If you owe thousands in unpaid tax debt, you probably have many concerns. It might be tempting to ignore all those IRS notices and letters coming to your door via certified mail. But it won’t be long before the Internal Revenue Service takes action to garnish your wages, places a tax lien on your property, and takes every legal measure to collect the money they are owed.
In 2021, the most recent year for which statistics are available, the U.S. tax gap reached $688 billion. The tax gap represents the difference between taxes owed to the federal government and taxes paid – in other words, the total of all past-due tax debt. With so many dollars in tax debt uncollected, you might think the federal government won’t come after you. But the government takes tax fraud and tax evasion very seriously.
If you knowingly and willfully avoided filing or paying taxes, there’s time to come clean. It’s important to know the consequences of tax fraud and how you can finally settle your tax debt before it’s too late.
Types of Tax Fraud and Tax Evasion
Tax evasion and tax fraud come in many forms. According to the Bipartisan Policy Center, the IRS lost close to $550 billion in 2021 due to underreporting of income. The vast majority of these funds ($396 billion) came from individual taxpayers who just failed to pay their tax debt. After that, $67 billion in lost revenue came from non-filers. Finally, roughly $57 billion in unpaid taxes come from tax underpayments, which means people either falsified deductions, claimed dependents they didn’t have, or otherwise took steps to falsely reduce their tax liability.
Examples of lying on your tax returns can be classified as tax evasion or tax fraud and may include:
- Falsely claiming dependents
- Knowingly and willfully underreporting or failing to report your income
- Knowingly claiming invalid tax deductions to lower your tax bill
- Establishing foreign bank accounts to hide income and failing to report it
Tax Fraud vs. Tax Evasion
Tax fraud typically involves filing a false return or willfully and purposefully including misinformation on your return, such as inflating donations to charitable organizations, declaring dependents that aren’t yours (or may even be pets), or using a Social Security number that isn’t yours when you file. Depending on the infraction, you might face criminal or civil charges for tax fraud.
Tax evasion typically results in criminal charges. Examples of tax evasion may include willfully failing to file your taxes, transferring money illegally to another individual or to off-shore accounts without reporting it to the IRS, and other attempts to evade paying taxes.
Tax Evasion vs. Tax Avoidance
Tax evasion is different from tax avoidance. Tax avoidance uses legal methods to reduce your taxes owed, such as claiming any deductions or tax credits you legally deserve. You might rely on tax preparers trained in the most up-to-date tax code to assist with tax planning that can help you reduce your tax liability. Examples of legal tax avoidance include:
- Tax loss harvesting
- Charitable donations
- Making energy-efficient home upgrades eligible for tax credits
- 401(k) contributions
Penalties for Tax Evasion and Tax Fraud
If you’re found guilty of tax fraud or tax evasion in a criminal case, you may go to jail for lying on your taxes or failing to file or pay your taxes. The punishment if you commit tax fraud varies depending on the amount of your tax liability, whether it’s a first offense or not, and the severity of the offense. You may be able to have your punishment, including jail time and financial penalties, reduced by pleading guilty, telling the truth, and working with the court to pay off your tax debt. It’s a good idea to seek the help of tax attorneys who understand tax laws and may be able to help you negotiate a reduced sentence.
If you’re found guilty of civil tax fraud, which means you aren’t being tried in criminal court, you could face a penalty of up to 75% of the underpayment of your taxes, according to the IRS. You won’t go to prison for tax fraud in a civil case; you will only face a prison sentence if you are tried and found guilty in an IRS criminal investigation.
According to IRS Code 7201, if you are found guilty of tax evasion, which is tried as a felony, you could face up to $100,000 in fines plus up to five years in prison. You will also be responsible for paying the prosecution’s legal fees. It’s important to note that the burden is on the prosecution to prove that you deliberately made false statements and attempted to evade your tax payments, you have tax debt owed, you willfully and knowingly evaded filing or paying your taxes.
The federal government has up to six years to prosecute in a criminal tax evasion case.
Tax fraud, depending on the amount of taxes owed and the specific infraction, is typically tried as a civil case. As such, it can involve fines and penalties, as well as payments of back taxes. In a civil case, the IRS has up to 10 years to collect past-due tax debt; this is the Collections Statute Expiration Date. The CSED can be extended if you file for bankruptcy or apply for certain types of tax debt relief, such as currently-not-collectible status.
Should You Worry About Going to Prison for Tax Fraud?
The IRS successfully prosecutes the majority of criminal tax fraud cases. According to the United States Sentencing Commission, 63.3% of tax fraud offenders were sentenced to prison in 2021, with an average sentence of 14 months. This is the most recent year for which statistics are available.
However, in spite of nearly two-thirds of offenders going to jail, the overall number of people in jail for tax fraud is relatively low. Only 370 cases reported to the U.S. Sentencing Commission involved tax fraud. Prosecutors must have evidence that the taxpayer willfully and knowingly cheated on their taxes. Tax code is complicated. Making a mistake on your tax returns is normal. If the IRS notices a discrepancy, a math error, or possible under-reported income, it might ask for verification and clarification by sending you a letter. All you need to do is send the appropriate proof that your tax return was correct or submit an amended return that reflects the correction.
The IRS may also issue a correspondence audit if they believe you mistakenly claimed a dependent or claimed the Earned Income Tax Credit when you weren’t eligible for it. These types of tax return errors very rarely lead to legal difficulties or accusations of tax fraud. It’s important to keep all your supporting documents related to your tax returns, including pay stubs and receipts from purchases that prove your deductions and tax credits are valid.
If you’re facing an IRS audit or charges of tax fraud, the professionals at Alleviate Tax are here to help. Reach out today.
FAQ
What are some examples of tax evasion?
Examples of tax evasion include failing to file your taxes, intentionally failing to pay your taxes, and hiding money in foreign accounts and failing to report that income.
How many years can you go without filing taxes?
If you don’t owe any money to the IRS, you don’t have to file tax returns. However, you may want to file to claim fully refundable refunds, which can put cash in your pocket. If you owe the IRS money, you should file your taxes every year. Otherwise, you could face penalties for failure to file and failure to pay. If the IRS can show you willfully evaded filing, you could face criminal charges.
Is not filing taxes a crime?
Tax evasion, which may include failing to file taxes or failing to pay your tax debt, can be prosecuted as a felony and Americans who are found guilty of tax evasion could face fines of up to $100,000 plus up to five years in jail.
