Will You Go to Jail for Not Filing or Not Paying Taxes?

You will not go to jail for missing a filing deadline or getting behind on your tax payments. However, if you commit tax fraud, you can face criminal charges that may lead to jail time. Additionally, if the IRS decides that your failure to file was related to tax evasion, you can also face criminal charges and imprisonment. However, in most cases, people do not get arrested or face jail time for unfiled or unpaid taxes. 

The IRS draws a stark line between people who cannot afford to pay their taxes and people who commit criminal tax fraud to avoid paying taxes. To help you understand the differences, this post looks at the reasons you can go to jail for tax-related crimes, and then, it talks about situations where you definitely won't face jail time and how to resolve those problems. 

Key Takeaways

• Fines and imprisonment are possible consequences for tax fraud and tax evasion.
• Making a mistake on your return or using legal tax avoidance strategies are not criminal offenses.
• You will not face jail time if you miss filing a few returns or can't afford to pay your tax bill. 
• The IRS handles most unfiled returns and unpaid taxes with civil actions such as garnishing wages or applying penalties.
• The IRS has sophisticated software that helps it discover unfiled returns and unreported income.
• Even if you fail an audit, you're more likely to just face penalties than jail time.
• If you're worried that you may have committed a tax crime, contact a tax attorney for help.

 

Tax Crimes That Can Lead to Jail Time

Tax fraud and evasion are the two tax crimes that can lead to felony charges and a prison sentence, and failure to file can be a misdemeanor with up to a year in jail. Here are the main tax crimes that can lead to jail time, but remember, you can only be convicted of these crimes if your behavior is willful. This is not the same as making a mistake. 

• Tax fraud - Tax fraud is when you deliberately falsify documents. For instance, this may include filing a fake tax return, putting incorrect information on an offer in compromise application, or providing the IRS with any other documents that are false.
• Tax evasion - Tax evasion is when you take illegal actions to avoid paying taxes. Often, this means committing tax fraud by reporting false information on your tax return so that your tax bill is lower than it should be.
• Underreporting income - Typically, people commit tax evasion by underreporting their income. To give you an example, imagine someone runs a cash business where they earn $100,000 per year and they don't report any of that income. By not reporting the income, they are evading over $20,000 in taxes depending on their tax bracket and the rest of their financial situation.
• Claiming false deductions - People can also evade paying taxes by claiming false deductions. For example, a business owner may claim deductions for expenses that they didn't really incur, or they may report personal expenses as business expenses. Similarly, an individual filer may claim that they have a child or child care expenses that they don't really have. 
• Falsley applying income - Another form of tax evasion, this occurs when you try to avoid tax by putting some of your income on the tax return of a person who is in a lower tax bracket. 
• Not reporting overseas income or assets - American citizens and residents are required to report all income they have earned throughout the world, and you may also be required to report certain foreign assets. If you don't and the IRS believes you failed to report due to a willful attempt to evade taxes, you may face criminal fraud charges.
• Helping someone evade taxes - If you prepare a false tax return or commit other acts to help someone else evade taxes, you can also face criminal charges and potential prison time. 
• Failure to file - Internal Revenue Code 7203 says that willful failure to file is a misdemeanor, and based on IRC 7201, if the IRS determines that the failure to file was criminal tax evasion, they can elevate the charges to a felony. 

All of the above issues can lead to criminal charges, but even with these issues, the IRS resolves most cases with civil penalties. For example, most people never face criminal tax fraud charges. Instead, they are much more likely to incur a civil fraud penalty of 75% of the tax. In many cases, the IRS will skip the fraud penalty and instead apply a 40% negligence penalty or a 20% accuracy-related penalty depending on the situation. Similarly, most people will never face criminal misdemeanor charges for not filing a tax return. Rather, they are much more likely to face the failure to file penalty, and in cases where the IRS believes the return wasn't filed due to fraud, they may also assess the Fraudulent Failure to File penalty.

These are not the only criminal tax acts, but they are the main ones that concern most people. You can also face prison time for promoting an abusive tax shelter, but only a small handful of people are involved in those types of activities. You can also face imprisonment for criminal acts committed as a tax preparer. 

Actions That the IRS Cannot Send You to Jail for

A lot of people get worried when they don't file or when they miss a tax payment, but the reality is that the IRS doesn't send people to prison for most acts. Have you done any of the following? If so, you may need a tax pro to help you with the situation, but you don't have to worry about jail time or criminal charges. 

• Tax avoidance - Tax avoidance is completely legal. It refers to using legal strategies to reduce your tax bill. In fact, avoidance is one of the reasons that many people work with a tax professional rather than handling their tax returns on their own. 
• Making a mistake on your tax return - If you accidentally reported the wrong information, talk with a tax pro about amending your tax return. The IRS doesn't put people in jail for mistakes, and usually, if the agency catches the issue first, they will just send you a notice about the additional tax due.  
• Can't afford to pay taxes - The IRS has many different options to help people who cannot afford to pay their tax bills. If you don't pay, you may face collection actions and penalties, but you won't face jail time. 
• Failure to file if not required to file - Not everyone is required to file a tax return. If the IRS has contacted you about an unfiled return, you should let them know why you were not required to file. 

The majority of tax problems will never involve jail time. If you're worried about unpaid taxes or unfiled returns, contact a tax pro for help today. If you believe that you may have committed criminal tax fraud or evasion by not paying or not filing, keep reading to learn more. 

Penalties for Tax Fraud and Evasion

Criminal 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 and criminal penalties for fraud if the IRS has pursued a criminal judgment against you. In most cases, the IRS uses civil penalties. 

What is the statute of limitations for criminal tax fraud?

The statute of limitations for criminal tax fraud is three years. However, there are numerous extensions that extend the statute to six years, and thus, effectively, in most cases, the IRS has six years from the last affirmative act to bring forward criminal charges. There is no statute of limitations for civil fraud charges. 

Civil Fraud Penalties

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. 

The IRS can also 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. While most creditors must get a judgment against you to garnish your wages or take other collection actions, the IRS does not need to get the court's permission for most collection actions.

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. 

How Does the Government Detect Tax Crimes?

The truth is that some people commit tax crimes for years before they get caught, but these crimes aren't worth the risk. The IRS has tools that help the agency find people who are not paying or filing their taxes.

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? Will I Go to Jail If I Fail?

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, which is tax evasion that is not related to income earned through criminal means. Even if you fail the audit, the IRS will generally just add penalties to your account. 

FAQs About Jail Time for Unpaid and Unfiled Taxes

Is tax avoidance illegal? 

Tax avoidance is legal. It is not the same as tax evasion. 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. 

Can you go to jail for not filing taxes?

If you did not file taxes because you were willfully trying to evade taxes, you can face imprisonment. However, that is very rare. Most people do not have to worry about jail time for unfiled returns. In most cases, the IRS just has you file the last few years to get caught back up.

Can you get arrested for not paying taxes?

You can be arrested for committing criminal tax fraud, but if you just get behind on paying your taxes, you don't have to worry about any criminal charges. However, if you continue to ignore the bill, the IRS can start involuntary collections including wage garnishment, asset seizure, and taking away your passport.

Can you go to jail for not paying property taxes?

No, you will not go to jail for not paying property taxes. However, in most areas, the government can seize your home and auction it off if you don't pay your property taxes.

Can you go to jail for not paying business taxes?

No, you will generally not go to jail for not paying business taxes, unless you're in a situation where you didn't pay the taxes in an attempt to commit tax fraud. The IRS has options to help business owners who get behind, including payment plans.

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 eligible 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.