Tax Fraud and Tax Evasion Penalties Explained
If you’re thinking of pulling a fast one on the IRS when you file taxes, think again. Tax fraud, along with its sibling tax evasion, is a criminal offense that can result in harsh consequences. If you don’t fulfill your legal responsibility to pay taxes, the IRS could hit you with a variety of civil or criminal sanctions, from fines and penalties to prison sentences.
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But what is tax evasion, exactly? And what is tax fraud? Learning what these crimes are is the first step to avoiding them. Instead of committing a federal tax crime, consider tax avoidance — then you can legally cheat your tax bracket, instead.
What Are Tax Evasion and Tax Fraud?
According to Title 26 of the Internal Revenue Code, “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof…” is guilty of tax fraud. Under this general umbrella of tax fraud falls tax evasion, which is a specific subset of activities such as non-disclosure of income or the reporting of false expenses.
You have the right to decrease your tax liability by claiming lawful deductions and charitable contributions, but you can’t avoid paying what you owe. If you’re aware of any business or individual committing this crime, you should act — always report tax fraud to the IRS.
Don’t confuse tax evasion with tax avoidance. Tax avoidance is legal — as long as you claim legitimate deductions that qualify with the IRS. Evading tax, however, falls into the same category as tax fraud because in both cases cheating the taxman is deliberate.
Penalties for Tax Fraud and Tax Evasion
Committing tax fraud or tax evasion includes deliberately refusing to file your taxes, filing incorrect returns, making false claims and failing to declare your full income. If you’re caught committing tax fraud or evasion, a tax audit will likely take place in your near future.
If you haven’t done anything wrong, you won’t have problems during an IRS audit. If you’ve cheated, however — and you’re wondering what happens if you don’t pay taxes — here’s what you might be in for:
- Failure to file a tax return, false withholding exemptions, delivering or disclosing false tax documents: A maximum sentence of one year in prison and/or fines of $100,000, plus all taxes owed and legal fees
- Conspiracy to defraud with respect to false refund claims: A maximum of 10 years in prison and $250,000 in fines
- Filing or preparing a false tax return: Three years in prison and $250,000 in fines
- Tax evasion, failure to pay taxes, conspiracy to commit a tax offense or conspiracy to defraud: A maximum of five years in prison and a $250,000 fine
Those who intentionally evade paying income taxes might be charged with a civil penalty, too, which can add up to 75% of the unpaid tax that’s attributable to fraud, on top of whatever taxes are owed. As a taxpayer, it’s important you remember that if you’re not honest with the IRS, you could run into stiff IRS tax fraud penalties.
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Degrees of Tax Evasion
If you don’t file a return or pay the taxes you owe, the IRS will assess penalties based on how it views your failure to file and pay.
Your failure to file can fall into one of three categories:
- Negligence: If the IRS believes you have neglected to file or pay taxes, you could face a tax penalty of 20 percent of the portion of the underpayments considered to be attributable to the negligence.
- Civil fraud: If the IRS believes you have committed tax evasion, but the offense is not considered criminal, you could face a penalty of 75% of the tax underpayment attributable to fraud.
- Criminal fraud: If you evaded paying your taxes and the act is considered criminal, you could face heavy court fines, imprisonment — or both.
The last two tax evasion penalties are on the severe end of the spectrum. The difference between civil and criminal fraud is the degree of proof required. In civil fraud cases, the government must prove fraud by presenting clear and convincing evidence. In the case of criminal fraud, the government has to present sufficient evidence to prove guilt beyond a reasonable doubt. An IRS criminal investigation is a lengthy and expensive process, as you will likely need to hire a tax attorney. However, it is rare that the IRS will pursue a criminal prosecution against an individual unless the fraud was particularly egregious.
You could also face an IRS tax audit from previous years, so ensure you accurately filed your past returns.
Tax Evasion and Tax Fraud FAQ
Here are answers to some frequently asked questions about tax evasion:
1. Can I Challenge a Tax Audit?
If you disagree with the outcome of an IRS audit, you have the right to file an appeal. You might want to enlist an attorney or CPA to help you prepare your defense because both tax avoidance and tax evasion are federal crimes.
2. How Long Does a Tax Audit Last?
The length of an audit depends on many factors, including its type and level of complexity, your ability to provide any requested information and your acceptance — or rejection — of the findings. There is no standard length of time an audit lasts, so keep your necessary receipts for several years of tax returns to streamline the process should an audit occur.
3. What Happens If I Don’t File Taxes?
Not filing taxes will result in a failure-to-file penalty, as well as interest on unpaid taxes. At worst, you could face jail time and hefty fines.
4. Is Tax Fraud a Felony?
Yes. Punishment for tax evasion is severe and has lifelong repercussions. As a felony, tax evasion jail time is always at least one year.
This article is part of GOBankingRates’ ‘Economy Explained’ series to help readers navigate the complexities of our financial system.
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John Csiszar contributed to the reporting for this article.