Tax Penalties

Can You Really Go to Jail for Not Paying or Filing Taxes?

A lot of people want to know if you can really go to jail for not paying your taxes? The short answer is maybe — it depends on why you’re not paying your taxes. If you cannot afford to pay your taxes, the IRS will not send you to jail. However, you can face jail time if you commit criminal tax evasion or fraud.

If you’ve just gotten behind on filing or paying you taxes, don’t worry. You can usually catch up and get back into compliance without ever worrying about criminal charges. Even with tax fraud, the IRS usually addresses the issue through civil penalties. Jail time really only comes up in extreme cases. 

Regardless of what you’re going through, the tax attorneys at The W Tax Group can help you navigate the tax code. If you’re having trouble with the IRS, contact us today.

Key Takeaways

• Jail time for unpaid taxes is possible but rare.
• Jail time is possible in cases of criminal tax fraud/evasion. 
• Criminal tax fraud or evasion requires willful acts. 
• The IRS has six years from the last affirmative act to initiate criminal tax fraud charges.
• Civil fraud penalties are much more common than criminal charges.
• If you don’t pay taxes, you may face collection actions such as wage garnishments or bank account levies.
• The IRS uses data matching systems and random audits to find non-filers and unreported income.

Can You Go to Jail for Not Paying Taxes?

Yes, if you commit criminal tax evasion, you can face jail time, but the IRS must bring criminal charges against you and the agency must establish that you willfully intended to evade the taxes. You will not go to jail just for making a mistake. In most cases, even if you commit fraud, you’ll only face civil penalties. 

Can You Go to Jail for Not Filing a Tax Return?

Theoretically, you can face up to a year in jail for an unfiled return, but again, the IRS only uses this penalty as a last resort for people who refuse to address their situations. If you simply get behind on filing, the agency will likely give you ample time to catch up, and often, you’ll often have to file the last six years of returns.

How Long Can the IRS Bring a Criminal Case Against You?

The IRS only has six years from the last affirmative act to bring criminal charges against you. However, the agency has an unlimited amount of time to bring civil fraud penalties against you.

Typically, the IRS only has three years from the later of your return due date or the date you filed to audit you. However, if you omit more than 25% of your income, the IRS has six years to audit your return and decide to bring criminal charges against you.

If you file a fake return or don’t file at all, there is no statute of limitations. The IRS has an unlimited amount of time to bring civil tax penalties against you.

Penalties for Tax Crimes

The most common tax crimes are fraud and evasion. Evasion is when you willfully avoid filing or paying taxes, and fraud is when you deliberately lie or deceive the IRS. There are several different types of tax fraud including:

• Failure to collect or pay tax.
• Failure to file a return or supply requested information.
• Fraudulent withholding exemption certificate or failure to supply information.
• Fraudulent and false statements.

Taxpayers may commit criminal tax evasion in the following ways:

• Not filing a return in a willful attempt to avoid paying taxes
• Falsifying financial records
• Underreporting income
• Falsely assigning income – for example, putting income you earned on your dependent’s tax return to get a lower tax rate.
• Not reporting foreign income or assets.

These crimes can lead to a prison sentence of up to five years and fines of up to $250,000 for individuals and $500,000 for corporations. To be convicted of these crimes, your behavior must be willful. Fraud and evasion are intentional. They are not the same as making a mistake on your return.

Civil Versus Criminal Penalties

In most cases, the IRS uses civil penalties to hold taxpayers accountable, and if you’re only facing civil penalties, then you don’t have to worry about jail time. 

Here’s an example. Let’s say that you don’t report a significant amount of income on your tax return, and the IRS decides that you committed tax fraud. Rather than pursuing criminal charges, the IRS assesses a civil fraud penalty against you. The civil fraud penalty is 75% of the tax owed or the tax that was unreported. 

However, if the IRS decides to pursue criminal charges against you, then, you may face jail time. This generally only comes up in extreme cases. For example, in 2020, a New York restauranteur pled guilty to one count of tax evasion, and he got a jail sentence of 24 months plus three years of supervised release. 

However, he evaded over $770,000 in taxes to the IRS and the NY Department of Taxation from 2010 to 2014. During that time, he took cash from his restaurant and cashed checks from his restaurants in different accounts. Then, he never told his accountant about the millions of dollars he was diverting, and of course, he also never told the IRS about the income. 

People Who Have Gone to Jail for Tax Fraud

When willful fraud or evasion is involved, the IRS will not hesitate to pursue criminal charges. Many famous people have gone to jail for tax evasion, including:

• Wesley Snipes was sentenced to three years in federal prison for tax evasion and failure to file returns.
• Mike “The Situation” Sorrentino from the Jersey Shore was sentenced to eight months in prison for failure to pay taxes on $9 million of earnings.
• Ja Rule (Jeffrey Atkins) received a 28-month prison sentence for failing to file returns and failure to report over $3 million in income.
• Daryl Strawberry spent three months in prison and three months on house arrest for failure to report half a million in income between 1986 and 1990.
• Founder of the Girls Gone Wild series, Joe Francis was sentenced to 301 days already served and a year of probation for filing false tax returns.
• Lauryn Hill faced a three-month prison sentence after not paying $1.8 million in taxes.
• Real Housewives of New Jersey stars Teresa and Joe Guidice were respectively sentenced to 15 and 41 months in prison for tax fraud and failure to file.
• Chuck Berry served 120 days in prison, four years of probation, and 1,000 hours of community service for tax evasion.
• Survivor winner Richard Hatch was sentenced to 51 months in prison for tax evasion and filing false returns.

Will You Get Caught If You File a False Return?

Filing a return with false information is a misdemeanor, and if charged, you can face up to three years in prison or up to $25,000 in fines. If you report additional dependents, overstate your business deductions, or lie about charitable contributions, you may face felony charges for tax evasion.

But will you get caught if you put the wrong information on your return? Not necessarily. It depends on the situation, but saving a few dollars on your tax bill is not worth the risk of facing jail time, incurring fines, or hurting your reputation.

To detect false information on returns, the IRS uses a matching system. If a financial institution, an employer, a client, or another third party reports information to the IRS and your return doesn’t have the matching info, the IRS will flag your return for a manual review. The IRS also randomly selects people and businesses for audits. If you file your tax return honestly and keep good records, an audit can be relatively painless. However, if you’ve lied on your return, an audit can be the first step toward a criminal case against you.

Example of a Tax Crime

To help you get a sense of how the IRS detects tax fraud and other tax crimes, here’s a story about someone committing tax evasion.

Joe has a Monday through Friday job at an office, and every year, he reports the earnings from his job on his tax return. On the weekends, Joe does junk removal. At first, he just provides services for a few friends, but over the years, he develops a strong reputation as a junk removal professional.

For the past few years, Joe has earned an extra $500 every weekend on his side hustle. His annual income from junk removal is about $25,000. He’s been saving the cash in a savings account at XYZ Savings Bank, but he hasn’t reported any of that income on his tax return.

The IRS sends Joe an audit notice. During the audit, the auditor asks about other income sources, but Joe claims that his only income is from his Monday-to-Friday job. When the auditor asks to see his bank statements, Joe provides the auditor with statements from his checking account, but he doesn’t share any of the statements from his savings account.

Joe believes that his return was randomly selected for an audit, but it wasn’t. The IRS has a reason to believe that Joe might be evading taxes. Last year, ABC Property Management Company paid Joe $3,000 to remove junk from some of their properties, and they issued a 1099-NEC to Joe. Although Joe didn’t receive the 1099-NEC because he moved, the IRS has a record of this payment, and the agency is curious about why Joe didn’t report it.

During the next audit meeting, the auditor asks Joe about his account at XYZ Savings Bank. Joe quickly lies and says that he forgot about that account because he never uses it. The auditor pulls out records that he has summoned from the bank and pokes a big hole in Joe’s story.

Based on the records in that savings account, the IRS realizes that Joe has been earning but not reporting extra income for years. The agency brings criminal charges for tax evasion against Joe. He must pay the taxes owed, plus penalties for criminal tax evasion, and he may face a prison sentence.

Penalties aren’t just for taxpayers. There are also consequences for tax preparers who commit tax fraud. If you’re in a situation like this, you need a tax attorney. Do not represent yourself.

Who Gets Randomly Audited?

Being randomly selected for an audit is relatively rare, but rather you’re randomly selected or chosen through sampling, the audit rate is relatively low. The IRS only audits about 0.5% of taxpayers every year. That’s just one of every 200. 

However, the audit rate strongly correlates with your income. If you report no income or a loss, you face a significant chance of being audited. People with incomes ranging from $0 to $25,000 are audited at a higher rate than taxpayers who report $25,000 to $5 million in income. That’s because at lower income levels, the IRS gives out the Earned Income Tax Credit, and the agency keeps a close eye on that valuable credit. 

If your income is over $10 million, your audit rate jumps to about 2.4%, so five times the average. Typically, when the IRS does an audit, the taxpayer does not face any criminal penalties. Even if the taxpayer made a mistake on their return, the IRS just adjusts the return and assesses the tax due.

For example, in 2015, the IRS only indicted 1,330 taxpayers for legal-source tax evasion. Legal-source means that the tax evasion was related to money earned legally, not to money earned by criminal activities. When you consider that 150 million people file tax returns, this is a very small number.

Can You Go to Jail for Reporting Illegal Income on Your Tax Return?

The IRS’s tax code requires people to report income earned from illegal sources as well as stolen money and items. For instance, if you earn income from selling drugs or other illegal goods or if you embezzle from your employer, you are legally required to report the income.

You are also supposed to report the fair market value of anything you steal — if you steal a car worth $10,000, you should report the $10,000 as income and pay tax on it.

But what if you report illegal income? Can the IRS tell law enforcement that you earned money from crime? This issue is complicated, and there have been many Supreme Court cases about it. Generally, the rule is that you must report illegal income, but you don’t have to incriminate yourself by revealing its source.

Can You Go to Jail for Not Reporting Illegal Income?

You can face jail time for tax evasion if you don’t report income from illegal sources. The most infamous case of this was Al Capone.

The FBI had been trying to capture this famous mobster for years. He was briefly arrested for carrying concealed weapons and contempt of court. His most significant arrest, however, was due to tax evasion. Federal Treasury agents gathered evidence that he failed to report his illegal income and thus failed to pay his income tax bill for years. Ultimately, he was convicted of this crime and spent 11 years in prison.

Will You Go to Jail If You Fail an Audit?

Yes, if the audit reveals criminal tax evasion, you may face jail time. However, this is rare. In most cases, when people fail an audit, the auditor assesses the additional tax liability, and then, they add penalties which can be severe if neglect or gross understatement of income was involved.

Is Tax Avoidance a Crime?

No, tax avoidance is a legal strategy to reduce your tax bill. You can legally avoid tax by legitimate means, and ideally, you should use tax planning strategies to reduce your tax bill as much as legally possible.

What Happens If You Don’t File a Tax Return?

If you don’t file a tax return, you can face a penalty of 5% of the tax owed, every month up to 25%. You may not be able to get loans or file for bankruptcy. The IRS may send you a substitution for return (SFR) which is essentially a return where the IRS assumes your income but doesn’t give you any deductions, exemptions, or credits.

The IRS can pursue collection action (liens, levies, seizures, etc) in pursuit of the unpaid tax, but you may also face misdemeanor charges and a penalty of up to one year in jail and up to a $25,000 fine for each unfiled return. For best results, reach out to the IRS first whenever possible. The agency is more lenient when you file your unfiled returns on your own.

Get Help with Tax Crimes and Fraud

Has the IRS accused you of fraud when you just made a simple mistake on your return? Are you worried about unfiled returns or unreported income? Dealing with tax fraud or evasion? Then, you need legal help.

The tax attorneys at The W Tax Group have extensive experience helping clients deal with the IRS. To learn more, contact us today.

Lead Tax Attorney at The W Tax Group

Stephen A Weisberg