auditor's advice, I submitted a formal response to the audit stating that I agreed with the tax assessment BUT noted that my W2 withholdings of $X amount hadn't been included in the calculation. I included copies of my W2s and requested that penalties be calculated only on the actual amount owed after withholdings. It took about 3 weeks longer, but they eventually sent a revised audit result that properly accounted for my withholdings and the penalties were calculated correctly from the start. Don't pay anything until this is straightened out!

Just to add another perspective - what the auditor told you is technically correct in terms of IRS procedure, but it's inefficient and potentially costly for you. The IRS often has different departments handle tax assessment (audit) and payment processing. When your audit is closed, your account should eventually reflect both the increased tax assessment AND your withholdings, but there can be timing gaps where penalties are calculated incorrectly. If you do follow the auditor's advice, make sure to follow up after paying to request a penalty abatement for the portion calculated on taxes you already paid through withholding. You can use IRS Form 843 for this. Include copies of your W2s showing the withholding.