Tax Evasion Penalties Explained
You’ve probably read these press release headlines before: “Business Owner Pleads Guilty To Tax Evasion And Sentenced To Five Years In Federal Prison Without Parole.” It may seem harsh for someone to spend time in jail for tax-related issues, but it is a federal crime to intentionally evade taxes or to submit fraudulent tax forms, so the IRS is diligent to pursue cases that help them redeem the lost costs from unpaid taxes.
There are several types of penalties that taxpayers may be subjected to if they are convicted of tax crimes, ranging from monetary fines to potential imprisonment, sometimes including supervised release, but always a burden to both the taxpayer and the community, so if you are being investigated for tax evasion, it is in your best interest to speak with a tax professional to help you avoid the most severe tax evasion penalties.
TABLE OF CONTENTS
Tax Evasion Penalties
What Is Tax Evasion?
Can You Go To Jail For Not Paying Taxes?
Which Tax Evasion Crimes Lead To Prison Sentences?
How Long Is The Prison Sentence For Tax Evasion?
Types Of Tax Evasion Penalties
How Can Tax Professionals Help With Tax Evasion Penalties?
Frequently Asked Questions
What is the difference between a civil penalty and a criminal penalty for tax fraud?
Key Takeaways:
- The most severe penalties for federal tax evasion include a jail sentence of up to 5 years, as well as fines of up to $250,000 for individuals or $500,000 for companies.
- Tax evasion involves the deliberate nonpayment or underpayment of taxes.
- The length of a prison sentence for an individual who has been convicted of tax evasion depends on three main factors: the type of tax crime, their criminal history, and the tax loss to the government.
- The severity of the punishment for committing tax evasion, including fines and potential prison sentences, depends on the type of tax evasion, such as failing to file a tax return, failing to pay estimated taxes, failing to keep tax records, filing a false tax return, or failing to disclose offshore bank accounts.
Tax Evasion Penalties
According to Section 7201 of the U.S. Internal Revenue Code, tax evasion is considered a federal crime that can result in harsh penalties, such as fines of up to $250,000 and potential prison sentences. It is against the law to avoid paying what you owe in income taxes, so the IRS is unlikely to go easy on someone who illegally avoids paying their true tax liability, instead defining consequences to highly disincentivize people from committing tax fraud.
What Is Tax Evasion?
Tax evasion is the intentional underpayment or nonpayment of tax liabilities that are owed to the Internal Revenue Service or another local, state, or federal government agency.
For the underpayment or nonpayment of taxes to be considered illegal tax evasion or tax fraud, as opposed to tax avoidance, the act must have been committed deliberately.
Can You Go To Jail For Not Paying Taxes?
If a taxpayer is convicted of a federal tax crime, they may be sentenced to jail time.
Before a taxpayer finds themselves sitting behind bars, there is quite a long process involved in a tax case being taken through the court system. Usually, the first action taken after the taxpayer files their federal income tax return is that their tax return will be subjected to an IRS audit. Throughout the auditing process, the IRS searches for examples of significant underpayment of taxes throughout the past year or across several tax years, as well as evidence that the taxpayer willfully evaded reporting accurate or complete information.
The most common reason individuals face criminal prosecution for tax crimes is due to tax evasion related to unreported income. This could involve failing to report the money they earned through a side hustle or a large transaction to intentionally lower their tax liabilities, or potentially creating false statements when filing their taxes.
It is important to remember that taxpayers will only be sentenced to severe legal charges like jail time in situations where they deliberately failed to report their full income or utilized fraudulent tax documents. Simple tax errors due to negligence are seen as an accident, so those taxpayers who did not intentionally break tax laws will usually be issued other IRS audit penalties.
Which Tax Evasion Crimes Lead To Prison Sentences?
Tax evasion is a serious tax crime that can lead to significant fines and prison time. Depending on the type of tax evasion crime, there are different baselines for how many years the convicted party will be sentenced to serve.
If you are a taxpayer who has made a mistake on your income tax return, such as being late to file, this situation would not result in you receiving a prison sentence.
Severe tax fraud charges like prison sentences are only issued to taxpayers who have intentionally attempted to underpay their tax liability or who have filed false tax returns, and not in situations where innocent yet negligent mistakes were made.
If you are being audited by the IRS or are concerned about the potential penalties related to your tax problems, consulting with an experienced tax professional can help you achieve the most optimal outcome for your case.
Here are some examples of tax evasion crimes that can lead to a person being issued a jail sentence:
- Deliberately Underreporting Taxable Income
Whether an individual is a salaried or wage-earning W-2 employee working for a company or they are a business owner, any income they earn through their main job or another side hustle must be reported on their income tax returns. Failing to disclose this income to the IRS will likely be viewed as intentional tax evasion, so convicted taxpayers who have failed to report and pay taxes on all of their income may be issued a jail sentence for their tax crimes.
- Filing False Tax Returns
Filing a false tax return can involve someone deliberately misrepresenting information on a tax return, such as utilizing false supporting documents and accounting books to make false credit claims, or can even involve identity theft if they use a stolen name and Social Security Number (SSN) to report income. People who are caught filing fraudulent tax returns might have to spend a few years in jail.
How Long Is The Prison Sentence For Tax Evasion?
There is a specific numeric system utilized to calculate tax fraud punishments that work by evaluating the severity of the offense, the defendant’s criminal history, as well as how much tax loss occurred.
These federal sentencing guidelines help define what is known as the base-level offense, and within this numeric system, there are 43 levels of tax fraud crimes, and the higher the level, the more serious the crime and, therefore, the more severe the sentence.
While multiple factors can impact the length of a prison sentence for tax fraud crimes, the average jail time falls between 3 and 5 years. The maximum jail time a person can be sentenced for tax fraud is 5 years. As well as serving time as a result of the conviction of a tax crime, offenders may also be issued fees, fines, and other financial penalties as part of the punishment for breaking the law.
Type Of Tax Crime
Depending on the specific characteristics of the tax crime, the defendant will be sentenced to a base-level offense. From there, adjustments to the offense level can result in the raising or lowering of the level, depending on the situation. As an example, people who fail to comply with the IRS investigation may end up with a raised offense level due to their lack of cooperation, whereas a compliant taxpayer who pleads guilty to their tax crime may be offered a reduced sentence.
Criminal History
A taxpayer’s criminal history can significantly impact the length of their jail sentence when they have committed tax fraud. In general, those with a history of breaking the law are usually issued a harsher sentence, as they are considered repeat offenders. While this trend is usually the case, the judge for the case has the right to determine the severity of the punishment when someone breaks the tax law, choosing to issue a sentence that is higher or lower than the base level of that crime.
Tax Loss
The main factor that impacts the length of a prison sentence for tax fraud crimes is the amount of tax loss, or the tax liability amount that should have been paid, experienced by the IRS or the government. The higher the amount of tax due to the IRS that was evaded by the defendant, the more severe the tax fraud penalties and therefore, the longer the prison sentence.
Types Of Tax Evasion Penalties
The punishment for being convicted of tax fraud or tax evasion can result in a combination of tax evasion fines and potential prison time, depending on the specific case. It is always recommended to follow all tax laws when preparing or filing your taxes and ask an experienced tax lawyer for assistance if you have any questions about tax law compliance.
However, if you are being audited or are being investigated for being involved in tax fraud cases, hiring a tax law professional who can represent you in trial and negotiate on your behalf is the best strategy to minimize tax penalties caused by any tax law violations.
The penalties for being convicted of tax evasion or tax fraud depend greatly on the circumstances of the specific tax case. There is a maximum penalty outlined by the law, which is $100,000 for individuals and $500,000 for businesses.
While it is possible for convicted tax evaders to be issued the full penalty, if they are compliant during the investigation processes, it is possible that they could instead be charged a lower penalty or even no penalty, instead of being charged the full maximum. Additionally, having experienced tax lawyers to help them through the process can help reduce what fines they have to pay.
Here are some examples of tax evasion penalties:
Failure To File Penalty
During a situation in which taxpayers fail to file an income tax return, the most common outcome for this misdemeanor is for them to be issued financial penalties, though it is still possible for them to be sentenced to one year of jail time, depending on the severity of the situation.
For each year that a taxpayer neglects their responsibility of filing a federal income tax return, they may be issued a penalty of $25,000. This penalty will be issued on top of their back taxes and not in place of their unpaid tax liability, so this penalty amount can be significant.
Failure To Pay Estimated Taxes
Estimated tax payments are supposed to be paid to the IRS throughout the year if their income is earned through a method that does not experience tax withholding, such as for self-employed individuals or freelancers. If taxpayers intentionally neglect to pay estimated taxes throughout the year, they may be charged a tax penalty.
The civil penalty for not paying withholding taxes is $500, but upon conviction of a criminal penalty, the fine is up to $1,000, a prison sentence of up to one year, or potentially both of these punishments.
Failure To Keep Tax Records
Taxpayers who claim various tax credits and tax deductions on their income tax returns but do not have receipts to support the claims may be subjected to tax penalties. If you get audited and don’t have receipts for the IRS, you may have to pay underpayment penalties.
In some cases, you can provide different types of documentation, such as bank statements, as proof of viable expenses, but at other times, taxpayers may need to pay a higher tax liability for whatever omission of taxes that were not supported by the receipt history. In some cases, taxpayers may be issued a fine of $25,000 or potentially up to one year of jail time.
False Or Fraudulent Tax Return Penalty
If a taxpayer submits a federal tax return with inaccurate information, they may be issued fines of up to $100,000 and possibly be sentenced to up to three years in prison. It is important that taxpayers understand that this type of deliberate tax evasion is considered tax fraud, and is a felony.
Failure To Disclose Offshore Bank Accounts
If taxpayers conceal some of their income, assets, or wealth by failing to disclose offshore bank accounts and are convicted by the IRS, they may be issued severe tax evasion penalties from the IRS.
If the failure to disclose information about offshore bank accounts was unintentional, the taxpayer may be issued a civil penalty. A one-time penalty may range between $500 to $10,000 when the concealment of offshore bank accounts was unintentional, but if this happens for several years, the IRS may issue a penalty of $10,000 for each year this information is not disclosed, with a maximum of six years.
Wilfully failing to disclose offshore bank account information generates more severe criminal penalties, such as the issuing of tax evasion fines of up to $500,000, and in some cases, a prison sentence of up to ten years.
How Can Tax Professionals Help With Tax Evasion Penalties?
If you are facing tax evasion charges, hiring an experienced tax professional is the best strategy to minimize your sentences and ensure the best outcome for your tax situation.
Even during a tax audit when the IRS has gathered all of the supporting information possible to learn about the details of the case, it can still be challenging for the audit agent to distinguish between a deliberate inaccuracy and an honest mistake, so it is important that you make an effort to prove that the violation was unintentional.
Whether you need a criminal defense lawyer or representation from a tax audit attorney, the tax pros will assist you with the best methods of resolving your issue.
Claiming Negligence
For an IRS audit to lead to someone being convicted of criminal tax evasion, there must have been evidence of the clear intent to avoid paying what they owe in taxes.
Therefore, if you are facing a tax evasion charge, a tax attorney can help you organize your defenses and potentially claim that any inaccuracies reported in your tax returns were due to negligence.
Negligence could include not knowing that income from your side hustle or gifted income must be reported, being unaware of the tax filing deadline, or what IRS forms should have been used.
While penalties and fees are still related to negligent tax errors, the consequences are much less severe than those for wilful tax evasion.
If there is a possibility to fight a tax evasion charge by claiming negligence, utilizing the experience and tax knowledge of an experienced tax professional may give you the best chance to avoid a severe tax evasion penalty.
Deferring Blame To A Tax Preparer
If you were not the person who physically prepared and filed your taxes, and instead hired help from a tax professional to file, you may be able to fight a tax evasion charge by providing evidence that you were following the advice of someone else.
If an external tax professional, such as a tax preparer or certified public accountant (CPA), advised you to claim certain credits or deductions that were incompatible with your life circumstances or potentially filled out the tax forms incorrectly, you may be able to avoid incarceration.
In this situation, hiring the assistance of an experienced tax lawyer can help reduce the penalties issued due to incorrect tax returns.
Recreating Tax Records
If the red flags in your tax audit were caused by the lack of receipts to support the expenses deducted from your taxable income, a tax professional may be able to negotiate to reduce the related IRS penalties and help you reconstruct your tax records.
While the initial investigation revealed signs that you intentionally underreported your income or evaded taxes, recreating tax records to provide reasonable evidence for those expenses may help reduce the penalties.
Tax evasion penalties are no joke, so if you are being audited by the IRS and fear you may be in trouble, or if you are already facing tax fraud charges, hiring an experienced tax lawyer is a non-negotiable next step to help you in the defense of your case and to minimize the repercussions of the tax situation.
Whether there is the potential that you could be eligible for IRS penalty abatement, you would benefit from the audit being reconsidered, or if you need someone to minimize the severity of your sentence, the tax relief pros at Ideal Tax are here to help.
Don’t wait to get started – contact us today for a free consultation and learn how we can help you through.
Frequently Asked Questions
What is the difference between a civil penalty and a criminal penalty for tax fraud?
If an individual is convicted of tax fraud, they may be subjected to civil tax fraud penalties or criminal tax fraud penalties.
The IRS has the jurisdiction to decide whether a case will be considered civil tax fraud or if they want to pursue a criminal tax fraud case. A civil tax fraud penalty involves the taxpayer paying restitution for the tax loss and fees that can exceed 75% of the tax underpayment.
A criminal tax fraud penalty can lead to hundreds of thousands to millions of dollars in fines, depending on the significance of the case, as well as the guilty parties facing potential prison sentences.
Luis serves as the Director of Operations for Ideal Tax, overseeing a multifaceted team including case management, tax professionals, document specialists, customer support, training, and development.
