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.
To understand your risk of criminal prosecution and jail time, it’s important to understand exactly what constitutes a tax crime. In this article, we’ll look at the differences between criminal and civil IRS judgments, and what penalties may be charged in each case. We’ll also cover how best to resolve existing tax issues to get back into the good books of the IRS.
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 other activities designed to mislead the IRS and 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.
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 all taxpayers and failure to file a return is often the beginning of IRS difficulties for many taxpayers.
When a tax return is late, initially, you’ll be charged interest and penalties. 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. 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 CPA 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.
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 to the original taxpayer’s personal expenses.
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.
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.
Even if the IRS might not strictly approve of the clever tax planning strategies involved in tax avoidance, these activities are all above board and legal. You won’t face jail time for tax avoidance. After all, you can’t go to jail for not paying taxes that you don’t legally owe.
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 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.
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%.
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.
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.
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 601-488-2079. We can defend your rights against the IRS and help find a successful resolution to any tax problem you might have.