One of the first questions that many people have after receiving a letter from the IRS is if they can go to jail for not paying taxes. Receiving a letter or notification from the Internal Revenue Service can be overwhelming and cause someone to think about the worst possible scenario. Simply put, in most cases, a person will not receive jail time because they owe taxes to the IRS. Although it is federally illegal to not file a tax return, it is extremely rare to have that be the only reason to go to jail. That said, some conditions can affect this, and as a result, they are important to unpack and understand.
In this article, our experienced tax lawyers at Victory Tax Lawyers answer the question of “can I go to jail for back taxes?” and put it to rest once and for all. We begin by providing some useful information about back taxes before moving on to providing a closer look at if and when jail time can be a possibility. Throughout the article, we reference various IRS processes, as well as the Internal Revenue Code that plays a pivotal role in understanding tax violations that can result in prison time.
Back Taxes: A Brief Background
Back taxes are the tax amount you owe to the IRS after the filing deadline has passed. Usually, this is April 15th of the following year. For example, a 2021 Tax Return for Individuals (Form 1040) was due by April 15, 2022, for the Tax Return and payment. Owing back taxes can be the result of failing to file a tax return, filing a return but not paying the tax amount you owe, or not reporting all income for a specific tax year. Not only do taxpayers need to pay the full amount that is due, but in addition, interest and other penalties that incur on the back taxes until your balance is zero. Back taxes are a big issue for the IRS. Recent data from the agency shows that Americans owed over $130 billion in back taxes, interest, and penalties in 2021. This number continues to grow.
Back Taxes: IRS Statute of Limitations, Period of Suspension, and Extensions
The general rule is that the IRS can collect back taxes for 10 years—in other words, the statute of limitations for back taxes is 10 years. The ten-year period begins on the date that IRS assesses the unpaid taxes. Although there are exceptions, in most cases the IRS must stop all collection efforts once the 10 years are up. One exception is during periods of suspension when the IRS can not sanction collection action against a taxpayer. For example, if a person files for bankruptcy, collections must cease for the length of the case plus an additional six months. Collections are also suspended during the IRS review of an offer-in-compromise. However, being on an installment agreement, or a Currently Non-Collectible (CNC) status does NOT toll the statutes.
Beyond suspensions, the ten years could also be lengthened if a person agrees to voluntarily extend the limitations. For example, if a person agrees to a partial payment for back taxes, one common condition of the agreement is agreeing to an extension to the ten-year limit. One important thing to note is that the IRS cannot extend for more than an additional 6 years.
So Can You Go To Jail For Not Paying Taxes?
Receiving jail time for simply having tax debt because you unintentionally forgot to pay or file your taxes by the due date is highly unlikely. One important aspect to consider here is civil offenses versus criminal offenses. Most tax liability cases are civil proceedings. Unintentionally or accidentally failing to pay taxes or reporting incorrect information is not a criminal charge. Instead, accidental errors and mistakes are what is referred to as tax negligence. These can only result in civil penalties—meaning no possibility of jail time for not paying taxes.
Tax negligence means that the taxpayer made a reasonable effort to follow current IRS tax laws, but made unintentional errors. Jail time becomes a legitimate possibility when a taxpayer owes back taxes because of tax fraud or tax evasion. This is because these are what the IRS considers criminal offenses done intentionally. Simply put, not filing a tax return is far better than intentionally filing a false tax return.
Tax negligence, tax fraud, and tax evasion penalties are all potential results stemming from an IRS audit. However, if the IRS has a strong suspicion that a taxpayer willfully tried to evade payment of taxes or attempted to evade reporting laws, they can bypass an audit and skip to a criminal investigation. The IRS Criminal Investigation (CI) department is responsible for making the determination to the Department of Justice for prosecution. The “special agents” that work in CI are highly adept at investigating tax crimes, and also carry a badge with a gun. Once CI makes a recommendation for prosecution, the Department of Justice has over a 75% success rate.
Before taking a closer look at tax fraud and tax evasion, we first look at common tax negligence penalties.
Common Tax Negligence Penalties
Failing to pay your taxes is one of the most common forms of tax negligence. Tax negligence penalties can also arise due to other reasons such as failing to file your tax return on time, incorrectly preparing a return, or not providing accurate information returns. As mentioned previously, tax negligence penalties are usually not punishable by jail time. Specific penalties include:
- Information Return—for taxpayers who fail to file or furnish their required information return or payee statement correctly by the due date. This includes failing to file 1099s.
- Failure to File—for taxpayers who don’t file their tax return by the due date. You can get a six-month extension to file.
- Failure to Pay—for taxpayers who don’t pay the tax you owe by the due date. There is NO extension to pay.
- Accuracy-Related—for taxpayers who don’t claim all your income or when you claim deductions or credits for which you don’t qualify. This is a 20% penalty that comes with some type of examination or audit.
- Erroneous Claim for Refund or Credit Penalty—for taxpayers who submit a claim for refund or credit of income tax for an excessive amount and reasonable cause does not apply.
- Failure to Deposit—for taxpayers who don’t pay employment taxes accurately or on time. Payroll companies usually handle these. If not, taxpayers need to go to EFTPS.gov.
- Tax Preparer Penalties—for tax return preparers who engage in misconduct.
- Dishonored Checks—when a taxpayer’s bank doesn’t honor their check or another form of payment.
- Underpayment of Estimated Tax by Corporations—for taxpayers who don’t pay estimated tax accurately or on time for a corporation.
- Underpayment of Estimated Tax by Individuals—for taxpayers who don’t pay estimated tax accurately or on time as an individual.
- International Information Reporting—for taxpayers who fail to timely and correctly report foreign sourced financial activity.
The IRS will notify a taxpayer of a penalty by sending them a notice or letter in the mail. This letter will most likely specify the penalty as well as the next steps to take. As a general rule, the IRS charges interest on penalties beginning on the due date of the amount you owe. Additionally, the interest increases until the taxpayer pays the balance in full. Interest rates that the IRS charges vary and often change quarterly. If you are successful in removing the penalties, the interest on the penalties will also be removed. However, interest on the tax cannot be removed.
Tax Fraud & Tax Evasion
Tax fraud is an umbrella term that covers a wide range of criminal activities that violate tax law. One key aspect related to tax fraud is that the acts of the person who committed the actions were intentional. As stated by the IRS, some examples of criminal tax activities include:
- Intentionally underreporting or omitting income
- Overreporting the number of deductions
- Claiming personal expenses as business expenses
- Claiming false deductions
- Hiding or transferring assets or income
- Keeping two or more sets of books
The Internal Revenue Code covers tax fraud in a few different sections, including:
- IRC § 7202 – Willful failure to collect or pay over tax;
- IRC § 7203 – Willful failure to file a return, supply information, or pay tax;
- IRC § 7204 – Fraudulent statement or failure to make a statement to employees;
- IRC § 7205 – Fraudulent withholding exemption certificate or failure to supply information; and
- IRC § 7206 – Fraud and false statements.
Tax evasion is a more serious extension of tax fraud with more severe punishment. The Cornell Law School Legal Information Institute defines tax evasion as using illegal means to avoid paying taxes, often by misrepresenting income to the IRS. Common forms of misrepresentation include:
- Underreporting income
- Hiding money in offshore accounts
- Inflating deductions
The IRS addresses tax evasion in Section 7201 of the Internal Revenue Code, which states the following:
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.
For tax fraud charges, the common standard for conviction is “clear and convincing evidence.” For tax evasion charges, on the other hand, the government must prove “beyond reasonable a doubt” to convict the defendant. This is the highest standard or burden of proof.
The IRS initiates criminal investigations when an IRS revenue agent (or auditor), revenue officer, or investigative analyst detects possible fraud. Investigations can also be initiated when information is passed to the IRS from investigations by other law enforcement agencies or by one of the numerous United States Attorney’s offices located throughout the country.
IRS Criminal Investigations (CI)
Criminal investigations begin with a preliminary analysis of evidence by an IRS special agent. Their superiors then review to determine if there is the necessary amount of evidence to initiate a criminal investigation. Once a full investigation is initiated, the special agent obtains evidence. They do this by reviewing financial data, executing surveillance and search warrants, interviewing key witnesses, and even subpoenaing bank records. Once all the information is gathered and analyzed, the IRS determines whether or not it substantiates criminal activity. In the case that it does, prosecution recommendations are reviewed by The Department of Justice Tax Division or The United States Attorney. Upon approval of recommendations, prosecutors prepare for trial, with the goal of obtaining a conviction.
Fortunately, IRS criminal investigations are quite rare. According to the most recent data outlined in the 2021 IRS Criminal Investigations Annual Report, the IRS initiated 1,372 investigations in Fiscal Year 2021. Of these investigations, prosecution was recommended for 850 of the investigations, and ultimately, 633 taxpayers were convicted and sentenced.
What to Do If You Owe Back Taxes
Although you will not go to jail for not paying taxes, neglecting back taxes can still have serious consequences. For example, the IRS can garnish your wages or seize your assets. If you receive a letter or notice from the IRS, we recommend you deal with it promptly. It will not just go away by itself. It is best to deal with the back taxes before the IRS starts their collections and seizures. There are different options for people who owe back taxes to the IRS, such as:
- Installment agreements (also known as payment plans) that give taxpayers the ability to pay back taxes over a designated amount of time through monthly installments;
- Request a short-term extension that provides a taxpayer with additional extra time (up to 180 days) to pay their full balance;
- Offer in compromise, which gives taxpayers with financial hardship the option to settle their tax debt for less than what they owe; and
- Currently-not-collectible status, which does not eliminate back taxes, but it stops the IRS from garnishing wages or seizing assets because of a well-evidenced dire financial situation.
Final Thoughts on The Matter of Jail Time for Not Paying Taxes
Considering the intimidating reputation that the agency has, receiving a letter from the IRS about back taxes can be extremely stressful. By reading the information outlined above, we hope you finally have the answer to the golden question of “can you go to jail for not paying taxes?” The key aspect to remember is whether or not the taxpayer engaged in criminal activity. To summarize, typically only criminal charges such as tax fraud or tax evasion can result in jail time. Making an accidental mistake, forgetting to pay taxes, or unintentionally making an error on taxes will carry penalties, but will not be punishable with jail or prison time.
Contact Victory Tax Lawyers—Proudly Serving the US
A dedicated tax lawyer can help you resolve your back taxes in the most effective way possible. At Victory Tax Lawyers, our lawyers have years of experience dealing with the IRS and helping our clients across the United States achieve the best outcome against the IRS. Our reputation as the best tax law firm in the nation stems from our track record of success.
For any questions related to back taxes or any tax issues, call Victory Tax Lawyers today at (800) 883-8301. If you want to settle your tax issues as soon as possible and not have the constant threat of the IRS looming over you, let our top-class tax attorneys help you! As we like to say—don’t get punked by the IRS!