If you’ve recently received a notice from the IRS, you know it can be a frightening and confusing time. You’ve likely heard that the IRS can have people arrested, and even put in jail. While that’s true, it’s not as common as you may think. Which tax offenses could lead to jail time? It all comes down to intentionality. Read on to learn more about the penalties for civil and criminal tax offenses for unfiled tax returns.
Civil IRS Offenses
The IRS is unlikely to jail people for civil offenses related to unfiled tax returns. They understand that not all people may be able to pay their debt in full, and that honest mistakes can be made when navigating tax laws. That doesn’t mean, however, that civil offenses come without a cost. In fact, the most common IRS issues may come with a hefty penalty as an incentive to pay off debts.
Fortunately, the IRS won’t imprison people if they aren’t able to pay what they owe right away. They realize that some taxpayers can’t help their financial situations and may not have enough money to pay tax debts on time. One of the most common IRS civil offenses is failing to pay, or underpaying, tax debt. This occurs when taxes have been filed, but money is still owed to the IRS.
Because the goal of the IRS is to receive the money its owed quickly, penalties for outstanding debts can be quite steep, creating an incentive to pay off the debt as soon as possible. If you receive a penalty notice for failing to pay or underpayment, you can expect to pay a penalty that accrues at a rate of 0.5% of the total unpaid amount monthly, maxing out at 25% after 50 months. Anyone owing more than $1,000 in estimated taxes can expect to be fined up to 4% the amount owed. If tax debt remains unpaid, the IRS could enforce additional penalties, including wage garnishment, property seizures, and tax liens. All remain in effect until the tax debt has been paid in full.
Failing to file your taxes may be deemed a civil offense if deliberate evasion cannot be proven. However, the penalties are higher than those for people who have filed, but are unable to pay off the debt. Once you receive a Failure to File notice, you’ll accrue a penalty of 5% of the unpaid tax amount every month. The penalty will max out at 25% but will remain until taxes are filed and the debt is paid.
Criminal IRS Offenses
While the IRS does not typically consider jail time for civil offenses, like failure to pay, they may consider it for acts they consider more intentional. The most common criminal IRS offenses are tax fraud and tax evasion.
- Tax fraud involves the deliberate falsification of information in order to lessen a tax burden. Examples of tax fraud include misrepresentation of personal expenses as business expenses or under-reporting income.
- Tax evasion is a form of tax fraud in which illegal methods are used to avoid paying taxes, which could include the intentional failure to file a tax return.
In these situations, the burden of proof is on the IRS to show that the fraud was intentional, and not the result of misunderstanding the tax code or simply forgetting to file one year. However, if the IRS can prove that deliberate action was taken to defraud the government, they are within their authority to impose jail time of up to five years for each offense. Anyone helping someone else evade taxes could also face three to five years in prison.
Depending on the situation, the IRS has three to six years to bring criminal charges against someone for tax fraud or evasion. The statute of limitations for tax evasion can last up to six years, but it doesn’t start until the missing returns have been filed.
Getting Professional Help
The tax laws and requirements are often confusing, and it can be unsettling to receive a notice from the IRS in the mail. If you have an unpaid tax debt or returns that have not been filed, you may want to consider engaging a tax professional with experience in navigating tax laws and penalties. Enrolled Agents are tax advisors with certification to represent you before the IRS. They have experience negotiating installment plans and Offers in Compromise to help individuals and business owners get back on track.
No one wants to end up in jail because of a tax offense. Fortunately, most civil offenses, including failure to pay, will not result in prison time. They will, however, come with hefty penalties from the IRS, which could lead to wage garnishment and even property seizure. Tax fraud and evasion, on the other hand, are seen as criminal offenses by the IRS. If they can prove that deliberate intent to defraud the government has taken place, they may consider imposing jail time.
It can be hard to navigate these IRS issues on your own. Whether you are concerned about years of unfiled tax returns or you need assistance in negotiating a payment plan with the IRS, contact the professionals at Tax Resolution by requesting a confidential consultation, to learn more about your options and next steps.