Is It Possible to Face Jail Time for Unpaid or Unfiled Taxes?

Yes, you can go to prison for not paying taxes or filing your tax returns but the circumstances have to be pretty extreme for that to happen. It depends on the situation. The United States doesn't just throw people into jail because they can't afford to pay their taxes. However, you can face jail time if you commit tax evasion, tax fraud, or do not file your taxes. In fact, you may face a year in jail (uncommon) for each year you did not file.

If you have unpaid taxes, the IRS can use a wide range of collection actions to get its money. The agency can issue federal tax liens, seize your assets, garnish your wages, and take other actions. But it can't throw you into jail unless you've actually committed a crime. 

To help you understand when you may face prison time for unpaid taxes, this guide looks at tax crimes, the penalties for these crimes, and the difference between civil and criminal judgments. 

Tax Crimes That Can Lead to Jail Time

Tax fraud and evasion are the two tax crimes that can lead to a prison sentence. Tax evasion is when you evade (use trickery to avoid) paying or filing taxes. Tax fraud is when you lie on your tax return, fail to supply information or make false statements to state or federal tax agencies. 

You can only be convicted of these crimes if your behavior is willful. This is not the same as making a mistake. 

Penalties for Tax Fraud and Evasion

Tax fraud and evasion can lead to fines up to $250,000 for individuals and up to $500,000 for corporations. You may also face a prison sentence of up to five years for these crimes. 

These punishments can be stacked on top of each other. Case in point, a Chicago woman faces up to five years in prison for each count of theft from an employee benefit plan, three years for each count of assisting to file false tax returns, and three years for filing false tax returns. For her crimes, she may go to prison for up to 30 years. 

However, you can only face prison time if the IRS has pursued a criminal judgment against you. In most cases, the IRS uses civil judgments. 

Civil Versus Criminal Judgments for Tax Issues

A civil judgment allows the IRS to take collection actions against you. Depending on how much you owe and the other facts related to your situation, the IRS may take your assets, seize your wages or bank accounts, issue liens against your property, or revoke your passport. The IRS has a lot of power to recoup unpaid taxes — it has more power than most creditors.

However, you cannot go to jail based on a civil judgment. There is no "debtor's prison" for people who haven't paid their taxes. 

If the IRS believes that you have committed fraud or evasion, it can assess civil fraud penalties against you. These penalties are 75% of the tax owed. For instance, if you evaded $10,000 of tax due to purposefully omitting income from your tax return, the civil fraud penalty will be $7,500. 

If you're guilty of civil charges, the IRS can decide to go a step further and file criminal fraud charges against you. At this point, you can face criminal penalties including fines and jail or prison time. 

Who Goes to Prison for Tax Crimes?

All kinds of famous people have gone to jail for tax fraud. The list includes Wesley Snipes, Daryl Strawberry, Lauryn Hill, Chuck Berry, and many others. But the government doesn't just assess these charges against the rich and famous. Many ordinary people have faced jail time for tax crimes. Take a look at these cases:

• A Texas man was sentenced to one year in prison, one year of supervised release, and restitution of $164,032 for not filing his tax returns for six years. 
• After preparing 13 false tax returns that claimed millions in refunds from the IRS, a Maryland accountant was sentenced to three years in prison and one year of supervised release. 
• A California business owner was sentenced to 18 months in prison, three years of supervised release, and $4.9 million in restitution after repeatedly failing to pay payroll tax. 
• A married couple failed to file tax returns and pay employment tax. They were sentenced to five years in prison, three years of supervised release, and $2.4 million in restitution. 
• An Ohio man was sentenced to one year in prison, three years of supervised release, and ordered to pay nearly $ 1 million in restitution for conspiring to commit fraud through his tax prep business.

These cases are not rare. In fact, all of the above prison sentences were issued within six weeks of the writing of this web page. The Tax Division of the Justice Department issues regular press releases about tax crimes. 

How Does the Government Detect Tax Crimes?

The truth is that some people commit tax crimes for years before they get caught. Many of the crimes listed above took place over several years before the perpetrators were caught. But these crimes aren't worth the risk. 

Simply for filing a false return, you can face misdemeanor charges with penalties of up to three years in prison and up to $25,000 in fines. The charges become felony charges if you report additional dependents, overstate your business deductions, or misstate charitable contributions. 

How does the IRS tell if you put fake information on your return? There are a few different ways. First, the agency uses an automated matching system. When third parties such as employers, financial institutions, or other entities submit W2's, 1099's, and similar income documents, the IRS's matching system compares the information on those forms with the information reported on the recipient's tax return. If the agency detects a mismatch, it looks closer at the situation. 

The IRS's computers also scan returns for potential fraud red flags. For instance, the agency knows which deductions are likely at certain income levels and which are not. Finally, the agency randomly selects some returns for full or partial audits. 

Am I Going to Get Audited?

The risk of an audit varies based on your income level. You're most likely to be audited if you report no income or over $5 million in income. People with incomes ranging from $1 to $500,000 have roughly a 0.5% risk of audit. At income levels above that threshold, your audit risk increases steadily until it reaches over 8% for people reporting over $10 million in income. 

Most audits do not lead to tax crime charges. In an average year, the IRS accuses about 1,300 taxpayers of legal-source tax evasion. Note that legal source tax evasion is tax evasion that is not related to income earned through criminal means. 

People who steal, embezzle, sell illegal drugs, or earn money by committing other crimes are supposed to report those earnings on their tax returns. If they don't, they can face criminal tax evasion charges. However, if they report the income, they may draw attention to themselves. If they run the income through a business, they can face money laundering charges. 

How the Courts Prove Tax Crimes

To find someone guilty of a tax crime, the courts must prove the following three elements:

1. An unpaid tax liability exists. 
2. The defendant evaded or tried to evade the tax.
3. The defendant intended to evade a tax they knew they were supposed to pay. 

The jury must find you guilty beyond a reasonable doubt to charge you with criminal tax fraud or evasion. In contrast, the burden of proof is lower when the charges are related to civil tax fraud or evasion. Again, you can only face prison time if convicted of criminal charges. 

Statute of Limitations on Criminal Tax Fraud and Evasion

The statute of limitations for tax fraud or evasion is generally three years after the date your return was due or the date you filed your return. The IRS cannot bring charges against you after this time unless you have omitted more than 25% of your income. Then, the IRS has six years. 

When fake or unfiled returns are involved, the IRS has an unlimited amount of time to bring forward charges. 

Is Tax Avoidance Illegal? 

Tax avoidance is not the same as tax evasion. Although these words are synonyms in common usage, they have different legal implications when talking about tax crimes. 

With tax evasion, you are evading taxes you are supposed to pay. Tax avoidance, however, refers to using smart (and legal) tax planning strategies to reduce your tax liability. Avoiding taxes through legal means is perfectly legal and ethical. 

Get Help With Tax Evasion and Fraud

If you have unfiled returns or know that you have misreported info on your returns, you should be proactive about correcting these mistakes. The IRS is always easier to work with if you contact the agency rather than waiting for them to hunt you down. In fact, if you reach out to the IRS before they contact you, you may be elgible for the voluntary disclosure practice, which allows you to avoid criminal prosecution in exchange for making a voluntary disclosure with Form 14457. 

Additionally, if you are dealing with charges of civil or criminal tax fraud or evasion, you need legal help from a tax attorney. On TaxCure, you can search for tax professionals based in your area who have experience with your specific tax concern. Don't deal with the IRS on your own — get experienced assistance today.