Can the IRS Arrest You?

If terms like “tax evasion,” “tax fraud,” and “IRS investigation” make you feel nervous, you aren’t alone. The majority of Americans do their best to complete their tax return accurately and in the appropriate amount of time to avoid the stress of dealing with the IRS. However, anyone can make an error when filing taxes and find themselves being audited or investigated.

You may make an honest mistake and underreport your income or write off a purchase that doesn’t qualify as a deduction. You may have even skipped paying taxes for a year or more and be worried about facing criminal charges and possible jail time for your oversight.

Knowing you have unfiled tax returns and unpaid taxes is stressful, and you may worry if your tax issues will cause you to be charged with a tax crime. If you’re worried that a tax error could send you to jail, you’ll be glad to hear that most Americans with tax issues will not face criminal charges.

Criminal Penalties and Civil Penalties

Individuals who make an honest mistake on their tax return or do not pay their tax bill because of financial difficulty will not have to worry about serving jail time. An example is if your IRS auditor finds that you still have taxes owed despite filing your return, a civil judgment will be brought against you unless the auditor finds reasons to suspect you were willfully committing tax fraud.

A civil judgment allows the IRS to collect tax owed and take actions such as serving a Notice of Levy, withholding a tax refund you are owed, or filing a Notice of Federal Tax Lien. The IRS has more power when pursuing debt than the average creditor, but you will not go to jail because of a civil judgment. Unless you have engaged in severe tax crimes, such as tax fraud and tax evasion, you will likely face civil consequences, not criminal charges.

In some cases, even tax fraud will not be charged criminally, and the individual will receive civil fraud penalties instead of criminal ones. Civil consequences are additional tax penalties added to your tax debt. Criminal consequences often involve jail time in addition to financial tax penalties.

Understanding Tax Fraud

While terms like tax fraud and tax evasion are often used indiscriminately by the average person to describe tax offenses, they are not interchangeable. Individuals who commit tax fraud can face criminal sanctions, civil sanctions, or both. However, tax evasion is charged criminally and is considered a federal tax crime.

Tax Fraud

To bring a successful tax case against an individual suspected of committing fraud, the IRS must prove that the taxpayer took willful or intentional action to dodge their tax obligations. Honest mistakes are not enough to constitute tax fraud, as the IRS defines it as “willful and material submission of false statements or documents with a tax return.”

When determining if fraud occurred, IRS investigators will be looking for actions that indicate intentional fraud occurred, such as the following:

• Unreported income
• Using a false social security number
• Failing to provide bank statements
• Willfully choosing not to file taxes
• Filing false tax returns
• Refusing to cooperate with the IRS auditor

Since the Internal Revenue Code is complicated, mistakes are not assumed to be intentional. If there are no signs of obvious fraud, the error is usually considered a genuine mistake, not a criminal act. While there may not be legal repercussions for an honest error, the taxpayer could be penalized for inaccuracy and have to pay a fee equal to 20% of the underpayment.

Common Tax Crimes Considered Fraud

The Criminal Investigation Division (CID) within the IRS investigates tax crimes, including fraud, money laundering associated with tax filings, and illegal income earned by an individual or business entity. Frequently pursued crimes include:

Tax Evasion

Tax evasion is a specific type of fraud that involves intentionally hiding information about your taxable income, bank accounts, and other financial assets from the IRS. Individuals attempt tax evasion to lower their tax debt, but choosing to evade taxes will only cost them more money in penalties and likely end in criminal prosecution.

Unlike other forms of tax fraud, which may only have civil penalties, tax evasion is a criminal offense. To prove tax evasion, the IRS must demonstrate that you willfully took measures to evade taxes and have an unpaid tax liability.

The IRS pursues individuals who are suspected of evading taxes diligently. Taxpayers convicted of criminal tax evasion could potentially go to federal prison for up to five years.

Tax Evasion Penalties

Filing taxes without providing the IRS with accurate income information has severe consequences. It only takes a quick look at penalties for tax evasion to realize withholding information to prevent being held responsible for the tax payment owed isn’t worth the temporary financial gain.

Some of the most frequently seen tax evasion penalties include the following:

• Paying a penalty
• Paying interest on overdue taxes
• Facing criminal charges
• Having your social security benefits deducted
• Having a federal tax lien placed on your property
• Having your property levied
• Losing your passport

Payroll and Employment Fraud

The IRS quickly comes down on employers who collect payroll taxes and don’t report them, fail to report accurate workplace numbers, or compensate employees under the table. Businesses engaging in illegal tax actions are often prosecuted aggressively. By making an example of unscrupulous business owners, the IRS sets a precedent that intentional violation of the tax code will not be accepted.

Refund Fraud

Tax refund fraud occurs when someone uses fraudulent W-2 forms or identity theft to file a false tax return to have someone else’s tax return deposited in their bank account. The thief will obtain the victim’s social security number and use it to file a return before the victim files. Often victims of refund fraud do not realize their identity has been stolen until they attempt to file their tax return and have their filing rejected because someone has already filed using their social security number.

Abusive Tax Schemes

When taxpayers go to lengths to avoid filing reports such as the Foreign Account Tax Compliance Act (FATCA), they will likely find themselves being investigated. Wealthy individuals may appreciate the privacy offshore accounts offer but accidentally take actions that aren’t compliant with IRS regulations. The IRS will investigate taxpayers who use offshore banking to avoid paying taxes on income, and the taxpayers could face civil and criminal consequences.

What’s the Difference Between Civil and Criminal Tax Fraud?

There are two types of tax fraud: criminal and civil. The majority of fraud cases are civil because it is much simpler to impose penalties upon the taxpayer. In criminal fraud cases, the IRS has the burden of proving fraud occurred beyond a reasonable doubt.

In civil fraud cases, the IRS only has to prove fraud occurred by presenting clear and convincing evidence. The IRS typically doesn’t pursue criminal charges against individuals who have committed tax fraud unless they are confident the case will be successful.

Will I Go to Jail if I Don’t File My Tax Return?

The circumstances surrounding your failure to file your tax return will determine whether you are at risk of facing criminal charges for your action or, in the case of neglecting to file a claim on time, inaction. You will not go to jail for failing to file your tax return because you were experiencing financial hardship.

However, you could face criminal charges if you did not file your return because you were attempting to avoid paying taxes on your income or financial assets. If you are convicted of a tax crime in criminal court, then there is a chance you could go to jail.

Trust Your Tricky Tax Situation to a Mississippi Tax Lawyer

Regardless of why you didn’t pay your taxes, as soon as the IRS becomes involved, you will want to seek legal counsel. Having an attorney representing you during the audit will not only make the process less stressful and ensure your rights are protected, but if the audit escalates into an investigation, your lawyer will already be familiar with the details of your case.

Since an audit is essentially a tax professional interpreting events based on the available information, a tax lawyer can help present the facts surrounding your financial and tax situation in the best possible light. If your case ends up in court, your lawyer will be ready to defend you, and if your case does not go to court, your lawyer can try to negotiate for lesser penalties.

What Do I Do if I Can’t Pay Taxes?

If you’re looking at your tax return and wondering how you’ll pay the money you owe the government, you aren’t the only one. Every year, approximately five million taxpayers will struggle to pay taxes and need an alternative payment solution than paying their tax bill outright when they file their returns.

While you won’t go to jail for being unable to pay your taxes, you’ll still want to behave proactively as soon as you realize the severity of your situation. It may be tempting to skip filing in an attempt to ignore the problem, but that will only compound your problem. Even if you cannot pay your taxes, you must file a tax return.

Request an Extension

You can request additional time to pay your tax debt in full. If the IRS grants your extension, you will have an additional 120 days to pay taxes, and they will send you a notice with the total amount you owe calculated through the payment due date. Generally, you will pay fewer penalties and fees by requesting an extension than you would by repaying the debt through an installation over a longer period.

Ask About a Payment Plan

When you can pay a portion of the taxes you owe but not the whole amount, a payment plan might be the right option. Your unique situation will determine what type of IRS payment plan you can utilize. Your local IRS office can discuss your situation with you and help you apply for a plan.

Payment options vary from simple short-term agreements that can be set up online to more elaborate arrangements requiring you to submit documentation. Contacting the IRS and asking to begin a payment plan shows that you are acting in good faith and trying to pay your tax debt, which makes it clear you aren’t attempting to commit a tax crime by not paying the full amount you owe.

Prove Financial Hardship

If you can prove financial hardship, which means you are currently unable to pay the IRS, they may delay your payments until you are able to pay. This delay in collections is referred to as reporting your account as currently not collectible.

Having your account labeled as currently not collectible does not mean you are no longer responsible for paying your tax bill or that your debt has been eliminated. Instead, it means that collection is being paused until your financial condition improves.

See if You Qualify For a Settlement

Taxpayers with little or no assets may qualify for an offer in compromise. An offer in compromise is a settlement that allows you to pay off your tax debt for less than what you owe.

Qualifying for an offer in compromise is challenging, and many taxpayers will not meet the criteria. You will have to be able to prove that you are experiencing true financial hardship and having difficulty paying your necessary living expenses.

Work With a Skilled Tax Lawyer to Secure a Fair Payment Plan

Although you can request a payment plan from the IRS without the guidance of a lawyer, there are benefits to hiring a tax debt attorney. Your lawyer will negotiate with the IRS on your behalf to attempt to secure a good plan for you to pay off your debt.

Since your attorney will be well-versed in tax law, they can propose alternative options for reducing your payments. They will also be able to help you gather the paperwork you need to provide to the IRS, preventing you from being denied assistance due to incomplete documentation

What Happens If You Commit Fraud?

When taxpayers cheat on their taxes, it is usually discovered during the audit. The majority of taxpayers who cheat on their taxes do so by choosing not to report all their income. An example of this that is frequently seen today is when an individual has a job where they receive a W-2 and a side job, but the only income they claim is from their primary job. You are responsible for reporting all your income, even illegal income.

When an auditor suspects you of unethical tax behavior, they may just give you civil penalties, or they could direct your case to the IRS’s Criminal Investigation Division (CID). Tax law is complicated, so the auditor expects to see a few errors on the returns they audit. However, they will be looking for actions that suggest you are intentionally withholding information.

If the auditor finds information that makes them suspicious you are committing tax fraud, they will contact the CID. Auditors do not have to tell you they are taking this action, so you may not find out until you are being actively investigated. When you work with a lawyer during the audit, you will have legal counsel already established if you are investigated.

Preliminary Analysis and Investigation

After the auditor initiates the investigation, special agents will review your financial information and tax documents to see if fraud or another criminal tax behavior occurred. Known as the primary investigation, this is the preliminary process.

The agent’s supervisor will evaluate the information once it has been collected and decide whether the investigation should cease or continue. If the supervisor believes there is enough evidence to continue, they will seek approval from the special agent in charge of the office to begin a “subject criminal investigation.”

The Criminal Investigation

After the investigation has begun, the agent will gather the evidence they need to prove you engaged in criminal activity. They will go to great lengths to collect the information they need to build a strong case.

The agent may conduct interviews of third-party witnesses, complete surveillance, and subpoena bank records. Your financial data will be reviewed carefully; anything out of place could be considered evidence.

Prosecution Recommendation

Following the gathering of evidence, the agent and their supervisor will determine whether the investigation results substantiate criminal activity. If the results do not, then the investigation is discontinued. If the results are sufficient and the CID believes the criminal prosecution should occur, a prosecution recommendation is sent to the Department of Justice.

Prosecution

If the Department of Justice determines prosecution could occur, the agent will assist the prosecutors in trial preparation. Once the agent’s report and all case information have been transferred to the prosecution, the prosecutors will manage the case.

Conviction

The IRS doesn’t like to waste time prosecuting cases they cannot win, whether they get that win via a guilty verdict or plea. If your case makes it to a criminal trial, having an experienced lawyer representing you is a must. If you are convicted of a tax crime in criminal court, you can face jail time and severe financial penalties.

When charged, tax crimes such as lying to an IRS employee and filing a tax return with falsified information can result in up to three years in jail. Crimes such as tax evasion and fraud can land convicted individuals up to five years in jail.

What Are Back Taxes?

Any money you owe the IRS from a given tax year is called back taxes. Back taxes accrue penalties and interest, so you’ll want to pay your past-due returns as soon as possible to keep the amount you owe from growing.

If you cannot pay your taxes, let the IRS know immediately. Even if you feel embarrassed because you have never struggled with your finances before, remember that the IRS is familiar with such circumstances.

Discussing your situation with the IRS right away demonstrates that you aren’t trying to keep from filing taxes entirely. It also allows you to set up a payment plan so that you can pay your taxes and back taxes.

What Is Tax Avoidance?

When taxpayers hear the term “tax avoidance,” they often assume it is similar to tax evasion or fraud. This assumption is false. Tax avoidance occurs when an individual or business entity takes steps to minimize their tax bill.

Is Tax Avoidance a Crime?

While tax avoidance may sound like it would involve unethical behaviors such as neglecting to pay your tax bill or failing to file taxes altogether, it isn’t illegal. If you use illegal methods to lower the amount you owe, what you are doing is no longer tax avoidance; it has become a tax crime.

Tax avoidance is intentionally worked into the Internal Revenue Code. Designed to encourage specific citizen behavior, tax credits, deductions, and exemptions can be used to advance big-picture goals on a national level, such as improving energy efficiency.

Working these incentives into the tax code also encourages taxpayers to indirectly subsidize specific critical services like retirement funding and health insurance. The complexity of the U.S. tax code prevents many taxpayers from taking full advantage of the tax breaks available to them.

Seeking the services of a tax professional can help you find all the legal tax savings you are eligible for and prevent you from making errors when filing taxes, such as accidentally claiming personal expenses as business deductions. While honest mistakes may not send you to jail, getting an audit notice because you inadvertently misunderstood a tax code is a stressor you’ll want to avoid.

Legally Lowering Your Tax Bill

You don’t have to engage in illegal behaviors to reduce your tax bill. When performed legally, the following methods allow businesses and individuals to decrease the amount of income tax they owe.

• Deducting business expenses
• Maxing out annual contributions to a retirement account
• Depositing money into a health savings account
• Claiming the mortgage tax deduction
• Receiving the adoption or child tax credit
• Legal income exclusion

Contact a Trustworthy Tax Attorney

If you’re concerned about your previous filing errors, failure to pay taxes, or have been selected for an audit, contact a tax relief attorney immediately. Your attorney will communicate with the IRS on your behalf, offer guidance through the IRS audit, and ensure your rights are not violated as the IRS investigates your situation.

No matter how friendly IRS auditors act, it’s important to remember that they examine your tax returns with the government’s interests, not yours. While an auditor cannot arrest you, if you fail your audit due to suspected fraud, they can initiate a criminal investigation, resulting in criminal penalties.

While the best course of action is to not give the federal government any reason to scrutinize your tax returns by choosing to obey tax laws and pay your taxes promptly, sometimes accidents happen. If you are being audited or investigated by the IRS, you need a dedicated tax lawyer looking out for your best interests. Contact Damiens Law Firm, PLLC, at (601) 957-9672 to discuss your situation with our skilled legal team today.