Will I Go to Jail for Unpaid Taxes?

When Does Not Paying Taxes to the IRS Become a Crime?

You can face very stringent collection actions for not paying your taxes, but most people will never face jail time. Not paying your taxes only becomes a criminal act if the IRS believes that you have not paid your taxes in an attempt to commit tax evasion, and they recommend criminal charges against you. However, even in cases of tax fraud, the government often sticks with civil penalties instead of criminal charges. 

When a taxpayer sees an unusually large tax bill that they know they can’t pay in full, their mind tends to go to the worst possible outcomes. They imagine losing their home, car, and wages—and they often wonder, “Can you go to prison for not paying taxes?” 

While there is this public image of the IRS as an agency willing to swarm your home and kick down your door when you don’t pay your taxes on time, the fact is that they do not want to take any more aggressive collection actions than they must. And except in very extreme cases, they do not come to taxpayers’ homes unannounced.

Although jail is a possibility when a taxpayer fails to pay their taxes, it is extremely unlikely. This outcome is rare and generally reserved for those who intentionally evade their taxes or engage in tax fraud—not taxpayers who simply find themselves in over their heads when tax time rolls around. By learning more about the scenarios that are likely to lead to jail time, you can put your mind at ease and start thinking about practical ways to tackle your tax debt. To learn more about your options and to get help dealing with unpaid taxes, contact us at The W Tax Group today.

Unpaid Taxes and How the IRS Handles Them

While the IRS isn’t in a rush to throw taxpayers in jail, they will do whatever they can to collect what they are owed. If a taxpayer files a tax return but does not make payment on their taxes owed, the IRS will go through a series of progressively more assertive steps to push a taxpayer to take action. 

The collection process can also be initiated if the IRS makes changes to a taxpayer’s filed return that leads to a tax bill, if an IRS audit leads to a tax liability, or if the taxpayer doesn’t file and the IRS uses a substitute for return to assess taxes against them.

The Collection Process

Upon realizing that you have not yet paid your taxes, the IRS will begin by sending you CP14 or CP501. Both notices are a reminder that you have unpaid taxes and that you should pay in full or make payment arrangements immediately.

If you do not respond to CP14 or CP501, the next step is to send CP503. CP503 is a slightly more serious reminder that the IRS has not received your tax payment and that you continue to have an unpaid balance.

CP504 notifies you of the IRS’s intent to levy your assets. However, this isn’t the official notice of intent to levy that the IRS must send before levying your assets. It does give them the right to seize your state tax refund if applicable.

The final notice you receive before the IRS moves on to levying your assets is LT11 or Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing. If you do not respond to this letter or make a payment within 30 days, the IRS may move on to levying (seizing) your assets.

The actions resulting from Letter 1058—liens, seizure of your bank accounts, wage garnishment, and levies on other assets—are not criminal actions against you. These are civil actions in response to your unpaid taxes.

How Early Action Can Protect You From Serious Collection Actions

The IRS prefers to collect taxes in the least obtrusive way possible; levying taxpayers’ assets or sending them to jail is far from the most convenient option. That’s why there are 30 days between each notice. By the time you have reached the point where the IRS is ready to seize your assets or take other action against you, you have had several months to reach out to them and come up with alternate arrangements. 

Even if you can’t pay in full, you should ideally call the IRS or a tax attorney the very first time they contact you to come up with an acceptable payment arrangement.

When Unpaid Taxes Could Lead to Jail

The average taxpayer does not have to worry about going to jail because of unpaid taxes. However, there are circumstances that can lead to prison sentences. They generally involve the intentional effort to defraud the IRS and federal government out of money, rather than a taxpayer’s unintentional inability to pay.

Criminal Tax Evasion

Criminal tax evasion has three elements that must be proven before a defendant can be sentenced: first, there must be an affirmative attempt to evade the payment of a tax. Second, there must be taxes that are owed and unpaid. Finally, the perpetrator must have engaged in this conduct willfully. 

The Justice Department notes that there are “virtually unlimited” ways to evade taxes. For example, filing a false return, intentionally concealing your ability to pay your taxes, placing assets in others’ names to avoid them being used for your taxes, or selling off assets to protect them from seizure may all be forms of tax evasion. Even not filing a tax return can be considered a crime if you didn’t file in a willful attempt to avoid the tax assessment.

Tax evasion is surprisingly common among people of substantial means, and a quick look at high-profile cases will show heavy punishments for tax evasion. Ja Rule spent almost 2.5 years in prison for failing to pay taxes on over $3 million of income. Survivor winner Richard Hatch was sentenced to more than four years in prison for failing to report more than $1 million in income. Although he was released early, he continued to fail to pay the taxes for the years in question, resulting in an additional nine-month sentence.

Tax Fraud: What the IRS Considers Criminal

Tax evasion is a type of tax fraud, and while not paying taxes is often classified as tax evasion in particular, the IRS may pursue charges under a different tax fraud statute.

Each year, the IRS prosecutes hundreds of tax fraud cases. These crimes peaked in 2019, and numbers in recent years have been considerably lower. The term “tax fraud” includes a wide range of illegal activities, including but not limited to:

• False exemptions and deductions
• False and altered tax documents
• Unreported income
• Failure to withhold
• Kickbacks
• Hiding assets

For example, someone who uses false or altered W-2s to pay less in taxes than they truly owe would likely be tried for tax fraud.

Tax fraud cases can cost the IRS hundreds of thousands of dollars, so they go to great lengths to prosecute these cases and hold people accountable. In one 2023 case, the government sentenced two individuals to 30 months in prison for defrauding the United States. They filed estate and trust tax returns on behalf of fraudulent trusts, filed false personal returns, and claimed tax withholdings to receive unearned refunds. Their efforts would have stolen over $2.2 million from the government.

Willful Failure to File a Tax Return

Failure to file a tax return is a type of tax fraud that may be classified as a felony or a misdemeanor. Again, this category doesn’t include those who simply fall behind on their tax filings or do not know they are supposed to file. Like other tax crimes, it requires the element of willfulness. 

If the IRS believes that you did not file your tax return in a willful attempt to evade taxes, they can recommend criminal prosecution. However, in most cases, the agency will just file a return on your behalf, assess taxes against you, and start the collection process. 

To illustrate when not filing may become a crime, consider someone who consistently filed their tax returns every year and paid on time. However, after winning a substantial amount of money in the lottery, they did not file their taxes in an effort to avoid paying taxes on the amount they earned. Their past tax filings may be proof that they knew of their obligation to file tax returns, which may make their current failure to file willful.

How the IRS Determines Willful vs. Non-Willful Failure to Pay

With willfulness being such a critical element of many tax-related crimes, it’s crucial to understand willful and non-willful conduct. In general, non-willful conduct occurs when a taxpayer takes unlawful action unintentionally or unknowingly. 

Let’s apply this to the example of a U.S. taxpayer who moves abroad. They have faithfully filed their tax returns for decades and have always paid on time. After moving abroad partway through the tax year, they assume they don’t need to file a tax return because they are no longer in the United States. However, they are still required to do so. This is a mistake that occurred despite a taxpayer’s good faith efforts to follow tax laws.

Willful conduct is anything done intentionally or in a genuine effort to unlawfully decrease your tax burden or get out of paying taxes. For example, someone who leaves the money from their side hustle off of their tax return because they don’t want to pay taxes on it is willfully defrauding the IRS. Someone claiming a deduction that they know they don’t qualify for in order to decrease their tax burden is willfully engaging in fraud.

Note that ignorance of the law is not necessarily a defense that works in criminal tax fraud cases. It’s critical to hire an attorney who has experience with fraud charges for unpaid taxes so they can help you create an effective defense. 

Less Common Tax Situations That Can Lead to Jail Time

The vast majority of unpaid tax cases that result in prison time are tax fraud and tax evasion cases. There are some more uncommon situations that may still result in prison time if it’s worth the IRS’s time and resources.

Repeat Offenders and Willful Neglect

A taxpayer unlawfully failing to file or pay taxes can’t claim non-willful conduct forever. If they are informed of their obligations and legal duties but continue to violate the law by failing to pay or file, they may still be prosecuted. 

For example, the IRS has taken action against those who claim that taxes are illegal or voluntary. This is considered a frivolous argument, and if a taxpayer continues to fail to pay under the guise of this frivolous argument, the IRS may seek criminal charges. In most cases, though, these cases result in financial penalties; criminal charges are generally reserved for cases involving substantial sums of money.

Serious Cases Involving Large Sums

Even in cases where someone has intentionally defrauded the government, prison time is likely not on the table unless there is a substantial amount of money involved. Remember, the IRS is in the business of collecting taxes. Mounting a criminal case against someone is time-consuming and extremely expensive. 

If someone fails to disclose an income source on their tax return and that omission results in an additional $600 in taxes owed to the IRS, the IRS is more likely to just change their tax return, add penalties for the error, and penalize the taxpayer that way.

But when someone’s tax fraud costs the government hundreds of thousands—or millions—of dollars, the IRS is far more likely to pursue criminal charges. In one 2023 case, the government pursued charges against a father and his two sons who engaged in a decade-long fraud. In addition to cheating the state lottery out of money, the family laundered $20 million dollars and cost the federal government over $6 million.

Illegal Income and Failure to Report

Even if you earn money illegally, you still have to report that income on your taxes. There’s space to report this income on Form 1040, line 8z, or on Schedule C if the illegal activity is the result of your self-employment. 

The most famous example of this is Al Capone. While federal agents knew he had engaged in illegal activities for decades, they were unable to make any charges stick because he was good at covering his tracks. His ultimate downfall was tax evasion. He failed to pay taxes on his ill-gotten gains, and as a result, was sentenced to 11 years in prison.

Criminal Charges and the IRS

When the IRS does decide to pursue criminal charges against an individual, they are generally very successful. Their investigations go on behind the scenes and the targets are often completely unaware until they are arrested.

The IRS Criminal Investigation Division

IRS Criminal Investigation looks into criminal violations of the Internal Revenue Code. Their focus is on financial crimes. The agency is divided into several emphasis areas, including:

• Abusive return preparer enforcement
• Abusive tax schemes
• Bankruptcy fraud
• Corporate fraud
• Employment tax enforcement
• Financial institution fraud
• Gaming
• General fraud
• Healthcare fraud
• Identity theft
• International investigations
• Money laundering and the Bank Secrecy Act
• Narcotics
• Non-filer enforcement
• Public corruption
• Questionable refunds

The IRS has a long list of resources at its disposal to uncover tax fraud and conduct investigations. One of the greatest tools they have is other taxpayers. There are anonymous tip lines and online report systems that people can use to report suspected tax fraud. A surprising amount of people have been caught because of a report from a disgruntled ex-spouse, wronged employee, or cheated contractor.

How Long Does the IRS Have to File Charges?

The statute of limitations for tax crimes is generally three years. However, the statute of limitations is six years for certain offenses:

• Defrauding or trying to defraud the government
• Willful attempts to evade taxes or avoid payment of taxes
• Willfully assisting with the preparation of a fraudulent return or document
• Willfully not paying taxes or filing tax return by the due date
• Willfully signing a return or other tax document knowing that some of the included information is false
• Willfully providing false information to the IRS
• Threatening a U.S. government employee working in their official capacity

The six-year statute of limitations, as you can see, applies to the vast majority of crimes that are likely to result in prison time. 

Civil vs. Criminal Penalties

In most cases, not paying taxes is a civil matter. It often comes down to a taxpayer not having the money to pay or acting under incorrect information or guidance. 

In these situations, they will likely face civil penalties—these include penalties for paying late as well as penalties for various types of accuracy or negligence. Criminal penalties are much heftier, often resulting in hundreds of thousands or millions of dollars in fines and penalties. In addition, of course, there is always the possibility of prison time.

Sentencing Guidelines for Tax-Related Crime

The U.S. Sentencing Commission is involved in the sentencing of tax crimes. Understanding the sentencing guidelines and how they are (or are not) applied can help you get a bigger picture of how tax evasion can affect your life.

First, the majority of tax fraud offenders who were sentenced fell within the recommended guidelines—54%. Nearly 35% received shorter sentences. A small number of offenders were sentenced above the guidelines, often due to:

• Using sophisticated means to carry out or conceal the offense; this is further proof of willfulness and can significantly strengthen the government’s case
• A person in a leadership or supervisory role participating in the offense
• Abusing a position of public trust or utilizing special skills to engage in fraud
• Impeding the administration of justice

While receiving a harsher sentence is rare, those who do serve a longer sentence often serve much more time. The average sentence increase was 46%.

Those who had their sentences reduced often received this leniency because they had minor participation in the offense.

As a result of these various factors, the average prison sentence for a tax fraud offense was 16 months in 2023. The average guideline minimum was 28 months.

How to Avoid Jail for Unpaid Taxes

Although jail time for unpaid taxes is rare, those who are tried and convicted face incredibly heavy penalties—so planning ahead and staying on good terms with the IRS is crucial.

Filing and Paying on Time

The easiest way to avoid trouble with the IRS is simply to file your taxes accurately and completely, pay your taxes on time, and respond promptly to any correspondence you receive from the IRS. This might sound impossible if you’re currently behind on your taxes, but it starts with getting caught up and then working with a tax professional to stay compliant with IRS requirements. For many people, that means either adjusting their withholdings at work or increasing their estimated quarterly payments.

Proactive Measures If You’re Behind

If you are already behind on your taxes, don’t panic—there are many options available to you, and unless you’ve been intentionally defrauding the IRS, odds are good that prison is not in your future.

First, you have to either contact the IRS directly to discuss payment arrangements or begin working with a tax attorney to find payment arrangements that fit your current financial situation. While contacting the IRS may seem frightening, they are generally open to payment plans that allow them to collect what they’re owed without putting taxpayers in financial hardship. Potential options include an installment agreement, an offer in compromise, or currently not collectible status.

When to Seek Professional Help

Are you behind on tax debt and trying to find a way to get caught up? There are many options, but unless you understand these options and their limitations, you may get overwhelmed trying to find the best path forward for you. 

In that situation, it’s worth setting aside some time to meet with a tax professional. A skilled tax attorney or enrolled agent can use their expertise and experience to help you find a solution to your tax problems and a way for you to stay on track in the future.

While it’s possible to go to jail for unpaid taxes, it is extremely rare—and it’s often avoidable if you are willing to be proactive about your tax debt. If you’re behind on your taxes and unsure of how to move forward, it’s time to meet with the team at W Tax Group. We help taxpayers across the country tackle complex tax problems, get caught up on payments, and avoid conflict with the IRS. Contact us online or call us at 877-500-4930 now.

Lead Tax Attorney at The W Tax Group

Stephen A Weisberg