Tax Evasion Jail Time, Penalties, and Other Consequences

The consequences of tax evasion are extremely severe. If convicted, you can face penalties of up to $100,000 for individuals and up to five years in prison. Tax evasion penalties are the stiffest penalties you can face under the tax fraud statutes, and if you believe that you may be at risk of monetary penalties or jail time, you should contact an attorney as soon as possible. 

However, in a lot of cases, people aren't even sure whether or not they've committed a crime. To help you know what to expect, this post outlines tax evasion penalties and jail time. It defines tax evasion, explains what to expect if you're being investigated, and looks at how the Voluntary Disclosure program can help if you aren't under investigation yet.

Key Takeaways

• Tax evasion is a willful attempt to evade taxes.
• Tax evasion is a felony type of tax fraud.
• Tax evasion leads to jail time, supervised release, monetary penalties, and restitution.
• Making a mistake is not tax evasion. 
• People commit tax evasion by not filing returns, underreporting income, lying to auditors, etc.
• IRS Criminal Investigation learns about possible tax evasion through computer analysis of returns, audits, and tips from law enforcement and whistleblowers.
• Cases go through multiple rounds of review before being sent to the Department of Justice Tax Division.
• Once a case goes to court, prosecutors push for guilty pleas or sentences. 
• The Voluntary Disclosure program can help you avoid criminal exposure if you come forward before the IRS contacts you.

Table of Contents

• What is Tax Evasion
• Legal Consequences of Tax Evasion & Penalties
• Tax Evasion Investigation Process
• How the Government Calculates Losses from Tax Evasion
• The Sentencing for Tax Evasion
• Preventing Tax Evasion Tips
• Voluntary Disclosure Programs Available for Tax Evasion
• Handling Accusations of Tax Evasion
• FAQs of Tax Evasion With Examples From Real Cases
• Getting Help With Criminal Tax Evasion Charges

What is Tax Evasion?

Tax evasion is a felonious attempt to evade or defeat the payment of taxes. To convict you of tax evasion under Statute 7201, the government must prove that there was a significant tax deficiency and that you acted willfully. To prove the tax deficiency, the government uses the your net worth, bank deposits, cash expenditures, and other details. 

The government must also be able to prove that the defendant committed willful acts to evade the tax. If the defendant was only negligent, their actions don't rise to the level of a felony conviction. 

Tax evasion is a type of tax fraud, but as it can be difficult to prove, the government often pursues other types of tax fraud charges under different statutes than the 7201 tax evasion statute.

Here are some terms that are often confused with tax evasion with links to resources with more information:

• Tax fraud: Tax evasion is a type of tax fraud, and it's always a felony. But there are several other types of tax fraud including felony, misdemeanor, and civil tax fraud.
• Tax avoidance: Tax avoidance uses legal means to reduce your tax bill, while tax evasion is an illegal attempt to not pay taxes by evading assessment or payment.
• Unpaid taxes: Not paying your taxes because you can't afford them or because you are neglecting payment is not the same as tax evasion. Tax evasion requires you to take willful acts to avoid the payment or assessment of taxes.
• Unfiled Taxes: Many tax evasion cases involve unfiled tax returns, but to be considered evasion or even fraudulent failure to file, the crime must have been committed with willful intention to defraud the government. Most failure to file cases does not constitute a crime.

Individuals commit tax evasion in multiple ways. They often fail to file returns or file returns that grossly understate their income, and then, they hide income or assets from the IRS by doing the following types of acts:

• Hiding income in bank accounts under other names.
• Depositing income in bank accounts owned by trusts. 
• Not reporting income from offshore bank accounts.
• Using offshore accounts to hide income.
• Cashing checks received by their business but never reporting the income.
• Accepting cash payments but not reporting them as business revenue. 
• Providing accountants with false information to file tax returns.
• Lying to IRS auditors.
• Transferring assets, hiding assets, or lying about assets to avoid paying taxes.

There are two ways that you can evade tax: 1) not reporting the tax liability by filing a false return or not filing at all or 2) not paying assessed taxes. However, not filing a return or not paying income tax is not automatically evasion. Again, the individual must take willful actions such as those noted above to evade the assessment or payment of taxes.

Legal Consequences of Tax Evasion

Tax evasion penalties are very severe. If convicted, you can face up to five years in prison for every count of tax evasion, and individuals can face fines up to $100,000, while corporations can face fines up to $500,000.

According to the US Sentencing Commission, about two-thirds of people convicted of tax fraud are sentenced to prison. The stats don't break out the specific jail time faced by people convicted of tax evasion in particular. Instead, they include all types of tax fraud convictions, with an average prison sentence of 16 months.

In addition to monetary penalties and jail time, people convicted of tax evasion also face supervised release, and they often have to pay restitution for the losses they caused or gains they earned through the scheme. People who have caused high tax losses may end up working the rest of their lives to pay restitution, and when the government orders you to pay restitution, they watch you very closely. For example, they may even stop you from something as simple as babysitting your grandkids for free if you are supposed to be earning money for restitution. 

Tax evasion convictions can also lead to the loss of your professional license. As a crime of moral turpitude, tax evasion can prevent you from being an attorney, CPA, stock broker, real estate agent, or nearly any other financial professional. Even doctors, funeral directors, and a long list of others can lose their professional licenses for committing tax evasion.

IRS Tax Evasion Investigation Process

The Internal Revenue Service Criminal Investigation (CI) Division investigates crimes against the Internal Revenue Code (IRC), the Bank Secrecy Act, and various money laundering statutes. To spot possible crimes, the IRS uses data analytics, audits, and whistleblower tips. Special agents learn about potential crimes from a variety of sources including revenue agents (auditors), revenue officers (collectors), investigative analysts, the public, law enforcement agencies, and US attorneys. 

After getting information about a possible crime, the IRS special agent does a primary investigation, and then, their supervisor reviews the information. If they both agree, CI opens a criminal investigation. The special agent works with the IRS Chief Counsel Criminal Tax Attorneys on the investigation, and the process includes interviewing witnesses, conducting surveillance, executing search warrants, subpoenaing records, and reviewing financial data. 

If the evidence is not sufficient, they discontinue the case, but if there is enough evidence to support criminal allegations, the special agent creates a Special Agent Report which gets reviewed by four different individuals and a quality review team. Then, if they all approve, they send the case to the DOJ Tax Division or the US Attorney.

The special agent may continue to help during the trial, but generally by this point, the prosecutors manage the rest of the investigation. Every year, there are approximately 3,000 criminal prosecutions, and hundreds of people are convicted of tax fraud. Many people plead guilty and accept a plea bargain, while others go through a trial and are sentenced.

How the Government Calculates Evasion Tax Losses

Tax losses from evasion are based on the loss that the government would have suffered if the offense were successful. If the evasion involved underreported income, the loss is calculated as 28% of the unreported income plus 100% of the false credits claimed against the tax. 

For example, say that you had $120,000 in income but you only reported $70,000. The loss is $14,000. That is 28% of $50,000. If you had also falsely claimed a credit of $10,000, that would increase the loss to $24,000. If you're a corporation, the loss is calculated as 34% of the unpaid tax.

Calculating losses based on improperly claimed deductions uses the same numbers. The loss is also calculated at 28% of the deduction for individuals and 34% for corporations. This calculation applies to itemized and business deductions, but it also applies to claiming a deduction to provide a basis for tax evasion in the future. For example, say that someone overstated the basis of an investment one year so that in future years, they would be able to reduce their capital gains related to selling that asset. 

In evasion cases that involve unfiled returns, the tax loss is the amount of tax that the taxpayer owed but did not pay. The courts calculate this loss as 20% (25% for corporations) of the gross unreported income minus any tax paid or withheld. However, if you can provide a more accurate number, the courts will use that instead.

Sentencing for Tax Evasion

In an effort to standardize penalties for tax evasion, the government created a sentencing table in the mid-1980s. The table dictates a range of sentencing levels based on the associated tax loss. For example, $2,500 or less is a level six, while more than $1.5 million is a level 22. 

Certain acts can increase the sentencing level. For example, using careful planning and sophisticated evasion tactics leads to an increase of two levels. Failing to report more than $10,000 in income obtained from criminal activity also increases the sentencing by two levels or at least up to level 12 if below that. 

Preventive Measures 

Because tax evasion requires willful intention, it's not something that you're going to commit accidentally. However, you can take steps to avoid tax evasion allegations by filing tax returns on time, reporting all of your income, and keeping accurate records about your income and expenses. Consult with a tax professional if you're unsure about the legitimacy or legality of an act you are taking.

Criminal Investigation Voluntary Disclosure Programs

The IRS has a Voluntary Disclosure Program for people who may have committed tax evasion or other types of tax fraud. To qualify, you must reach out to the IRS before they contact you. If you've been contacted about an audit or are already under investigation, you cannot use this program. 

Making a voluntary disclosure can allow you to avoid criminal charges, but this program is only for people who believe they willfully committed a crime. If you made a mistake, you should explore other options. The IRS advises that you consult with a tax attorney before filing a voluntary disclosure.

How to Handle Accusations of Tax Evasion

If you receive a target letter or any other notification letting you know that you're being investigated for tax fraud, contact a tax evasion attorney as soon as possible. Make sure that you understand the crime being investigated. While you should cooperate with investigators, you may want to have your attorney handle all communication. They will ensure that your rights are protected.

To be on the safe side, don't talk with anyone else about the case, including friends, relatives, and colleagues. Anything you say may end up being used against you. Also, be careful of what you say to IRS employees. Although IRS agents are not required to give you a Miranda warning, they can and will use what you say when developing your case.

Do not destroy evidence. Although this can be tempting, it breaks additional laws, and your attorney may be able to use the evidence in your defense. When choosing a lawyer, make sure that you select someone who focuses on tax law and has experience defending individuals against tax evasion charges.

FAQs About Tax Evasion With Examples From Real Cases

Is tax evasion a crime?

Yes, tax evasion is a crime under Title 26 Statute 7201. 

Is tax evasion a felony?

Yes, tax evasion is always a felony. In contrast, tax fraud can be a felony, misdemeanor, or civil offense.

How long can you go to jail for tax evasion?

You can go to prison for up to five years for each count of tax evasion. Many people are convicted of multiple counts of tax evasion plus time for other crimes, leading to long sentences. 

For example, as of August 2024, a doctor from Alaska is facing three counts of tax evasion, while her husband is facing four counts for evading close to $10 million in taxes. If sentenced to the maximum terms, she could face 15 years imprisonment, while he could face 20 years.

They are also facing up to a 10-year sentence for healthcare fraud, and one year for each count of not filing a tax return. These sentences can be added to their tax evasion sentences. 

What are the penalties for tax evasion?

The penalties for tax evasion include up to five years imprisonment, fines of up to $100,000 for individuals, supervised release, and restitution. 

For example, a FL medical equipment manufacturer was convicted of tax evasion for causing tax losses of over $2.4 million, and now, he faces a maximum penalty of up to five years in prison, plus supervised release, and monetary penalties.

He failed to file tax returns for over two decades, and he hid income by opening two bank accounts in a trust's name with his girlfriend as the sole signatory. He also restructured his business in an attempt to evade IRS taxes. 

What is the difference between tax evasion and tax avoidance?

Tax avoidance is when you use legal strategies to reduce your tax bill. Tax evasion is when you use illegal strategies to avoid paying taxes. 

For example, there are legitimate ways to use trusts in tax planning, particularly if you're dealing with an estate. However, trusts are often abused in tax evasion schemes. For example, a Colorado dentist was recently convicted of tax evasion after he used trusts to hide income from his dental practice. He caused a tax loss of over $1 million and now faces up to five years in prison for every count of tax evasion.

What is the difference between tax evasion and tax fraud?

Tax evasion is a type of tax fraud. Tax fraud refers to a variety of crimes where someone tries to defraud the government. It can be a misdemeanor or a felony, but it's often a civil issue that does not lead to criminal charges.

Is keeping two sets of books illegal?

Yes, keeping two sets of books is illegal, and if caught, you can face tax evasion charges. For example, an Alaska businesswoman was convicted of tax evasion after providing her accountant with false records and filing false returns that created a tax loss of $550,000. 

She kept two sets of books for her hotel, bar, and liquor store. She used the real records to track her investment, and she used the second set of records that understated income to file her tax returns.

Can you go to jail for lying to an auditor?

Yes, if the courts determine that you lied to an auditor in an attempt to evade taxes, they can sentence you to jail time. 

For example, when a former attorney from Pennsylvania was audited in 2019, he lied to the auditors about his income and bank accounts. In 2024, he pled guilty to tax evasion for tax year 2016, and at the time of writing, he is out on bond while waiting to be sentenced.

Can you face tax evasion charges on unreported illegal income?

Yes, you can face tax evasion charges for not reporting income obtained illegally. Additionally, you cannot use the Voluntary Disclosure program to come forward about unreported illegal income. 

For example, an Alaska man was recently sentenced to 30 months in prison for embezzlement and tax evasion. He embezzled money from the City of Houston, Alaska and from a private company in Wasilla Alaska for several years, and from 2016 to 2021, he failed to report or pay income tax on the funds he stole. In addition to his prison sentence, he was ordered to pay $1.5 million in restitution to the United States and he faces up to three years of supervised release.

Can you go to prison for lying to get taxes discharged through bankruptcy?

You can get certain taxes discharged in bankruptcy, but if you lie to do so, you may face tax evasion charges. 

For example, a Minnesota businessman was convicted of tax evasion charges for filing false bankruptcy schedules, making false statements during a bankruptcy case, and hiding assets (namely two speedboats) from the IRS. His actions caused a tax loss of over $400,000

He was sentenced to 21 months in prison and three years of supervised release, fined $25,000, and ordered to pay approximately $280,000 in restitution to the United States.

Get Help With Criminal Tax Evasion Charges

If you are dealing with tax evasion, you should contact an experienced criminal tax attorney to help you. An attorney can answer your questions if you're interested in the Voluntary Disclosure program. They can represent you if you're already under investigation, and they can provide guidance and help for any other criminal or civil tax problems. 

To get help today, use TaxCure to search for a tax attorney based in your area.