Falling behind on your taxes is a common problem, but could it be criminal? If you’ve failed to file your taxes and pay them on time, it’s unlikely that you’ll be sent to jail. The majority of people who are behind on tax returns or payments face penalties and aggressive collection efforts–not a criminal investigation and jail sentence. However, there are circumstances where jail time is a possibility.
At McLaud Law P.C., we have the answer you’ve been looking for. In this guide, we cover the rare scenarios that tax-related problems result in jail time, the other common outcomes, and how you can protect yourself. To discuss your tax needs in greater detail, call us at 585-397-7785 today.
Key Takeaways
- The IRS rarely pursues criminal charges for tax-related problems. Most cases result in civil penalties, such as collection action, interest, and other charges.
- The government needs to prove that you “willfully” evaded your tax duties in order to gain a criminal conviction. Honest mistakes don’t usually trigger charges.
- Tax evasion cases can carry severe consequences, including a sentence of up to five years’ jail time and up to $100,000 in fines.
- The statute of limitations means the IRS has a period of up to six years to pursue criminal charges. However, there is no limit on civil cases.
- Getting help from a qualified tax attorney early on is the smartest way to protect yourself. If you’re worried about your tax-related issues, don’t wait until it’s too late.
What are Federal Tax Crimes That Can Lead to Jail?
Tax-related crimes can result in prison time, but most actions taken by taxpayers aren’t criminal; they’re the result of misunderstandings, an inability to pay, or unintentional errors. But if you are charged with a crime, it’s important to know what the charges mean and what the government has to prove.
Let’s take a look at the federal tax crimes that carry jail time:
- Tax Evasion (26 U.S.C. § 7201): If you willfully attempt to evade your tax duties, including your return and payment, that is a serious federal crime. It involves hiding your income, filing false returns, or hiding certain assets from the IRS. Note that this doesn’t extend to merely failing to pay your taxes. The tax-related crime can carry prison time of up to five years and fines of up to $100,000 for individuals.
- Willful Failure to File (26 U.S.C. § 7203): This is a misdemeanor offense. It’s when you willfully fail to file a tax return, supply relevant information, or pay your taxes. To convict you, the government will need to prove that you acted “willfully”, meaning that you did it on purpose. The crime carries a fine of up to $25,000 and up to one year in prison for individuals.
- Willful Failure to Pay Tax (26 U.S.C. § 7203): Similar to the willful failure to file charge, this one is also a misdemeanor. It involves “passive noncompliance,” which means that you failed to pay your taxes despite the fact that they were due. Again, this can carry a fine of up to $25,000 and a one-year prison sentence for individuals.
- Filing False Returns (26 U.S.C. § 7206): This tax-related crime is when you knowingly file a return that contains false information. This can include either signing a claim that you know to be false or even helping someone else file a fraudulent claim. The crime can lead to up to three years imprisonment and up to $100,000 in fines.
- Failure to Collect or Pay Over Employment Taxes (26 U.S.C. § 7202): This crime only applies to business owners who must withhold payroll taxes from employees but fail to remit them to the IRS. It carries up to a five-year prison sentence and is a serious offense.
Which Statutes Govern IRS Criminal Charges?
The government has a limited timeframe to bring criminal charges for tax crimes. In most cases, there’s a six-year window that starts from the last confirmed time that you committed a tax-related crime.
Of course, there are circumstances when the IRS will extend the statute of limitations. For example, if you leave the country and become a fugitive, that time will not count towards the limit. The clock simply pauses when you leave and restarts when you return to the U.S.
Note: Civil tax fraud has no statute of limitations. That means that the IRS can pursue civil cases indefinitely, should they have the evidence to do so. Many people make the mistake of believing that after the six-year period is up, they are free of any consequences. However, the civil liability remains, meaning that you may have to pay significant interest and penalties.
What are Civil vs. Criminal Judgements?
The vast majority of tax-related problems won’t result in jail time. The reason is that they are often civil cases as opposed to criminal cases. Understanding the difference will help you to navigate your tax situation and determine the severity of your circumstances.
Criminal Tax Cases
In criminal cases, you must have “willingly and intentionally” violated federal tax law. You must have known that what you were doing was illegal. IRS Criminal Investigation (IRS-CI) handles these types of cases, and they can result in imprisonment, hefty fines, and a criminal record.
Civil Tax Cases
Civil cases are most often non-intentional on your part. They may involve genuine mistakes, negligence, or non-willful failure to file and pay your taxes. While these cases don’t lead to incarceration, the penalties you face can be severe. They include interest and fines.
It’s not always one or the other. Keep in mind that the same conduct can lead to both civil and criminal cases. For example, when you face tax-related criminal charges, you will also face civil fraud penalties, back taxes, and interest. Additionally, if you are acquitted in a criminal case, the IRS can still pursue a civil case against you.
Worried about your tax-related issues? Working with a qualified tax attorney is a smart move. An expert will be able to help you navigate the complex federal tax laws and come to the best resolution for your personal circumstances.
Getting Help with Unfiled or Unpaid Taxes
When you have unfiled returns, unpaid taxes, or any concerns about your past tax conduct, it can weigh heavily on your mind. Taking proper action now shows the IRS that you are willing to comply and may work in your favor, potentially preventing jail time down the line.
At McLaud Law P.C., we have a team of skilled tax professionals committed to providing taxpayers with the advice and support they need. If you need help understanding your options to minimize your criminal and civil liability, getting in touch is the first step. Request a free consultation today or call us at 585-397-7785.
Frequently Asked Questions
What happens if you have unpaid or unfiled taxes?
The IRS has the legal right to impose penalties on you if you have unpaid or unfiled taxes. They may charge interest on your account or take collection activities that will quickly escalate.
The first time you fail to file your taxes, the penalty will typically be 5% of your unpaid taxes per month, up to 25%. Should you file your taxes on time but not pay them, the IRS will usually charge you 0.5% of your unpaid taxes per month. Again, this can rise up to a top amount of 25%. In cases where both penalties apply, the failure-to-file penalty will be reduced by the failure-to-pay penalty.
What happens if you file a false tax return?
Filing a false tax return is serious business and carries serious consequences. Under 26 U.S.C. § 7206, making a false tax statement on any return is classed as a federal crime. It can lead to up to three years of jail time and up to $100,000 in fines.
This crime covers all manner of false statements, including underreporting your income, claiming for false deductions, and inflating your business expenses to reduce your tax owed. The IRS looks for patterns of behavior to determine whether you may have filed a false return.
Of course, if you realize that you’ve filed a return that includes incorrect details, you need to put it right sooner rather than later. Contacting the IRS about this error shows good faith and may help you to avoid criminal prosecution, but you should always consult a tax attorney before doing so.
Can Audits Lead to Jail?
Not all IRS audits lead to jail. Only criminal convictions, which rarely happen as a result of an audit, result in a prison sentence. The audit is a civil examination of your tax return.
The most common audit outcomes include an adjustment of your tax liability, additional payments, or even no changes whatsoever. Of course, if the audit reveals criminal activity or willful fraud, you may face charges and jail time.
What if I report income from an illegal source?
All income is taxable, regardless of how it was earned. If you report illegal income, you will still have to pay taxes on it. However, this move does not provide you with any immunity from law enforcement. You are not required to share the source of your income on your tax return.
Reporting illegal income doesn’t automatically expose you to criminal charges, since tax returns are confidential. Most of the time, law enforcement agencies need a court order to access your tax information. To gain that, they need to prove this is necessary to investigate your income. The IRS does not typically share this information with external agencies without a court order.
What if I don’t file a tax return?
When you fail to file a tax return on time, the IRS typically sends multiple reminder notices to urge you to file your return. You’ll be charged interest and penalties, and eventually, the IRS will use the information they have to create a Substitute for Return on your behalf and bill you what they believe you owe. In rare cases, you may face criminal charges if the IRS believes that your failure to file was willful.
What if I can’t pay my taxes? Can I go to jail?
If you are unable to pay your taxes, that doesn’t mean that you will ultimately go to jail. The IRS doesn’t imprison people when they are facing poverty or financial hardship. What’s more, there is a selection of IRS payment plans you can access when you’re unable to cover your taxes.
Still, there are tax-related situations that do result in criminal charges. Some of the most common include hiding assets from the IRS, using nominee bank accounts or shell companies to conceal your earnings, and making false statements on your tax returns. The key here is that your actions must be “willful,” meaning that you purposely evaded paying taxes.
The IRS has many other routes to collecting your taxes. These include federal liens, seizing assets, and levies on your bank account. When you’re unable to pay, there are also options, such as the Currently Not Collectible status or an Offer in Compromise (OIC). A trusted tax attorney can help you find the best resolution for your situation and negotiate with the IRS on your behalf.
This communication is Attorney Advertising. It is presented for informational purposes only and does not constitute legal advice. Every legal situation is different, and prior results do not guarantee a similar outcome. This communication does not create an attorney-client relationship between McLaud Law P.C. and the recipient.
