Last Updated: March 10, 2023
Not paying taxes because you don’t have to (exempt for whatever reason) and not doing so because you don’t want to are two completely different things. The latter could even result in tax fraud jail time.
In his letter to Jean-Baptiste Le Roy in 1789, Benjamin Franklin famously stated:
“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”
Still, according to the Tax Policy Center, about 61% of Americans paid no federal income tax in 2020. How can this be? Well, when you count in the pandemic, federal stimulus, high unemployment, and tax credit programs, this comes as hardly surprising.
Under such circumstances, tax evasion examples are getting more and more common. Then again, not all tax evasions are malicious (or even deliberate). Does this make your case better or worse?
With all of these questions out there, it might be a good idea for you to understand the US tax system and what penalties you’re facing if you go against it.
What Is Tax Evasion?
Tax evasion is a concept that envelops any kind of underpayment or non-payment of taxes owed by an individual, corporation, trust, or organization (incorporated entity).
The most important thing you need to understand is the difference between tax fraud and negligence. Tax evasion penalties often depend on the circumstances. You see, not all tax evasion happens out of malicious intent. Sometimes, people just forget to file their taxes or do so incorrectly.
- Tax negligence (a mistake) will get you a 20% penalty tacked onto your tax bill.
- Tax fraud, on the other hand, can result in as much as a 75% civil penalty.
The biggest problem here is that it’s not always easy to prove either.
Also, you need to remember that there is civil tax fraud and criminal tax fraud. Nonetheless, the truth is that 98% of the time, the IRS punishes tax fraud with civil penalties, which means that you will likely never face criminal fraud penalties.
What is considered tax evasion?
Some of the most common examples of tax evasion are:
- Hiding income
- False income
- Inflating deductions
- Not reporting cash transactions
- Hiding interest
- Illegally assigning income
In either of these cases, tax evasion is a serious offense. It comes under criminal charges, and substantial penalties (even jail time) are involved.
Is tax evasion illegal?
Tax evasion is always illegal, and it involves penalties, jail time, or both. In 2020 alone, 593 people were sentenced for tax crimes in the US. Moreover, the most notorious criminal in the history of America, Al Capone, was not convicted of bootlegging, illegal gambling, murders, or extortion. Instead, he got sentenced to 11 years in prison for tax evasion.
In other words, tax evasion is a crime, and penalties can be quite severe.
Other than this, the majority of people want to know two things.
- How much will they have to pay back?
- Can they go to jail for tax evasion?
Now that we’re clear on it being illegal, what is the maximum penalty? In terms of tax fraud jail time in the USA, you can serve up to one year for every year of taxes that you didn’t file.
Not only that, but you can even go to jail for helping someone else hide (evade) their taxes. This sort of fraudulent activity can earn you up to five years of jail time. Still, in most cases, jail time depends on the situation at hand.
Evidence of tax fraud
First of all, it’s important that the IRS can prove fraud (opposite to negligence). Here, it’s all about the evidence. For instance, pocketing the money without entering it into your books is evidence of fraudulent intent. The same goes for bank records that don’t add up to your books.
One more thing that will go against you is that, in this day and age, finding suitable tax software is easier than ever. The fact that you can inform yourself, automate the process, and minimize the likelihood of error is so simple, yet not done, will not look good.
How much jail time can you get?
Your tax evasion jail time will depend on the specific circumstances and gravity of your case. For instance:
- Filing a fraudulent report carries up to 3 years in prison.
- Misrepresenting financial details or concealing them will lead to up to 5 years in prison.
- Failing to file a tax return can lead to up to 1 year in prison (although highly unlikely).
- Willfully failing to pay estimated taxes or keep records could lead up to 1 year in jail.
- Failing to disclose offshore bank accounts (willfully) will lead to up to 5 years in jail.
Remember that all of the above-listed also comes with a fine depending on the original tax, specific circumstances, and evidence accumulated.
On average, those facing jail time for tax evasion will receive three to five years.
Is tax evasion a felony?
If you are proven as someone who has willfully attempted to evade or defeat the tax imposed, you will also be guilty of a felony. This is listed under Section 7201 of the Internal Revenue Code.
The fact that tax evasion is a white-collar crime doesn’t make it any less serious.
One more thing you need to know here is that willfully failing to pay taxes is a federal offense.
While this may seem serious and the tax penalty you face is quite hefty, proving that you’ve made an honest mistake might be the best course of action.
Because 90% of Americans don’t really understand the new tax bracket reform, and as many as 48% don’t even know in which tax bracket they were in 2019, proving you made a mistake might not be as hard.
What Is Tax Avoidance?
What is exactly tax avoidance, and how is it different from regular tax evasion?
Well, unlike tax evasion, which is an outright failure to pay the taxes, tax avoidance is an action to lessen the liability. In other words, whereas tax evasion means not paying taxes at all, tax avoidance means paying less than what you owe.
The biggest issue worth pointing out in the tax evasion vs tax avoidance debate is that tax avoidance might imply your efforts to find legal ways to reduce your obligations as a taxpayer.
There are many methods used to reduce your obligations as a taxpayer, like charitable giving or investing into a tax-deferred mechanism (like your individual retirement account).
Is tax avoidance legal?
Tax avoidance is, by its definition, legal. The most common form is avoiding capital gains tax on stocks. Essentially, paying taxes on stocks applies only if you sell them or if they yield financial gain (in the form of dividends).
So, we all hear about this and that billionaire not paying their taxes, right? They usually pay themselves low salaries while amassing a fortune in other assets (such as stocks). They then borrow money off those assets to finance their lavish lifestyles. By selling these assets, they would have to pay capital gains taxes but this way, they can walk past the red tape.
The most important thing to stress out is that all of this, although morally dubious, is completely legal, which is a key difference when making a tax avoidance vs tax evasion comparison.
What Is a Tax Fraud?
What about tax fraud, and what’s the situation like when it comes to tax fraud vs tax evasion?
The oversimplified explanation would be to say that tax evasion is a more serious form of tax fraud. This means that the penalties are more serious, as well.
Tax fraud means willfully cheating on a tax return in an attempt to avoid paying your tax obligation. Some of the most common (and best known) forms of tax fraud are:
- Using false SSN
- Not reporting income
- Claiming personal expenses as business expenses
- Claiming false deductions
Moreover, both tax evasion and tax fraud are federal crimes. They are also punishable by severe fines and prison.
Is tax fraud a felony?
The key thing you need to remember here is that making a mistake or two on your return doesn’t mean that you’ve committed a felony. The IRS needs to prove that you did it willfully, and they need to prove it beyond a reasonable doubt. Only then will this go under felony, and you’ll land into some real trouble.
Still, once tax evasion is proven beyond a reasonable doubt, tax evasion is a felony regardless of the amount owed.
Is It Illegal to Not File Taxes?
What about just not filing taxes? Is it really illegal, and if so, what are some potential consequences? What’s the absolute worst thing that can happen?
If you fail to file taxes for one year, what you’re looking at is a failure-to-file penalty or late-filing penalty (depending on your situation). The penalty for this is about 5% of the tax you owe each month, with a maximum sanction of 25%. So, in terms of tax penalties, the longer you wait, the worse it gets.
If you’ve made this mistake in the past, you might wonder if there’s a way for you to find out what years you didn’t file taxes?
The simplest way to figure this one out is to use Get Transcript and request your account transcript. Nowadays, you can get all of your tax forms online.
The IRS statute of limitations says that (under normal circumstances) they can’t look at tax returns that are older than six years. However, if you simply didn’t file a return, there’s no legal limit to when they can come after you. So, if you didn’t file your taxes, to begin with, you can’t put much faith in the tax evasion statute of limitations.
Filing Taxes Twice
So far, we’ve discussed people who fail to file their taxes and get in a bit of a problem. Some of these people just made a mistake, it slipped their minds or underestimated the consequences. However, what happens to those who make the opposite mistake? Is there a penalty for filing taxes twice?
Worry not. If you attempt to file twice, the IRS will just outright reject the second return. You will also get a code (usually 0515 or IND-515) and an explanation. This way, the problem will be easy to diagnose, and you will not suffer an IRS tax penalty.
To avoid repeating this mistake, you need to schedule your taxes. This can be somewhat troublesome since not all taxes are due on the same date. For instance, the due date on property taxes varies across states, while federal taxes are due on the same date. Needless to say, this is when you don’t count the tax deadline extension.
How Long Does It Take to Investigate Tax Evasion?
So, imagine a scenario where you’ve failed to file your taxes, and you didn’t receive any form of tax evasion punishment. This doesn’t mean that you’re out in the clear or that it won’t catch up with you in the future.
In fact, it takes approximately 1,000 to 2,000 working hours to investigate tax fraud. This means that, depending on the complexity of your case and the number of people on the case, it may take 12 to 24 months to fully investigate it.
The most important thing you need to keep in mind is that there’s no time limit on the collection of taxes. Even if 10 or 20 years pass, you may still be on the hook. Of course, this is only true in theory, seeing as how there’s generally a 10-year time limit on collecting taxes. In other words, the IRS tax penalty is inevitable.
Can You Just Refuse to Pay Taxes?
You must have heard all sorts of phrases online, ranging from the idea that tax is legalized robbery to comparing it to the medieval tribute. So, if you find these claims sensible, can you just outright refuse to pay taxes (out of some ideological reason or your personal revolt)?
The answer to this question is quite simple – while there is such a thing as tax resistance, you cannot legally avoid paying taxes.
In theory, you could avoid consumption tax by not buying the item being taxed, but this is seldom worth it (from either practical or a political standpoint).
Overall, the average jail time for tax evasion is three to five years. Still, you need to keep in mind that in most cases, tax evasion will lead to (considerable) penalties instead of jail time. To go to jail, criminal charges need to be filed against you, and, in the majority of situations, this will not be the case.
Also, there are always nuances. Finding a way to avoid a part of your tax payment in a legal way is not the same thing as submitting a fake tax return. Therefore, the average (or common) punishment won’t be the same either.
Remember, making an honest mistake is not a fraud, but it may be difficult to prove. Still, it is a valid defense strategy, even though its success will depend on your ability to convince a judge or the jury that you’re speaking the truth. In this situation, nevertheless, it’s always better to just hire a lawyer than trying to come up with a defense strategy on your own.
If you file your return and prove that you are not able to pay your taxes, you will not be put in jail. However, if your return is fraudulent, you can get up to five years of imprisonment. Tax evasion and tax fraud is both felony and a federal crime.
Filing single when married is a crime that can result in up to three years in jail and a fine of up to $250,000. In other words, this is never a good risk. Not getting married or getting married for tax reasons is something else entirely (and completely legal, even if ethically dubious).
Not filing taxes is one form of tax evasion and, as such, can land you in prison for five years. Failing to file a return could earn you prison time for up to one year for every year that you didn’t file. The statute of limitations for the IRS here is three years from the due date of the return.
If you are less than 65 years of age, are single, and earn below $12,550, you generally don’t need to file a federal tax return. If you’re older than 65, the minimum threshold is $14,250. Married people filing jointly (if both spouses are under 65) have a minimum income of $25,100.
In a scenario where you get audited and fail, you will be charged with a failure-to-pay penalty. This is usually 0.5% of your unpaid tax. It applies monthly until your taxes are paid in full. In short, the IRS changes your return, sends you a 90-day letter, and, eventually, starts collecting.
You need to contact the IRS right away. To correct it, you need to file an amended return. Some people choose to have this amended return filed by a professional (to avoid a repeated mistake). Failure to correct the mistakes will usually involve penalties with interest.
The most straightforward answer is that you will face a late filing penalty. The sanction is 5% per month, based on the amount that you owe. For those who cannot make these payments right away, the IRS has payment installment plans as an alternative.
Lying on your tax return will most often create a mismatch that will eventually grow in an audit. In other words, lying on your tax return will get you caught and audited. An audit is quite expensive on its own (in additional taxes), which is why you want to avoid it whenever you can.