Know Your Taxes: What Tax Penalties Count as a Felony?

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The IRS (Internal Revenue Service) initiated 3,395 criminal investigations on US citizens in 2016. 79.9% of those criminal investigations lead to prison time. 

The average time spent in prison for tax fraud and/or evasion was 41 months. Like death, taxes are unavoidable. 

And anyone can go to jail. Even celebrities such as Wesley Snipes, Ja Rule, and the fashion house Dolce and Gabbana couldn’t escape their duties to pay taxes.

But while most Americans fear tax penalties, many are unsure of what constitutes tax fraud and tax evasion. They’re also unsure of who goes to jail for tax evasion. 

If you’re wondering what tax fraud and evasion are, keep reading. We’re sharing with you everything you need to know about what tax frauds count as felonies. 

What Tax Penalties Are

There are several tax fraud penalties every taxpayer needs to be aware of. Unfortunately, ignorance isn’t a good excuse in most cases. 

Dishonored Checks

The IRS doesn’t like it when you send them a bad check to pay your taxes.

If your bank doesn’t honor the check or another form of payment you use to pay them, this is considered a tax penalty. 

Failing to File

April 15th is traditionally the due date for annual taxes. The only time that date is extended is if April 15th falls on a weekend or holiday. 

However, if you file an extension and are approved, you will not receive a penalty if you do not file by that date. 

Failing to Pay

Not only are you expected to file your annual taxes on or by April 15th, but you need to pay them as well. And no, you can’t pay part of your taxes, they expect you to pay the full amount. 

Also, an extension to file does not extend the time you have to pay. You should also understand that you will begin accumulating interest of 5% on any unpaid taxes one day after your bill was due. 

And that interest will continue to compound daily until you pay your bill. 

Failing to Pay Proper Estimated Tax

Some people are required to pay estimated quarterly taxes. You’ll be penalized if you fail to pay enough taxes due for the year through your quarterly estimated tax payments. 

It’s also a penalty if you don’t withhold enough when required. 

Who Needs to Pay Quarterly Taxes

If you own a business, you’ll generally need to pay quarterly estimated taxes such as if you are involved in a:

  • Sole proprietorship
  • Partnerships
  • LLC
  • S corporation shareholder

You only have to file if you expect you’ll owe tax of $1,000 ore more. If you own a corporation, you’ll have to pay estimated taxes if you expect to owe tax of $500 or more. Also, included are those people whose tax was more than $0 for the prior year.

Who Doesn’t Need to Pay Quarterly Taxes

If you meet all three of the following criteria, you won’t have to pay estimated quarterly taxes: 

  • You were an American resident or citizen for the entire year
  • You had no tax liability for the prior year
  • Your prior tax year covered a 12-month period

If you’re still unsure, check Form 1040-ES for individuals or Form 1120-W for corporations on more details. You can also ask your accountant. 

Non-Criminal Actions the IRS May Take If You Fail to Pay Your Taxes

If the IRS feels you did not pay the full amount of taxes they are due they will send you a Notice of Tax Due and Demand for Payment.

The only time the IRS requests data that’s seven years or older is if they’re conducting an audit that suggests they need more data. Otherwise, the IRS can legally collect taxes, interest, and penalties for any of the years you’ve failed to pay your taxes. 

The IRS Can Easily Discover You Failed to Pay Taxes

They also have programs set up to help them identify anyone who hasn’t filed their taxes. If you are being audited, it’s best to hire an accountant to help you find any records you may need.

Often, in just a few weeks, if your situation isn’t too complicated, it can be settled. You may simply have to pay taxes, interest, and penalties.

Options When You Can’t Pay Your Taxes

You do have options if you can’t pay your taxes on time. The IRS has a Start Fresh Program designed to help people in your situation. 

Installment Agreement

You can attach Form 9465 which is the Installment Agreement Request form. The amount has to be $25,000 or less and can be paid off within five years. 

If approved, you’ll need to show the amount you can reasonably pay each month and what day each month you’d like to pay the installment. There is also a fee to set up the installment plan, plus a late payment penalty, and interest that accumulates.

However, it will not exceed 25% of the total of your unpaid taxes. 

Compromise with the IRS

If even the installment plan is too much to pay, you may be able to make a compromise with the IRS to settle for less. To apply for this you’ll need to fill out Form 656 which is an Offer to Compromise, along with Form 433A which is a Collection Information Statement. 

When Failing to Pay Becomes a Crime

The IRS has no interest in making the lives of hard-working Americans worse by making them pay taxes. The only time it becomes a legitimate crime if you fail to pay your taxes or return a file on time is when you do one or more of the following:

It’s also important to know that the IRS doesn’t have to prove exactly how much you owe. But you will be thoroughly audited if it comes to that and you may also be investigated and criminal charges may be filed. 

What Tax Fraud Is

There is a difference between tax fraud and tax evasion. What is tax fraud?

Tax fraud is actually a general term for which many different laws fall under. Both Title 26 in the IRS code and Title 18 of the US Code fall under tax fraud. 

Intend to Defraud the Government

But basically, tax fraud is when you intend to defraud the government by not paying taxes you know you owe. And tax fraud is punishable by both civil and criminal penalties. 

Meaning, you may have to pay a hefty fine or, you may have to pay a hefty fine and spend time in jail. 

The Burden of Proof Lies with the Government

It’s the government’s job to prove tax fraud and it’s often difficult for them to prove a taxpayer intentionally defrauded the government the money it’s due. For that reason, it’s not often the government chooses to pursue a taxpayer even if it looks as though the taxpayer intentionally underpaid their taxes. 

And as long as a taxpayer can provide a reasonable legal argument for why they failed to pay their taxes, they can usually beat a criminal charge as well. 

What Tax Evasion Is

What is tax evasion? It’s actually a subset of tax fraud. 

Most often, the term “tax evasion” is used in criminal matters when someone is charged with violated 26 USC § 7201. Tax evasion is when someone deliberately misrepresents their taxable income to the IRS. 

Examples of Tax Evasion

A few examples of tax evasion are:

  • Not filing your tax return when you have taxable income in order to avoid detection
  • Purposely taking more deductions or expenses than you actually have
  • Purposely not declaring all of your taxable income

Those who work in businesses where they are given cash such as a bartender or the owner of a grocery store may be tempted not to report or deliberately hide some of all of the cash they earned. 

Who Goes to Jail for Tax Evasion

The government has a team of lawyers, accountants, and security experts whose sole job is to investigate allegations of criminal tax fraud activity such as:

These people have the ability to bypass and hack into computers in order to uncover information and audit backlogged accounts. And that evidence can and will be used against a violator in a court of law. 

American’s Right to Privacy

However, thanks to Americans having a right to privacy, the IRS can’t monitor every citizen’s personal finances. Instead, they rely on American’s being honest.

But if you are caught committing tax fraud or tax evasion, the government may very well choose to make an example out of you.

Making a False Statement to the IRS 

If you are audited by the IRS, do not attempt to hide anything from them. Those individuals or corporations who make false statements or are found purposely hiding their records like their bank statements from an IRS auditor are most likely to be facing criminal prosecution. 

This type of behavior is considered by the IRS to be “badges of fraud”. And they’re a good indication that someone has actively and knowingly engaged in tax evasion.

Unreported Income

It’s unusual for the IRS to go after a bartender for not claiming all of their tips to the IRS. Mostly because it’s too hard to prove.

However, if you purposely fail to report something such as the sale of your business, that’s a huge red flag to the IRS. Another huge red flag of tax evasion is if you fail to report an entire source of income such as money you’ve earned from a side business.

Businesses Most Likely to Be Guilty of Tax Evasion for Unreported Income

The biggest tax evasion businesses are:

  • Accountants
  • Doctors
  • Car salespeople
  • Hair salon workers
  • Fashion store owners
  • Lawyers

Grocery and other store owners who work with lots of cash are also often guilty of tax evasion.

Tax Evasion and Tax Fraud Penalties

There are different rules governing possible fines and/or jail time. It depends on what crime(s) the person committed. 

Here are a few tax penalties to be aware of:

Title 26 USC § 7202

If the IRS proves you willfully failed to collect, account for or pay over tax, it’s considered a felony. Possible penalties are:

  • Imprisonment no longer than five years
  • A fine of $250,000 or less (individuals) or $500,000 (corporations)

It’s also possible to have to pay the fine and go to prison. 

Title 26 USC § 7203

If you are found guilty of failing to file a return, pay your taxes or supply proper information as directed by the IRS you be guilty of a misdemeanor. Possible penalties are:

  • Imprisonment of up to one year
  • A fine of $100,000 (individuals) or $200,000 (corporations)

You can also have to pay the fine and spend time in prison. And you’re responsible for paying the court costs for the prosecution.

Title 26 USC § 7206(1)

If you commit fraud or make false statements, such as committing perjury, it’s a felony. Possible penalties are:

  • A fine of $250,000 (individuals) or $500,000 (corporations)
  • Prison up to three years

You may have to pay both the fine and spend time in prison. You’ll also have to pay the prosecutions court costs. 

Title 26 USC § 7206(2)

This applies to anyone guilty of committing fraud or making false statements. It also includes aiding, assisting or advising someone of filing false or fraudulent documentation. 

This is considered a felon. Possible penalties are:

  • Imprisonment up to three years
  • A fine up to $250,000 (individuals) or $500,00 (corporations)

You can also be forced to pay the fine and go to prison. You’ll also be responsible for the cost of the prosecution. 

Title 18 USC § 371

If you’re found guilty of conspiracy to commit offense or defraud the United States or any of its agencies, you may face possible penalties of:

  • Prison for up to five years
  • A fine of $250,000 (individuals) or $500,000 (corporations)

Or you may be required to pay the fine and go to prison.

Get Help Before It’s Too Late

The IRS isn’t interested in making your life more difficult. But if you’re guilty of tax fraud or evasion, you could be facing very high tax penalties. 

Don’t wait until it’s too late to get the advice and assistance you need to avoid fines and/or prison time. We can help. Click here to contact us.

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