Tax evasion contributes to the nation’s tax gap, the difference between owed and collected taxes totaling around $600 billion annually. This figure represents an estimated $7 trillion in lost tax revenue over the next decade.
However, tax evasion is not the only tax-related crime that can result in jail time for the American taxpayer.
What happens when an individual does not pay their tax? Can they go to jail for not filing or paying their tax returns? In what situations can the Internal Revenue Service (IRS) put the taxpayer in jail, and when can it not do that?
lookupinmate.org discusses what happens when you fail to pay taxes and when the IRS can and cannot send you to jail. This article also covers the penalties for tax evasion in the United States, avoiding tax consequences, and recovering after not filing taxes on time.
Who Goes to Prison for Tax Crimes?
Any individual, famous or ordinary, can go to jail for tax crimes. The government typically assesses the charges against famous and wealthy individuals because, in theory, they pay higher taxes.
However, the law also applies to everyday citizens, meaning they can be charged and jailed for tax crimes once caught.
Can You Go to Jail for Not Filing Taxes?
The IRS may not immediately take action if an individual does not pay taxes on time. However, the agency can mail a bill outlining how much the taxpayer owes, including any penalties.
Depending on the amount owed, the taxpayer can accumulate a high penalty in the form of interest and fees.
The IRS will not immediately file charges against the taxpayer despite this financial penalty. Still, not taking the necessary action to pay taxes after the IRS notification can put the taxpayer in a difficult situation.
Can You Go to Jail for Not Paying Taxes?
U.S. law states that any individual who willfully attempts to evade or defeat any tax shall be guilty of a felony. Upon conviction, that individual can be fined up to $100,000, imprisoned for up to five years, or both, in addition to other costs of prosecution and penalties provided by law.
For corporations, the fee can be up to $500,000.
Can You Go to Jail for Not Paying Business Taxes?
Similar to individual taxes, business taxes that taxpayers fail to pay can land them in jail. This situation is also true for individuals charged with tax evasion or fraud.
Although tax authorities are not keen on putting offenders in jail, the government still prefers to collect taxes owed.
In cases like the non-payment of business tax, communicating and negotiating a solution with the IRS or state tax agency is always in a business owner’s or individual taxpayer’s best interests.
The solution often starts by filing unfiled returns, even if the business owner does not have the money to pay the tax debt. Doing so can help the business owner avoid a criminal investigation that can lead to criminal charges and eventually, jail.
What Happens if You Do Not Pay Taxes?
There are several reasons an individual fails to pay taxes, such as forgetting to file tax returns, not feeling like filing taxes, or possible criminal reasons not to file taxes.
Regardless of the reason, the IRS will likely send a written summons in the mail to remind the erring taxpayer to pay the taxes owed. The summons often mandates a meeting with the agency.
When taxpayers fail to file their taxes on time, the IRS imposes a failure-to-file penalty. This penalty is typically five percent of the tax owed monthly or part of the month when the return is late. This penalty can increase up to a maximum of 25%.
Furthermore, there is a minimum penalty for late filing if the return is more than 60 days late. For tax returns filed in 2022, that amount is $435, or 100% of the tax owed, whichever is lesser.
How Long Can You Get Away With Not Paying Taxes?
Tax assessments have a collection statute expiration date (CSED). Based on the Internal Revenue Code section 6502, the length of the collection period after a tax liability assessment is ten years.
When the collection statute expires, the government’s right to pursue collection of tax liability also ends.
What to Do if You Cannot Pay Your Taxes
An individual who fails to file taxes and worries about the consequences should consider taking action immediately.
Consulting an accountant or tax attorney for legal advice is one of the best ideas to ensure the necessary liabilities are adequately handled.
Even if the taxpayer cannot afford to pay the tax bill, the taxpayer will not go to jail as long as they file their return.
In this situation, the taxpayer may work with the IRS to devise an alternative arrangement or payment plan. The plan can give taxpayers time to earn money to pay what they owe.
Is Tax Avoidance Illegal?
Avoiding taxes through legal means is ethical and not illegal.
In common usage, tax avoidance is sometimes used synonymously to tax evasion. However, these terms have different legal implications when referring to tax crimes.
Tax evasion is evading taxes the taxpayer is supposed to pay. On the other hand, tax avoidance refers to using legal and innovative tax planning strategies to reduce tax liability.
Are You Going to Get Audited?
From 2010 to 2015, taxpayers whose incomes amounted to $10 million and above had significantly higher tax audit rates than taxpayers from other income categories.
This statistic indicates that higher income taxpayers are more likely to be audited than taxpayers from lower-income brackets.
Penalties for Tax Evasion in the U.S.
Individuals or entities committing tax evasion in the United States are likely to face the following judgments and penalties:
Criminal vs. Civil Proceedings and Penalties
Most tax law violations are civil and not criminal offenses. Hence, individuals who get audited and turn out to owe money are usually placed with civil penalties to collect the remaining money.
The IRS does not imprison individuals who make honest mistakes on their tax returns. These individuals can only go to prison if criminal charges for tax law violations are filed and if they get sentenced to criminal prosecution.
Criminal vs. Civil Judgments for Tax Issues
The IRS can take collection actions against the taxpayer in a civil judgment. These actions include seizing the taxpayer’s assets, bank accounts, or wages, revoking their passport, or issuing a tax lien against their property.
The total value of the taxpayer’s seized assets depends on how much the IRS believes the taxpayer owes the agency. In these situations, the IRS has the power to recoup unpaid taxes.
Still, taxpayers cannot be jailed due to a civil judgment, and there is no prison for debtors who have not paid their taxes.
Tax Fraud and Jail Time
Deliberately attempting to avoid paying taxes through lying or falsifying information is considered a crime. Individuals accused of such an act can be considered guilty of tax fraud.
Tax fraud includes falsifying records, lying intentionally on the tax form, and misrepresenting certain expenses.
Income tax fraud is a severe crime where the taxpayer can face jail time if found guilty. For instance, tax fraud involving fraudulent returns, statements, or documents can place the taxpayer in prison for not more than one year.
If you know someone jailed for tax fraud or other tax-related crime and need to locate where they are currently incarcerated, you can search for them at lookupinmate.org. This interface allows you to search for inmates by jail type, jail name, or state.
IRS Voluntary Disclosure Program for Unfiled Back Taxes
The IRS runs a voluntary disclosure program, similar to the programs of state tax agencies, allowing taxpayers to process their unfiled taxes without facing a prosecution recommendation.
This policy applies to taxpayers who:
- File back tax returns accurately
- Inform the IRS voluntarily regarding their failure to file and pay taxes for one or more years
- Inform the IRS voluntarily about their back taxes before they come under criminal investigation
- Pay the total amount of taxes owed or, if the taxpayer cannot do so, work out a payment plan agreement
How Much Money Can You Owe the IRS Before You Go to Jail?
If the IRS believes a taxpayer owes taxes, it will not hesitate to remind the taxpayer of their obligation.
However, unless the taxpayer committed any tax-related crimes, there is no set amount of money they have to owe the IRS before they go to jail.
How Does the Government Detect Tax Crimes?
There are ways for the IRS to determine whether the taxpayer’s return contains fraudulent information.
The agency utilizes an automated matching system. Employers and financial institutions submit W2’s (wage and tax statement), 1099’s (information returns), and similar income documents, and the matching system compares the information on these forms with the tax return information.
If the IRS detects a mismatch, the agency can consider the situation an indication of fraud.
The IRS can also scan tax returns for signs of fraud. For example, certain deductions are likely at certain income levels. A significant deviation between the two figures can be a red flag indicating a potentially fraudulent entry.
How the Courts Prove Tax Crimes
The courts prove the following elements to determine if an individual is guilty of a tax crime:
- There is an existing unpaid tax liability
- The defendant evaded or tried evading the tax payment
- The accused knew they were supposed to pay the tax and intended to evade it
For the court to charge the individual with criminal tax evasion or fraud penalties, the jury must find the defendant guilty of the violation beyond a reasonable doubt. The individual can face jail time if convicted of criminal charges.
If the charges are related to civil tax evasion or fraud, the burden of proof is lower.
What the IRS Cannot Send You to Jail for
When it comes to determining tax fraud, the individual’s intent matters. As long as the taxpayer is not actively attempting to defraud the government, their probability of committing a crime is low.
With that situation in mind, the following scenarios do not warrant the IRS sending you to jail:
Tax Filing Mistakes
The IRS is not interested or even allowed to send anyone to prison over cases of simple, unintended mistakes.
Examples of simple tax filing mistakes include math or computing errors, forgetting to fill out a form, or misreading the instructions. These honest mistakes should not result in criminal charges.
Avoiding Taxes With Write-Offs
Business owners and self-employed individuals usually track their business expenses and use tax write-offs as a legitimate method to avoid taxes.
American tax laws permit taxpayers to deduct the cost of their work-related purchases from their taxable income.
Avoiding Taxes With a Business Entity
The United States has several legal business entities, such as sole proprietorships, partnerships, and corporations.
A taxpayer starting a business can choose which particular entity they will establish so that they can pay less tax at the end of the year.
Not Being Able to Pay Your Tax Bill
Despite unpaid taxes not being favorable in the IRS’ perspective, the erring taxpayer cannot be sent to prison even when they do not have enough money to pay the tax.
When the taxpayer owes more than what they can afford, the IRS can help them work out a payment plan or offer a compromise, letting the taxpayer haggle for a lower tax bill.
Tax Avoidance
The IRS describes tax avoidance as a perfectly legal method to lessen an individual’s or entity’s tax liabilities and maximize after-tax income.
Eligible taxpayers can claim tax deductions, adjustments, or credits to income, such as when claiming a refund for overpayment of taxes after filing a tax return or a deduction for interests paid on home mortgage payments.
When Are You Not Legally Required to File?
The following situations demonstrate when the individual is not obligated to file taxes:
- They are a U.S. citizen earning less than the annual threshold in a given year, based on their filing status and employment type.
- They are a non-U.S. citizen engaged in certain types of U.S. activity, assuming there is proper withholding of U.S. taxes.
- It is a limited liability company (LLC) taxed as a partnership but with no activity (income, assets, and expenses) during the tax year. In contrast, LLCs taxed as a corporation are taxed yearly, even without activity.
Tax-Related Crimes for Which the IRS Can Send You to Jail: Can the IRS Put You in Jail for Not Paying Taxes?
The severity of a tax-related crime and the likelihood for the IRS to send a taxpayer to jail depends on factors like the amount being owed, the number of times the offender got caught, and whether they are using a tax evasion scheme.
These tax crimes include the following:
Tax Fraud
Tax fraud is any activity that hides or falsifies the information on a taxpayer’s tax returns to avoid paying the amount owed.
Examples of tax fraud are claiming personal expenses as business-related deductions or using a falsified social security number.
Regarding criminal penalties, the average prison sentence for tax fraud is around 17 months. That length can go longer depending on the tax fraud’s scope.
Tax Evasion: What Is Tax Evasion?
Tax evasion is a specific tax fraud type that, unlike tax avoidance, is the willful withholding of information about the taxpayer’s income, bank accounts, or other financial assets to pay lower taxes.
One example is when someone works a side job and does not include their income from that job on their tax returns.
How Can the IRS Find Out About Tax Evasion?
There are several ways the IRS can find out about a taxpayer’s tax evasion activities, such as the following:
- A random audit that reveals information in a taxpayer’s books wherein the figures do not add up correctly.
- A client the IRS is auditing for a substantial contract labor deduction claim when that client did not file any 1099s. Payments worth $600 or higher made during a trade or business require a 1099 form.
- A client paying an independent contractor over $600 and filing a 1099-NEC form with the IRS without the contractor’s knowledge.
Failure to File
There is a difference between an erring taxpayer who fails to file their tax returns by accident and someone who willingly refrains from filing. This difference can determine what course of action the IRS will take.
Purposely avoiding filing tax returns is illegal, and the IRS can act against the taxpayer. On the other hand, the IRS considers an accidental failing to file as an honest mistake and will not result in a criminal charge.
Illegal Tax Shelters
Tax shelters are strategies taxpayers use to reduce their overall income tax liability without affecting the value of the taxpayer’s income or assets.
Not all tax shelters are illegal. For example, putting part of an employee’s income into an employer-sponsored 401(k) program is considered a legal tax shelter.
However, taxpayers who use illegal tax shelters are intentionally avoiding paying taxes. Placing money into an undeclared overseas bank account serves no legitimate tax collection purpose and can be considered illegal.
Statute of Limitations for Criminal Tax Evasion and Fraud
The statute of limitations specifies the time allowed for the IRS to bring charges against an erring taxpayer. This period is generally three years after the date the taxpayer filed their return or the due date of their return.
After that period, the IRS can no longer pursue charges against that taxpayer unless they exclude more than 25% of their income. In this case, the IRS has a six-year window.
However, when the taxpayer has unfiled or fake returns, there is no limit for the IRS to press charges.
How to Avoid Tax Consequences
The IRS cannot file a criminal case against a taxpayer who is unable to pay taxes on time, provided that the taxpayer is not intentionally avoiding or lying about their taxes.
The best solution for taxpayers is to pay their tax bills in full. However, there are times when they cannot do so immediately. In these cases, they can enter an agreement with the IRS for alternative tax relief solutions, such as the following:
- Installment agreements that let an individual pay off their tax bill over time
- Penalty abatement that can help reduce fees you’re facing due to late payment
- The IRS Fresh Start Program that can help taxpayers owing a high tax amount or struggling to pay off back taxes
Entering any of these solutions gives the taxpayer enough allowance to make the necessary payments to the IRS.
However, the IRS can restart the tax consequences if the taxpayer defaults on their payment plan.
Getting Back on Track After Not Filing Taxes: Options for Resolving Back Tax Debt
The IRS is willing to help non-willful tax violators to return to compliance. The agency offers amnesty programs to help erring taxpayers reduce or eliminate the penalties.
Proving Reasonable Cause
To participate in the agency’s tax amnesty programs, the taxpayer must first prove that they did not commit a willful violation.
One reasonable cause for being unable to file taxes correctly can be that the taxpayer’s house and all of their financial records were damaged or burned down in a fire. Another reason is hospitalization during the filing date, rendering the taxpayer unable to pay the taxes.
As long as the taxpayer can prove their circumstances and intentions in those cases, they will not be put in jail. In certain situations, the IRS can waive some or all penalties.
Being Proactive
Taxpayers who owe taxes will likely have a favorable outcome if they communicate with the IRS before the agency catches the violation. For example, a late tax filing is better than not filing the returns.
Proving reasonable cause can be confusing to some taxpayers. In this case, they should consider seeing a tax attorney to ensure the best possible outcome.
Doing Your Taxes
Filing tax returns on time helps the taxpayer avoid any risk of civil or criminal proceedings. The taxpayer may also need to file for an extension if necessary.
Taxpayers can consider using tax software programs to fill out forms correctly and compute taxes accurately.
In complicated situations, the taxpayer can work with a tax professional or a certified public accountant (CPA) to minimize or prevent mistakes in filing taxes.
Government Forgiveness Programs
If the taxpayer can provide a reasonable cause, the IRS offers several options to help taxpayers resolve their back taxes:
Short- or Long-Term Payment Plans
If the taxpayer’s violation leads to a significant interest payment or a larger tax bill, they can apply for a payment plan.
These plans have their own associated fees and are not as cheap as paying the owed amount upfront. Still, these plans can help put the taxpayer back in good standing with the IRS.
Offer in Compromise
The IRS will still consider negotiating a lower tax bill if the payment plan is outside the taxpayer’s financial capacity. To receive this offer in compromise, the taxpayer must ensure all their estimated payments and tax filings are updated.
Penalty Relief
The IRS offers full penalty relief to erring taxpayers for extreme circumstances only. In these situations, the agency gives the taxpayer a chance to obtain enough money to pay the tax and interest.
Individuals filing for penalty relief will still be legally required to pay any interest the tax bill accrued.
Streamlined Filing Compliance Procedures
Individuals who are living abroad or earning foreign income should know what taxes to report. This process can be complex. However, the streamlined filing compliance program can help taxpayers get back on track in these situations.
As long as the taxpayer is not purposely hiding offshore accounts, the program will help streamline or simplify the process of paying the taxes owed.
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References
- The Case for a Robust Attack on the Tax Gap
https://home.treasury.gov/news/featured-stories/the-case-for-a-robust-attack-on-the-tax-gap - 26 U.S. Code § 7201 – Attempt to Evade or Defeat Tax
https://www.law.cornell.edu/uscode/text/26/7201 - Topic No. 653 IRS Notices and Bills, Penalties, and Interest Charges
https://www.irs.gov/taxtopics/tc653 - Part 5. Collecting Process, Chapter 1. Field Collecting Procedures, Section 19. Collection Statute Expiration
https://www.irs.gov/irm/part5/irm_05-001-019 - IRS Audit Rates Significantly Increase As Income Rises
https://www.irs.gov/about-irs/irs-audit-rates-significantly-increase-as-income-rises - 26 U.S. Code § 7207 – Fraudulent Returns, Statements, or Other Documents
https://www.law.cornell.edu/uscode/text/26/7207 - The Difference Between Tax Avoidance and Tax Evasion
https://apps.irs.gov/app/understandingTaxes/whys/thm01/les03/media/ws_ans_thm01_les03.pdf - Quick Facts: Tax Fraud Offenses
https://www.ussc.gov/sites/default/files/pdf/research-and-publications/quick-facts/Tax_Fraud_FY17.pdf - Form 1099 NEC & Independent Contractors
https://www.irs.gov/faqs/small-business-self-employed-other-business/form-1099-nec-independent-contractors/form-1099-nec-independent-contractors