Can You Go to Jail for Unpaid Taxes?

Owing back taxes because of financial difficulties or an honest mistake on a tax return is not considered a criminal act – you will not face jail time for unpaid taxes unless you’ve intentionally committed tax evasion or tax fraud.

The IRS uses civil penalties and collection actions (e.g., wage garnishment, bank levies) to deal with unpaid taxes. Criminal charges only come into play when you willfully commit a tax crime. 

A tax attorney can help you resolve your tax problems with the IRS, and they can also help if you’re facing criminal charges.

Key Takeaways

• You will not go to jail for owing back taxes – unless you committed criminal tax fraud or evasion.
• Tax crimes require willful intent, such as purposefully filing false tax documents or concealing information from the IRS.
• You will not go to jail for making a mistake on your tax return. 
• The IRS uses civil fraud penalties to deal with most cases of tax fraud.

Risks of Not Paying Vs. Not Filing

The IRS typically deals with not paying and not filing civilly, but both of these actions can become a crime if they involve willful fraud or attempts to evade the payment or assessment of taxes. This post covers the consequences of non-payment. Check out our post on Can You Go to Jail for Not Filing to learn more about the civil consequences and criminal risks of not filing. 

How Much Do You Have to Owe for Unpaid Taxes to Be a Crime?

The amount owed does not matter – tax crimes are about willful intent to deceive the government or evade taxes, rather than how much you owe. 

For example, someone may owe $500,000 and not face criminal charges. They can set up payments, and if they don’t, the IRS will come after their assets. In contrast, if someone owes $20,000 and hides assets to evade payment, they may be charged with a tax crime. 

Two Types of Tax Crime: Evasion and Fraud

The IRS may pursue criminal charges if your nonpayment is tax fraud or evasion. Evasion is a type of criminal tax fraud.

• Tax fraud – intentional falsification of documents. 
• Tax evasion – willful attempt to evade payment of taxes.

For example, if you transfer assets or lie about them so you don’t have to pay your taxes, that is criminal. If you simply cannot afford to pay, that’s not a crime. 

When Is Jail Possible for Unpaid Taxes?

The IRS recommends criminal charges when an individual’s behavior escalates to intentional attempts to defraud the IRS and the U.S. government. 

Common factors of unpaid taxes resulting in prison time include:

• Willfulness: 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 willfully refuses to pay taxes, that may be considered a crime.
• Intentionally hidden income sources: If you’re not paying taxes because you willfully failed to report 1099 income, for example, the IRS may pursue criminal charges, but even in these cases, the agency often relies on civil fraud penalties. 
• Hiding assets: If you transfer assets or lie about them on IRS relief forms so you don’t have to pay your taxes, that is a crime. 
• Concealing relevant information: Ignoring a summons for documents, destroying documents, claiming a bank won’t give you documents, or otherwise interfering with IRS audits or investigations. 

When Unpaid Taxes Become Tax Fraud or Evasion

Let’s look at some examples of tax fraud and evasion in relation to not paying taxes. 

Failure To File a Tax Return

If the IRS believes that your failure to file is a willful attempt to evade taxes, you can face criminal penalties and potentially go to jail. Again, however, the IRS usually deals with unfiled returns using penalties and substitutes for returns (a tool to estimate your tax liability if you haven’t filed. 

Example: You earn $200,000 per year in self-employment income. You don’t file for several years to purposefully avoid paying over $50,000 in tax annually. 

Filing a Fraudulent Return

Filing an inaccurate return on purpose to avoid paying taxes is also a crime. 

Example: You falsely claim tax credits or deductions, such as reporting additional dependents or misstating charitable contributions, so you don’t have to pay as much tax as you really owe.

Falsifying Financial Records

Any deliberate falsifying of the financial records you or your tax preparer uses to file your tax returns or other IRS documents is considered a criminal attempt to evade taxes. 

Example: You apply for an offer in compromise, but on the application, you say your $100,000 luxury vehicle is only worth $10,000. The IRS accepts a low settlement, and you avoid paying taxes because you lied on the form.

Underreporting Income

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

Example: You don’t report your business’s cash revenue, which understates how much you owe on your return. The IRS discovers the error, realizes it’s willful, and pursues criminal charges against you.

Falsely Assigning Income

Another illegal method for evading taxes is falsely assigning your income to someone else. 

Example: You have the profits from a business venture go to a family member or friend, who then gifts it back to you. Your tax return shows less tax than you owe, which was done on purpose so you didn’t have to pay.

Ignoring Overseas Income

All overseas income must be reported to avoid criminal tax fraud charges. You also must report foreign bank accounts over a certain value. The IRS typically deals with these issues using penalties, but again, if they are willful attempts to evade paying taxes, they may become criminal.

Example: You don’t report foreign bank accounts because you aren’t aware of the requirement. It’s an honest mistake, and you come forward voluntarily. That’s not a crime. However, if the IRS believes you took actions willfully so that you didn’t have to pay taxes, that may be a crime. 

Tax Evasion vs Tax Avoidance

Whereas tax evasion involves breaking the law to avoid paying taxes, tax avoidance consists of 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.

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 face misdemeanor charges of up to $25,000 in fines and three years of jail time. With felony charges, 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 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 impose 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.

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 keyword 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.

What Usually Happens If You Don’t Pay the IRS?

The IRS deals with non-payment of taxes through civil actions – here’s what usually happens if you don’t pay:

• Penalties – failure-to-pay penalty 0.5 to 1% per month, up to 25% of original tax liability. Interest stacks on top of penalties.
• Liens – filed if you owe over $10,000 (sometimes less) and attach to all current and future assets.
• Levies – the IRS may involuntarily collect taxes through levies, including wage garnishments, bank levies, and asset seizures.

The IRS sends multiple notices throughout this process, alerting you of potential consequences and urging you to make payment arrangements. 

Relief Options

The IRS offers the following options to help taxpayers catch up on their tax debt:

• Payment plan – allows you to pay off your tax liability over several months or even years.
• Currently Not Collectible – the IRS will pause collection actions against you and review your situation every two years or so to ensure you still qualify.
• Offer in Compromise – allows you to pay off all the tax you owe for less than the current balance, based on the value of your assets and disposable income.
• Innocent Spouse Relief – relief from your spouse’s liability on a joint tax return if you meet specific criteria. 
• Penalty Abatement – have one or more IRS penalties waived.

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) 873-6510. We can defend your rights against the IRS and help find a successful resolution to any tax problem you might have.

Frequently Asked Questions

Can you go to jail for not paying taxes?

No, unless you commit criminal tax fraud or evasion so that you don’t have to pay taxes. If you don’t pay, the IRS will use civil means, such as assessing penalties or garnishing your wages, to deal with you – not criminal charges.

Can the IRS arrest you for not paying taxes? Can they put you in jail?

IRS Criminal Investigation (CI) agents can arrest you. The IRS has the power to recommend prosecution by the Department of Justice (DOJ). The IRS gathers information and conducts audits, but ultimately, the DOJ prosecutes tax crimes.

Will I go to jail if I owe taxes and haven’t filed 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.

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.

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.