You’ve probably seen news headlines and social media posts of famous people who went to jail for tax evasion or paid millions of dollars in fines after being convicted of tax fraud at the state or federal level.
It’s true. It can happen.
Will it happen to the average, middle-class, hard-working business owner, gig worker or W-2 employee? Probably not. But if you have failed to file your taxes or are facing a large tax bill, it’s important to understand the potential consequences.
Famous People Who Went to Jail for Tax Evasion
Hospitality mogul Leona Helmsley served a prison sentence after evading millions in income taxes. Time rated her one of the Top 10 Tax Dodgers of all time this year. She tried to reduce her tax liability by writing off personal home improvements as a business expense for her hotels and allegedly told a member of her staff, “Only the little people pay taxes.”
Reality TV star Mike Sorrentino, of Jersey Shore fame, went to prison for eight months following a tax evasion conviction. He and his brother were charged with falsifying tax returns worth $9 million.
Actor Wesley Snipes failed to file tax returns between 1999 and 2001 and served jail time between 2010 and 2013. This shows that the Internal Revenue Service may not catch up with you immediately, and trials may not be swift. But if you owe millions in taxes and have tried to avoid the situation, the IRS could (and probably will!) catch up to you.
Real Taxpayers Also Suffer the Consequences of Tax Evasion
It’s not just big-time real estate investors, politicians, and actors who go to jail for tax evasion, either. In February 2024, a Texas man was convicted of tax evasion and sentenced to 41 months in prison.
According to court documents and a news release published by Justice.gov, he worked in the United Arab Emirates and Qatar between 2013 and 2018 and failed to report more than $4 million in income. He falsified tax returns between 2013 and 2017, declaring income of just $100,000 annually, the report said.
In 2018, he failed to file his tax returns, setting off a red flag to the IRS. Justice.gov reported that his actions caused the IRS to suffer a loss of $1,169,348 in tax revenue.
Who Is At Risk for Criminal Prosecution?
You don’t have to be famous to face criminal charges for tax fraud. But, being rich, and grossly under-reporting your income, can put you on the IRS’ radar and potentially lead to an audit. If you commit tax fraud by lying on your tax returns and trying to evade taxes, there’s a chance the IRS will prosecute.
If you face criminal prosecution for tax fraud, you will likely face fines, penalties, and jail time.
According to a report published by IRS.gov, in 2023, the IRS convicted 88.4% of the financial and tax crime cases accepted for prosecution.
Even so, the chances of an average taxpayer getting to that point with the IRS are slim. According to the 2023 IRS Criminal Investigation Report, the agency initiated just over 2,767 criminal investigations. These cases represented a potential financial loss of $37.1 billion in unpaid taxes.
A Quick Fact sheet from 2021 regarding tax fraud offenses, specifically, reported that 370 cases of tax fraud were reported to the U.S. sentencing commission that year. The median loss for these offenses was $278,325, with the lion’s share falling between $100,000 and $1.5 million.
Of those convicted in 2021, more than 63% went to prison.
Can You Be Charged with Criminal Tax Evasion?
Prison sentences and criminal prosecution for tax evasion don’t happen often, but they can happen. And, with the IRS promising to ramp up audits with the help of artificial intelligence in 2024 and beyond, criminal prosecution for tax evasion may happen more frequently.
In 2022, the IRS received a cash infusion of $80 billion as part of President Joe Biden’s Inflation Reduction Act. While the additional funding helped the IRS better manage the 2024 tax season and respond to taxpayer phone calls and requests for help, IRS commissioner Danny Werfel promised that the IRS won’t boost enforcement for individuals making less than $400,000.
However, the plan intends to triple audit rates on corporations with assets exceeding $250 million, partnerships with assets of more than $10 million, and individuals with a positive income of $10 million or more, according to a report from CBSNews.com.
CBSNews.com also reported that individuals with annual income exceeding $10 million are most likely to be audited. Even so, the odds were fairly low as of 2021, with only 0.2% of personal tax returns facing an audit. Of those taxpayers with income exceeding $10 million, 2.4% had their returns audited.
Whether you fall into these categories or not, if you try to evade taxes by under-reporting income or failing to file, just like that Texas worker, you could be at risk of criminal charges for tax evasion.
An audit is typically the first step toward criminal prosecution for tax fraud. But just because you receive an audit notice doesn’t mean you’ll be charged with tax evasion or tax fraud.
How to Avoid Tax Fraud Charges
The solution to avoid tax fraud charges seems simple on the surface:
- Report all your income, including cash income and gig work, to the IRS
- Do not over-inflate your business expenses or tax deductions when you file tax returns
- Don’t claim dependents who don’t exist
- Don’t fail to file your tax returns in a timely manner
That doesn’t guarantee you won’t be flagged for an audit. It helps to work with a professional tax preparer who understands how to minimize your tax liability legally and will stand by your side if you face an audit.
Fortunately, even if you face an IRS audit or owe taxes you can’t afford to pay, it doesn’t necessarily mean you’ll be charged with tax fraud or tax evasion.
Solutions for Past Due Tax Debt
If you cooperate with the IRS during an audit, you might have to pay back taxes and penalties on under-reported income. But the IRS would prefer to collect past due taxes than spending time and money trying to send taxpayers to prison. The percentage of criminal tax fraud cases pursued each year is very small. The number of people wouldn’t even fill a small stadium.
If you establish a payment plan or file for an offer in compromise, you may still be able to settle your tax debt for less than you owe. The keys? Cooperate with the IRS and find the right tax professional to help you through the legal process of an audit and negotiating tax debt relief.
Don’t conceal bank statements or income. The IRS knows if you’ve received Form 8300, indicating cash income exceeding $10,000, or a 1099 form you received as an independent contractor or gig worker or income from investments.
In general, if you are upfront with the IRS about your income and your ability to pay past due taxes, they will work with you to achieve tax resolution. You can pay off your IRS tax debt over time, and the IRS receives its money, helping to bridge the tax gap between what American taxpayers owe and what the IRS has collected.
Rely on a professional tax resolution firm like Alleviate Tax to help reduce penalties and interest and pay off your tax debt as quickly as possible so you don’t have to worry. But as long as you are honest on your tax returns, you shouldn’t worry about going to jail for unpaid tax debt.
PPA
How common is it to go to jail for tax evasion?
In 2023, the IRS Criminal Investigation identified $5.5 billion in tax fraud and convicted 1,508 taxpayers, according to the most recent data available.
Does the IRS go after gig workers?
If you receive income through a client or a side gig, or if you receive funds through a payment app like Paypal or Venmo, you may receive a Form 1099-MISC or Form 1099-K. If you fail to report this income on your tax returns, the IRS may audit you. You might also have to pay an accuracy-related penalty to the IRS, which is 20% of the underpayment of tax.
How long can you not file taxes before going to jail?
Every year that you fail to file taxes, penalties will accrue. If you don’t file a tax return, the IRS can issue a substitute tax return, estimating your taxes owed based on wages and other income. The IRS is not likely to include deductions or exemptions, which means the tax liability will be higher than if you filed a tax return.
The IRS is likely to pursue criminal charges only if they suspect tax fraud or tax evasion, which would indicate that you willfully under-reported income or failed to file to conceal income.
What happens if I don’t pay taxes?
If you fail to pay taxes, you won’t go to jail. However, interest and penalties will accrue. The IRS can place levies or tax liens on your property and garnish your wages. Only if the IRS suspects that you have committed tax fraud or tax evasion will they initiate criminal charges that could lead to prison time.
How much money do you have to owe the IRS before you go to jail?
The IRS will not put you in jail for tax debt you can’t afford to pay. If you willfully evade paying taxes, under-report income, or convince tax fraud, the agency can pursue criminal charges.
