Tax Crimes and Penalties

Wesley Snipes, Mike “The Situation” Sorrentino, Lauryn Hill, Teresa and Joe Giudice, and Sophia Loren all have something in common: They all served prison or jail time after being convicted of a tax crime. The Internal Revenue Service (IRS) actively audits income tax returns and pursues payment of those who have outstanding debt. In some situations, the outstanding tax debt signals actions that warrant criminal prosecution. The penalties imposed for a tax crime conviction can be significant.

Civil vs. Criminal Tax Penalties

The same conduct and actions that can trigger a civil tax audit can also initiate a criminal investigation. The IRS determines if the taxpayer’s willful actions amount to enough to warrant pursuing criminal penalties. IRS Special Agents criminal investigation division will investigate your tax records and related evidence. There may also be additional agencies that participate in criminal investigations.

If the IRS decides to pursue civil and criminal cases, the standard of proof is different. The standard of proof for civil tax fraud is “clear and convincing evidence.” While the standard of proof for criminal tax fraud is “beyond a reasonable doubt.” The higher standard for criminal cases is because the penalties are much harsher. A civil tax fraud case can’t send you to jail the way a criminal one can.

The IRS must prove that the taxpayer had a duty to act to prove that someone committed evasion or fraud. It must also prove the taxpayer knew they had this duty and failed to perform it. David C. Gair, a tax attorney at Locke Lord in Dallas, Texas, stresses the importance that the IRS places on finding taxpayers who fail to make their payments. “There are penalties and interest associated with it [nonpayment of taxes], and the IRS will go after the person individually for those liabilities. It is actually the number one or two domestic criminal enforcement measure that the IRS has. They really don’t like people that don’t pay their employment taxes.”

Common Tax Crimes

The two most common tax crimes prosecuted are evasion and fraud. These two broad categories can cover a wide range of tax-related offenses. Evasion is the willful avoidance of filing or paying taxes. Fraud is the concealing or provision of false information. Generally, tax crimes are illegal behavior or actions willfully taken by a taxpayer or business. These are some other commonly prosecuted tax crimes.

• Failure to pay taxes
• Filing a false tax return
• Identity theft
• Interference with the IRS
• Illegal Disclosure of information

What Is Tax Evasion?

Criminal tax evasion is willfully evading the payment of an owed tax liability. This willful failure is often discovered through a routine tax audit or someone reporting the evasion to the IRS. Someone may talk about their federal tax evasion to another individual who reports the action. Or it could be a discovered financial discrepancy that an employee reports. These actions are common examples of tax evasion:

• Falsely claiming credits
• Claiming extra dependents
• Falsely claiming state residency
• Hiding financial assets
• Underreporting income
• Only using cash to hide financial activity
• Operating multiple differing sets of financial records

The potential penalty for tax evasion can vary based on the tax code. For example, 26 U.S. Code § 7201 comes with a felony conviction, up to five years in prison, and a $100,000 fine if convicted. This code covers the willful attempt to evade a tax. The 26 U.S. Code § 7202 is a felony conviction with up to five years of prison time. However, the maximum fine is $10,000. This code applies to individuals who willfully failed to collect and pay over tax. Finally, 26 U.S. Code § 7203 is the willful failure to file tax returns, supply information, and pay owed taxes. It has the least harsh penalties if convicted of a misdemeanor, one year in jail, and a $25,000 fine.

Gair talks about how easily a taxpayer can find themselves in trouble with the IRS and, conversely, how easy it is to avoid trouble. “As long as you keep up with your taxes, you’re good. It’s people that don’t keep up with their taxes—at the end of the year, they owe a bunch of taxes. And they’re like, I’m gonna throw my employer under the bus because I don’t really like them anyway. The employee basically blows the whistle on them, and that’s how a lot of employers get in trouble also.”

What Is Tax Fraud?

Criminal tax fraud differs from evasion. A taxpayer committing evasion is looking to avoid paying their taxes, while a taxpayer committing fraud is providing false information to avoid paying their taxes. For example, evasion could be a taxpayer not giving their social security number. Fraud is when someone gives the wrong social security number. Other examples of common fraud activities include:

• Failed to file a tax return
• False statements about financial affairs
• Falsifying income tax return information
• Willfully not reporting all income

Tax fraud charges can cover making false statements, intentionally hiding information, and intentionally providing incorrect information. Depending on the code the taxpayer is convicted under, maximum fines range from $1,000 to $100,000. Maximum prison tax fraud penalties can range from one to three years. Convicted individuals can receive either fines, jail, or both.

Penalties for Tax Crimes

When convicted of a tax crime, taxpayers face several possible penalties. First, they will face penalties from the civil audit. These penalties are primarily monetary in the form of fines, interest, seizure of bank accounts, and fees. If convicted of criminal charges, the taxpayer will face additional penalties. They could have a misdemeanor or felony on their record. A taxpayer could face both criminal and civil penalties.

How Are Tax Penalties Determined?

Once a taxpayer is convicted of a tax crime, the next phase of the court process is to determine sentencing. The potential penalties are outlined in the Internal Revenue Code. Because the IRS wants to deter other taxpayers from committing tax crimes, prosecutors will seek the maximum possible sentence. The prosecutor will make a recommendation to the presiding judge, who will then make a ruling.

The jail time determined will depend on each case’s specific facts and circumstances. The sentencing range listed in the tax code serves as a starting point. There is also a set of guidelines that contain 43 levels to define the seriousness of the offense convicted. The guidelines define the base of the crime committed and progressively more serious levels. Generally, the more serious and heinous the crime, the more severe the punishment.

Additional factors are also considered when determining penalties. The taxpayer’s criminal history can impact the decision. A lengthy criminal history can signal a disregard for the law, making a more severe penalty more likely. Another factor considered is the amount of tax owed to the IRS. The more you owe, the more severe the punishment.

Can You Go to Jail for Not Paying Taxes?

Whether you go to jail or prison for not paying your taxes isn’t about the action of paying or not paying. The criminal standard focuses on whether or not you willfully decided not to pay your taxes. With this in mind, you likely won’t go to jail if it was an honest mistake that you didn’t file or pay for a year. In contrast, you are more likely to go to jail or prison if you decided not to file or pay your taxes.

The average jail time or prison sentence for those convicted of a tax crime is between three and five years. However, your punishment could be up to the maximum listed in the tax codes. In addition to jail time, convicted taxpayers will likely have additional penalties. These could include community service, monetary payment, or house arrest.

When Should I Get a Lawyer?

You should consult a tax attorney if you receive notice of an IRS audit, criminal investigation, or criminal charges. A lawyer can advocate on your behalf and protect your rights during the investigation and court process. You may start out facing minor tax issues that do not require the assistance of an attorney. However, if you see the situation escalating, then it can be wise to consult with an attorney about the situation.

Find a Criminal Tax Attorney

Facing a tax audit is scary enough. However, your situation can quickly become life-changing if that audit turns into an IRS criminal investigation. A tax attorney can provide much-needed legal advice in this situation. Their knowledge of the tax law can help you form a legally valid and effective criminal defense.

Visit the Super Lawyers directory to begin your search for an experienced tax attorney. For more information, read our guides on tax law and white-collar crime.