Tax season always seems to creep up, and before you know it, it is time to file your tax return. Fortunately, it is unlikely that you will go to jail for not filing taxes. Tax crimes include tax fraud and tax evasion, but if you consciously make a good-faith effort to pay your taxes, you are unlikely to go to jail or face serious tax problems. An experienced tax resolution lawyer can provide insight on your situation.
Can You Go to Jail for Not Paying Taxes?
Yes, you can go to jail if you fail to pay your taxes. The IRS can and will go after businesses and individuals who commit tax fraud, which is when income is underreported on tax returns to reduce the amount of taxes owed.
Criminal prosecution is unlikely, however, and criminal penalties will only be brought against individuals who sought to mislead the government by filing false tax returns. Prison sentences are also rare, though tax evasion charges are felony charges, which carry a longer jail sentence.
Who Goes to Prison for Tax Crimes?
There are four main reasons why the IRS may bring criminal charges against individuals or businesses for their taxes. They are filing a false return, a failure to disclose income, failing to pay taxes on foreign income, and helping someone else evade taxes.
The most common source of tax fraud on a tax return is some form of unreported, legal income, known as legal source tax evasion. Not paying taxes on a portion of your income, usually some form of self-employment or cash-only businesses, is more than making honest mistakes and results in creating false documents on your tax returns.
What Is the Prison Sentence for Failure to File?
You will not face a prison sentence for failing to file a return, though you will be charged penalties on the amount on your filed tax return. However, if you commit tax fraud by filing an inaccurate return, you can face fines higher than your tax bill and the potential to go to jail.
For willfully filing a false return, individuals can be fined up to $100,000 in addition to being sentenced to prison for up to three years.
What Is the Prison Sentence for Tax Fraud?
The maximum sentence for tax evasion is five years. However, keep in mind that each case is different, and you can be charged with multiple counts of the same crime. You can also be charged for helping others avoid paying their taxes. Not reporting foreign income and keeping it in offshore bank accounts will also get the attention of the IRS.
You may also be charged for any other criminal act that you commit to try to pay less tax, for example, if you forge documents like a false social security number or try hiding income under a fake business entity, those could be classified as other tax crimes such as forgery and wire fraud. You may also be charged with making false statements if you lie to hide your income and assets.
What the IRS Can Not Send You to Jail For
Keep in mind that if there is an issue with your tax return, the IRS will reach out to you directly seeking clarity. You’re most likely to receive a notice in the mail asking you to provide receipts or additional information about your tax return or notifying you that you have unfiled taxes that need to be sent in.
Whether or not you respond to that initial letter, the IRS will also issue a statutory notice of deficiency once they reassess your tax return, at which point you will be notified of the new amount that you owe.
Honest Tax Filing Mistakes
The IRS has no interest or desire to go on trial for a few basic errors. Mathematical mistakes or failure to correctly complete an instruction sheet are annoying and can be costly, but they are not criminal.
In truth, audits have only a very small chance of landing you in jail, and only if it can be proven that you engaged in tax crimes knowingly and willingly. Usually, if you fail an audit, you will just be subject to penalties.
Will I Be Charged with Tax Crimes?
Criminal charges are not often in the cards for most people. The IRS criminal investigation division will only go after people and businesses that have filled out false tax returns on purpose. Making an honest mistake on your tax returns will not land you in jail, though you may be audited.
In fact, you would be surprised at how many people do the math wrong, fill out the wrong form, forget to keep their business deductions up to date, or otherwise do something that causes tax issues on their returns. Most of the time, the worst that this will result in is an audit.
What Happens Next If There Is an Error?
If you are found to have made a mistake on your tax return, such as classifying one of your personal expenses as a business expense or taking too many tax deductions, your return will be audited and reassessed. You may see some civil penalties or a civil judgment attached to your tax return, but you won’t have committed a tax crime.
However, if the IRS thinks that you have participated in activities that it would classify as tax evasion, you should speak to a tax attorney. A tax attorney is the only one who can give you proper advice on how to prove your case and avoid a prison sentence.
Is It Possible to Face Jail Time for Unpaid or Unfiled Taxes?
Yes, it is possible to face charges of tax crime if you do not file a required tax return. You may also face time in jail for not paying your taxes after you have been reassessed to owe more than your initial return indicated. This can be known as willful evasion, as the IRS will see it as avoiding taxes.
In most cases, you’ll simply be assessed a financial penalty, and the IRS can garnish your wages to recoup that money if you don’t pay. For severe cases of fraud or failure to file, you may face charges. However, there are a few special cases in which you do not have to file a tax return.
What If You Are Not Legally Required to File Tax Returns?
You may not earn enough money to have to file a tax return. If you are in a tax situation where you earn less than the standard deduction for a single taxpayer, which for the 2022 tax year is $12,950, you do not have to file a tax return.
Also, if you only receive Social Security benefits as your income for the year, you are not required to file a return. However, if you receive Social Security benefits and other forms of income, your Social Security income could become taxable and would have to be reported on your return.
What Happens if You Do Not File Your Taxes for Three Years?
While not filing your taxes for three years may not be classified as tax fraud or tax evasion by the IRS, it can still have repercussions. Failing to file a tax return for three years means that you are no longer entitled to any refund that may have been assessed.
There is no jail time associated, but you may find yourself financially short of where you would be. It is important to file your taxes on time if you think you are owed money, and talking to a professional about your taxes is the best place to get started.
Ways to Avoid Legal Problems With Your Taxes
The easiest way to avoid any problem with your taxes is to avoid failing to file entirely and to ensure that there are no sources of unreported income that you have failed to account for. Here are a few other good rules of thumb to keep in mind when paying taxes each year:
Do Not Miss Any Filing Deadlines
Failing to file your taxes by the filing deadline can lead to large financial penalties. You will be assessed a 5% penalty per month on the total balance of unpaid taxes in a tax year, up to a maximum of a 25% penalty five months after the deadline.
If you fail to file your taxes for 60 days, or two months, the minimum fee is either $435 or 100% of your unpaid taxes, whichever amount is lesser.
Paying What You Owe Right Away
If your tax return shows that you have tax owed for a specific tax year, prioritize paying it right away. You will be assessed a failure to pay a penalty of 5% of the total balance per month, up to a maximum of 25% after five months. Combined with a maximum failure to file penalty, you could see penalties up to 50% of your total unpaid tax amount added to your tax return.
If you do not have enough money to do so in one lump sum, you should reach out to the Internal Revenue Service and ask about potentially setting up a payment plan. A payment plan with the IRS gives you an extended period, and you will be assessed fees and interest charges on your total balance.
Negotiate a Payment Plan with the IRS
Short-term plans are free for individuals to apply for but require you to owe less than $100,000 in combined taxes owing and any interest or penalties. Longer-term plans come with additional fees and require you to owe less than a combined $50,000 in taxes and assessed fees and penalties.
Make sure that you are well aware of the estimated payments that will have to be made monthly when negotiating a payment plan. Failing to pay taxes after negotiating alternative payment terms may be seen as a form of tax fraud or tax evasion, and the IRS is unlikely to show leniency if this is the case.
Cooperate If You Are Audited
If you find that your tax return is flagged for an audit, you should do everything you possibly can to cooperate with the IRS professional assigned to your case. Give them access to all the bank statements, documents, accounts, and information that you have on hand.
If you ignore the audit notice, they will make changes to your tax return unilaterally, and you will find yourself owing more money than previously. Ignoring their reassessment will waive your right to appeal their changes after 90 days from the updates to your tax return.
Work with a Tax Professional
Finally, another thing to do to avoid any legal or financial penalties associated with your tax bill is to hire a tax professional to avoid such circumstances. They can also help reduce the total tax liability that you are responsible for in a tax year.
Working with a professional is also a good idea if you have been audited already and have been assessed with a penalty. A professional can help you appeal the decision or work to secure penalty abatement or penalty relief, depending on the specifics of your case.
Tax Evasion Penalties and Jail Time Sentences Guide
Tax fraud and evasion penalties will depend on the size and severity of the crime and your willingness to cooperate in the audit that uncovered the tax fraud. Jail sentences are possible but will depend on the specifics of your case and if it is found beyond a reasonable doubt that you willfully failed to fill out your tax returns properly.
If convicted, you will have to pay the back taxes plus a 75% penalty. You will also face up to five years in jail time and will have a criminal conviction permanently on your record, which will make it harder for you to find a job.
Tax Evasion and Tax Avoidance: What’s the Difference?
Tax evasion is an illegal act and a form of tax fraud. Tax avoidance refers to legal steps that you can take to reduce the amount of tax that you pay. You can legally pursue tax avoidance through tax credits and incentives to reduce your tax liability without facing jail time.
Tax evasion, on the other hand, is a crime as described above. Tax evasion refers to illegally hiding or lying about your income to not pay taxes on income earned.
Reducing Your Tax Liability
There are ways to reduce your tax bill without having to face criminal tax evasion charges. Business expenses, like office supplies, utility costs, and in some cases, wages can be used to reduce the total amount you will be paying in taxes.
As an individual, you can also contribute to special tax-sheltered savings accounts, like employer-sponsored 401(k) accounts or Individual Retirement Accounts (IRAs), which can reduce your total taxable income for the year.
Are you concerned about tax debt or are looking for ways to reduce your tax burden this year? Contact the team at Seattle Legal Services, PLLC at 206-895-7268 today. We are a full-service firm that offers professional advice to help make it easier for you to pay taxes for yourself and your business, no matter your needs.