Can You Go to Jail for Unpaid Taxes?

When someone falls behind on their taxes, they only face the risk of jail time if they’ve intentionally committed tax evasion or tax fraud. Only tax crimes can be punished with a prison sentence. Owing back taxes because of financial difficulties or an honest mistake on a tax return is not considered a criminal act.

You may face civil IRS penalties and collection actions if you owe back taxes. But as long as you cooperate with the IRS and demonstrate a willingness to resolve your tax problems, it’s highly unlikely that your situation will deteriorate into a criminal investigation.

Before you panic and assume that jail time is the most likely outcome of your current tax situation, keep reading to learn more about different types of tax crimes, the penalties faced by individuals who are convicted, the difference between those who cannot pay and those you intentionally attempt to escape paying taxes, and what to do if you are unable to pay your taxes in full.

Key Takeaways

• You will not go to jail for making a mistake on your tax return. 
• You will not go to jail for owing back taxes. 
• You can face jail time for criminal tax fraud or evasion. 
• Criminal tax evasion includes willful attempts to illegally avoid paying taxes.
• Criminal tax fraud includes filing false tax documents or concealing information from the IRS.
• The IRS uses civil fraud penalties to deal with most cases of tax fraud.

Two Types of Tax Crime: Evasion and Fraud

Most tax crimes involve one of two major tax law violations of the federal government tax code: either tax evasion or tax fraud. For the IRS to pursue criminal charges against you, you’ll need to be found guilty of one or both of them.

The terms tax evasion and tax fraud are sometimes used interchangeably, but the fundamental difference is that tax fraud applies when a tax document is intentionally falsified and tax evasion involves both falsified documents and other activities designed to illegally reduce your tax bill. If you ever suspect that you’re under investigation for either tax fraud or evasion, speak to a tax attorney at once to consider your legal options.

When Do You Go to Jail for Tax Crimes?

It’s important to recognize that the IRS is not out to put as many people in prison as possible. Their goal is simply to collect the taxes they are owed, ideally by the least restrictive means possible. That is, they would rather people pay taxes willfully or after an initial notice than to collect taxes by levying assets and revoking passports. However, they do recommend charges when an individual’s behavior escalates to intentional attempts to defraud the IRS and the U.S. government as a whole. 

Common factors in tax crime cases resulting in prison time include:

• Willfulness: Willfulness must be present for someone to be sentenced for tax fraud or evasion. If someone makes a mistake that a reasonable person in their situation would have made, that isn’t enough to imprison them. But if someone knows they owe taxes or should file their tax returns and fails to do so, that does constitute willfulness.
• Intentionally hidden assets or income sources: The IRS has ways to figure out if an individual willfully hides assets or income sources. For example, someone with a side gig may fail to report that income–only for the IRS to receive a Form 1099 for that individual from one of the companies that hired them. While it may make sense for someone to forget a side gig that paid them $20, it doesn’t make sense that they’d forget an Uber account where they earned $10,000 over the course of the year.
• Ignoring opportunities to resolve issues: During audits, the IRS does give individuals the chance to rectify issues before moving forward with criminal charges. For example, they may ask for income documentation or bank statements. When an individual intentionally ignores these requests, makes up excuses for their non-compliance, and otherwise interferes with the IRS’s investigation, that points to fraud.
• Going to great lengths to conceal relevant information: Individuals who destroy records or documentation that may prove their role in tax fraud often end up facing prison time. Consider, for example, someone who failed to report a bank account where they earned a significant amount of money in interests over a period of several years. Instead of providing the IRS auditor with requested bank statements, they claim that the records are no longer available or that the bank refused to provide them.

Tax Evasion

The IRS defines tax evasion as willfully attempting to evade the assessment of a tax or the payment of a tax. The following examples of evasion are some of the most common tax crimes.

Failure To File a Tax Return

If you fail to file a tax return, it may be considered deliberate tax evasion. Filing taxes is a legal obligation for most people and failure to file a return is often the beginning of IRS difficulties for many taxpayers.

When a tax return is late, you’ll be charged interest and penalties after an IRS assessment. The IRS will either assess penalties after your late return comes in or file a Substitute for Return if you do not file at all. At that point, they will assess penalties based on what their calculations indicate you owe. You may then have civil collection actions pursued against you.

As the months pass, if you still fail to file the return, the situation may be elevated to a criminal tax violation if the IRS believes that your failure to file is a willful attempt to evade taxes. In this case, you can face criminal penalties and potentially go to jail. 

Falsifying Financial Records

Any deliberate falsifying of the financial records that you or your tax preparer use to file your tax returns is considered a criminal attempt to evade taxes. This may include misrepresenting assets or exaggerating tax deductions in your financial books. Consider, for example, an individual who files an offer in compromise application. 

The application asks for information on your assets and the equity held in them. The applicant has a paid-off luxury vehicle worth $100,000. However, they misrepresent the type of car they own and indicate that its true value (and the equity held in it) is $5,000. This results in the IRS accepting a much lower offer than what the individual should have paid, based on the assets they actually owned at the time of the application.

Underreporting Income

All taxpayers are legally obligated to report their income fully and accurately to the applicable tax group. Willfully unreported income is considered criminal tax evasion for which you might go to jail.

Your reportable income includes cash income. Some businesses and employees commonly receive payments in cash, such as food truck businesses, babysitting services, and waiters. You must report income in full, including all your income received in cash, to avoid trouble with the IRS.

Falsely Assigning Income

Another illegal method for evading taxes is falsely assigning your income to someone else. In this situation, the taxpayer may have the profits from a business venture go to a family member or friend, who then gifts it back to the original taxpayer.

This is considered a deliberate attempt to avoid paying taxes. Falsely assigning income may also result in criminal prosecution.

Ignoring Overseas Income

Individuals with property or business investments abroad may commit tax evasion by failing to report their foreign income in the records they provide to their CPA. It’s a mistake to think that overseas bank accounts or bank statements don’t apply to IRS tax returns. All overseas income must be reported to avoid criminal tax evasion charges. 

This ties in with FBAR reporting requirements. The Report of Foreign Bank and Financial Accounts, shortened to FBAR, requires U.S. persons living abroad to disclose specific accounts and assets they may own. This information must include the maximum value of each account during the year. Generally, an individual must file an FBAR if the aggregate value of their accounts is more than $10,000 at any point during the year.

Tax Evasion vs Tax Avoidance

Whereas tax evasion involves breaking the law to avoid paying taxes, tax avoidance consists in finding legal ways to reduce your tax bill. Tax avoidance often makes use of ambiguities that exist in current tax laws to pay as little as possible, usually under the guidance of a skillful tax lawyer.

The key difference here is that tax evasion is illegal and tax avoidance is not. Tax avoidance is working within the tax code to decrease the amount you owe. You won’t face jail time for tax avoidance.

Tax Crime vs Honest Error

Navigating complex tax laws can be challenging and taxpayers occasionally make honest mistakes while preparing and filing taxes. Mathematical errors, copying errors, transposition errors, and tax filing mistakes are not uncommon. Businesses also make unintentional mistakes with business deductions, staff classification, payroll tax procedures, and more.

If you’ve committed an error that resulted in a reduced tax bill, there’s no need to panic. The IRS is generally forgiving as long as you promptly file an amended return.

Provided that you communicate readily and openly with the IRS about your mistake, an honest error is very unlikely to result in criminal charges or jail time. Over the years, the IRS has become astute at perceiving the difference between an honest mistake and deliberate evasion.

However, if the IRS deems that your mistake was due to careless disregard or negligence, they may charge you with a 20% accuracy penalty. This isn’t a criminal charge but it’s still a hefty fine, so it’s always important to file tax returns and pay taxes with diligence and care.

Tax Fraud

Tax fraud is somewhat more focused than evasion: it primarily involves willfully lying on a tax return. The IRS may bring criminal fraud charges against an individual if when filing their return they misrepresent their state of affairs in order to falsely claim tax credits or deductions such as reporting additional dependents or misstating charitable contributions.

Tax fraud may also include understating gross income, claiming false deductions, claiming personal expenses as business expenses, or using a false social security number. Any other false statements during the filing process would also be considered fraudulent.

For a business, tax fraud might include such tax crimes such as not reporting all cash payments made or received, intentionally not filing payroll tax reports, underreporting workforce numbers, or failing to withhold federal insurance contributions or income tax from employee paychecks. All of these activities, if committed intentionally, would incur criminal penalties and the possibility of jail time.

Potential Penalties for Tax Crimes

If criminal charges are brought against you by the IRS because of fraud or evasion, you may face serious financial penalties. Individual taxpayers may receive fines of up to $250,000 and corporations may be fined up to $500,000. The IRS may also send you to jail for up to five years.

Misdemeanor vs Felony Charges

Depending on the extent of the crime, you may initially face misdemeanor charges of up to $25,000 in fines and three years of jail time. Misdemeanor charges may apply, for example, if you are audited and fail to produce receipts to prove your claimed deductions.

But for more extensive attempts at deception in your tax return, you’re likely to face felony charges. With a felony charge, you may receive the maximum fines and a prison sentence of up to five years.

IRS Punishments Can Stack

It’s important to note that, as with any crime, these IRS punishments can stack on top of each other. If you’re found guilty of multiple accounts of tax fraud or evasion, the IRS can send you to jail for a longer stretch than five years.

Five years of jail time is the maximum penalty for each individual tax crime. When a taxpayer commits multiple tax crimes in a single year, or spread over several years, they can potentially be imprisoned for decades. When you see someone get sentenced to decades in federal prison, it’s often because multiple related charges are filed at the same time. For example, someone may be found guilty of furnishing fraudulent returns, making fraudulent statements, and willfully failing to supply return, in addition to tax evasion. 

Additionally, when individuals use the U.S. Postal Service or the Internet to commit tax evasion, that results in additional federal charges. Consider this example: a man from L.A. illegally obtained over $5.5 million in federal funds via a combination of COVID schemes and tax fraud. He fraudulently applied for COVID jobless benefits on behalf of over 450 individuals and filed nearly 300 fraudulent tax returns in an effort to collect Economic Impact Payments. As a result, he was sentenced to 24 years in prison.

Civil Penalties for Tax Fraud

Not all tax crimes are punished with criminal charges. For relatively minor incidences of fraud or evasion, the IRS may only prosecute civil fraud penalties against you.

The IRS will usually assess civil fraud penalties based on your total tax debt. A civil fraud penalty might be 75% of your total tax liability in addition to levies or liens against your wages, bank accounts, and other assets to retrieve the unpaid taxes and penalties in full.

Civil Versus Criminal Judgments

If you’re struggling to pay your taxes because you don’t have enough money, then you haven’t committed a crime. As long as you don’t commit tax fraud or evasion, the IRS won’t file criminal fraud charges against you or send you to jail.

When the IRS finds a civil judgment against a taxpayer for their unpaid taxes, they may apply civil tax penalties such as fines and high interest on the outstanding tax bill. They may also pursue aggressive collection actions such as wage garnishments, bank levies to seize your bank account balances, and liens on your property.

Tax Liability Isn’t Necessarily a Crime

Civil tax collection actions can be extremely disruptive to your finances, property, and life, but you can’t go to jail merely for struggling to pay taxes because of financial difficulties. Debtors’ prison was abolished in 1833, and in 1983, the Supreme Court ruled that someone with tax debt can only go to jail if that individual willfully decided not to pay.

The key word here is “willfully.” If you have an unpaid tax bill, it’s essential that you communicate readily and openly with the IRS and show a willingness to resolve your tax problems as quickly as possible.

You may be able to apply to various IRS programs designed to help struggling taxpayers resolve their tax debt. A tax lawyer can help you understand your options and communicate effectively with the IRS with regard to these programs.

Civil Penalties and Collection Actions

Failing to pay or file taxes on time results in rapidly accumulating interest and penalties. The late filing penalty is usually 5% of the total tax owed for each month it’s late, up to a maximum of 25%.

Filing your return on time but failing to pay your taxes in full results in late payment penalties of 0.5% of the total tax bill per month. This will increase until it reaches 25% of the total taxes owed.

You’ll also be charged interest on the tax bill. The interest charged is usually the federal short-term interest rate plus 3%, and it compounds daily.

Eventually, the IRS will pursue collection actions against you. Once the IRS pursues further collection actions and issues a notice of intent to levy or lien your assets, the late payment penalty may increase to 1% per month.

If you receive a notice of intent to place a levy on your bank account or lien on your property, it’s important to respond immediately. Ordinarily, you only have 21 days to appeal a levy and 30 days to appeal a lien.

What To Do if You Can’t Pay Taxes in Full

Without filing false tax returns or willful avoidance of paying your taxes, you’re very unlikely to go to jail for not paying your back taxes. But the longer you leave the problem unresolved, the larger your tax debt will become and the harsher the IRS actions will become against you.

Eventually, the IRS may deem you to be willfully avoiding making a payment. Criminal charges may then be filed against you. No matter what your current tax situation is, it’s in your best interests to act to resolve it as soon as possible.

Government Forgiveness Programs

You may be able to take advantage of various IRS programs designed to help taxpayers who are struggling with back taxes. You may be able to negotiate a payment plan that allows you to pay off your tax liability over several months or even years.

If you can obtain Currently Not Collectible status, the IRS will pause collection actions against you for a period of six months to two years. Alternatively, an Offer in Compromise would allow you to pay off all the tax you owe for less than the current balance.

If your spouse owes back taxes and you share a joint tax return, you may be able to avoid sharing your spouse’s tax problems with Innocent Spouse Relief. Taxpayers can also sometimes have one or more IRS penalties waived with a Penalty Abatement.

How a Mississippi Tax Attorney Can Help You

All of the aforementioned IRS tax relief programs are only applicable to certain candidates who will need to follow a detailed application process and prove that their financial circumstances warrant the assistance. Tax attorneys provide tax relief services to help struggling taxpayers understand their financial and legal options and effectively apply to IRS tax relief programs.

An experienced tax professional can also help you appeal IRS collection actions such as wage garnishments or bank account levies. And if you’re worried about facing criminal IRS charges, a tax attorney can represent you and work to find the most favorable outcome possible under the law.

Facing IRS problems alone can be a stressful and overwhelming experience. An attorney can provide the support and guidance you need to get your financial life back on track.

Your attorney can also arrange effective tax preparation services. With proper tax guidance from a reliable legal source, tax evasion, tax fraud, and falling into debt with the IRS become far less likely to ever occur.

If you’re struggling with back taxes or other IRS difficulties, contact Damiens Law Firm, PLLC today at (601) 957-9672. We can defend your rights against the IRS and help find a successful resolution to any tax problem you might have.

Frequently Asked Questions

Will I go to jail for not filing my tax returns?

If you are intentionally not filing your tax returns to avoid paying the IRS the taxes you owe, jail time is a possibility. A lot depends on whether your failure to file is willful or non-willful, as well as what steps you take to remedy the situation.

Can the IRS put you in jail?

The IRS has the power to recommend prosecution by the Department of Justice. They gather information and conduct audits, but ultimately, prosecution of tax crimes lies with the Department of Justice.

Does the IRS know if I hide or fail to disclose income?

The IRS can often track undisclosed income via official tax records. The income that clients or contractors pay you can be used to decrease their tax bill, so they will likely report it to the IRS as an expense. When they report that they paid you income and you do not report that income, the IRS will follow up on it and look for other signs of fraud.

Will I go to jail for reporting illegal income?

The IRS requires you to report all income, even that obtained illegally, such as via drug trafficking, embezzlement, or prostitution. You are generally able to disclose the income without revealing its source to avoid implicating yourself, but if you don’t report that income, the IRS can still track down illegal sources of income and pursue criminal charges for tax evasion.

How much do I have to owe the IRS to go to jail?

Going to jail for tax debt has less to do with how much you owe and more with how you handle that debt. If the debt accrued due to fraudulent behavior on your end, rather than a simple lack of funds, it is more likely to result in jail time. Even if you owe a substantial amount, if you cooperate with the IRS and pursue a payment plan or other solution, jail time is unlikely.

Do audits lead to jail time?

The vast majority of tax audits do not result in prison time, but in civil penalties. However, many cases of tax fraud or evasion did start with an audit that uncovered more and more fraudulent behavior, so it is good to be prepared and proactive if you are the subject of an audit.

What if I’m self-employed and haven’t ever filed taxes?

It is more common for self-employed individuals to fall behind on tax filings, simply because of the lack of a W-2 and other common tax forms. However, the penalties can be high, especially since self-employed individuals pay additional self-employment taxes. If you want to get caught up, it’s important to work with a tax attorney to file your late returns and get set up for future compliance.

What can I do if I haven’t filed my taxes but don’t want to go to jail?

Generally, if you just have a few years of unfiled returns or even decades, you can get back into compliance by filing the last six years, and jail will not even be a remote possibility. However, if you didn’t file in an attempt to evade taxes or if you’re dealing with certain filing requirements for offshore accounts, the IRS does have voluntary disclosure programs for those who would like to become compliant and avoid unnecessary penalties and even criminal charges. This is a complex subject that should be discussed with a tax attorney.