Fraud can come with severe consequences. With fines and possibly prison time on the line, many people wonder: When does the IRS pursue criminal charges? The IRS generally won’t prosecute someone who made an honest mistake, but if there’s clear evidence of taking deliberate actions to illegally avoid paying taxes you owe, you may face criminal charges. When it comes to avoiding criminal tax charges, understanding the situations that may trigger an investigation is critical — and so is knowing what to do if you’re targeted.
If the IRS has begun a criminal investigation against you, the single most important thing to do is to contact an experienced tax attorney. At Victory Tax Lawyers, we have the skills and experience needed to negotiate with the IRS on your behalf and represent you in court if need be. If you’re concerned about criminal prosecution or need help with tax relief, reach out for a free attorney consultation today.
This blog will cover what kind of fraud results in criminal charges, when the IRS will pursue them, how you can know whether you’re under investigation, the possible consequences, and how to avoid charges.
When Does the IRS Pursue Criminal Charges?
When most people think of tax crimes, tax evasion (a deliberate failure to pay all the taxes you owe) often comes to mind. However, while tax evasion is a common criminal charge, it’s far from the only one. The following actions are very likely to trigger a criminal investigation against you.
1. Tax Evasion
Often, people who evade taxes still file tax returns — they just intentionally underreport earnings or otherwise attempt to fraudulently reduce tax liability. Hiding money in offshore accounts, creating fake deductions (like claiming business expenses that didn’t exist), and hiding income or other assets using shell companies are some of the most common strategies. The IRS takes tax evasion seriously. If you are convicted, you may face a fine of up to $100,000 ($500,000 for corporations) and be sentenced to up to five years in prison.
2. Tax Fraud
“Tax fraud” is a very broad category of offenses that includes tax evasion. It also includes filing false returns, making false statements on your return, or falsifying any tax-related documents. Depending on the circumstances, tax fraud can be either civil or criminal.
3. Employment Tax Fraud
When employers fail to meet their employment tax obligations, they may find themselves facing civil and criminal litigation. Taxpayers commit employment tax fraud in many ways, including not reporting cash payments made to employees, failing to withhold employment tax from their wages as required by law, and deliberately failing to file payroll tax reports. An employer convicted of criminal tax fraud may face jail time and financial penalties, including fines and restitution.
4. Failure to File or Pay Taxes
Some tax-related crimes are highly sophisticated and involve multiple layers of deception. However, simply refusing to file and pay your taxes is a crime as well. Failure to file is a misdemeanor offense punishable by a fine of up to $25,000 ($100,000 for corporations) and up to a year in jail.
5. Money Laundering
Money laundering is the process of concealing the origins of illegally obtained money. Often, that money is funneled through legitimate businesses to make it appear “clean.” Because many criminal enterprises regularly commit both tax evasion and money laundering, it’s not unusual for a person to be charged with both at once.
6. Fraudulent Tax Schemes
Some groups put together complex schemes to defraud the IRS (and sometimes taxpayers as well). A very common scam involves fraudulent tax preparers who make false promises to reduce the taxpayer’s liability. They often use overly inflated deductions or claim credits the taxpayer isn’t eligible for to generate a better refund. In many cases, they charge very high fees, and by the time the taxpayer is done paying, they have nothing left to deal with the actual issue with the IRS.
Another common tax scheme involves filing false tax returns. In 2023, the IRS prosecuted a man from France who collected $2.2 million in refunds from 1,701 fraudulent tax returns. The man was sentenced to 34 years in federal prison.
7. Identity Theft Tax Scams
Identity theft tax scams can be incredibly sophisticated. Criminal enterprises collect Social Security numbers and other information to file fraudulent tax returns and claim refunds. The IRS flags suspicious returns for review in an effort to stop scams like these.
What Constitutes a Criminal Tax Violation?
Not all tax violations are considered to be crimes. However, when there is clear evidence that you have a pattern of taking deliberate actions to avoid having to pay taxes, the IRS may opt to pursue criminal charges. One of the primary discerning factors between criminal and non-criminal cases is willful action. If you end up underpaying because you were careless and rushed through your tax return, your actions were negligent. As a result, you may face a civil penalty but not criminal charges.
However, if you intentionally fail to report income from a business venture to avoid paying taxes, your actions are considered deliberate tax evasion. Bear in mind that the standard of proof is different based on whether you’ve been accused of a civil or criminal violation: In civil violations, the evidence against you just needs to be clear and convincing, whereas, for criminal violations, the evidence presented must prove your guilt beyond any reasonable doubt.
The IRS frequently imposes civil penalties on individuals convicted of tax crimes because the proof requirements for civil violations are less stringent than those for criminal violations. Understandably, the IRS is quiet about the specifics of how it tracks and investigates suspected offenders. However, all taxpayers should know that some actions carry a high likelihood of triggering an IRS criminal investigation. These are some of them:
1. Repeatedly Failing to File Taxes
If you have a stressful year and forget to file your taxes, the IRS may not investigate you right away. However, because most people who repeatedly fail to file taxes are doing so in a deliberate effort to avoid paying what they owe, the IRS often treats repeated failure to pay as a crime.
2. Significantly Underreporting Income
Some people trying to avoid paying taxes may still file, but they choose to report far less income than they actually earned. If the IRS notes that you’re making far more than you claim, you might face criminal charges.
3. Not Paying Payroll Taxes (If You Have Employees)
Every employer knows (or should know) that they are required to collect and pay payroll taxes. However, some of them pay employees “under the table” in an effort to avoid these taxes. This is illegal and may lead to criminal prosecution.
4. Leading an Unexplainably Lavish Lifestyle
If your reported earnings are close to the poverty line, but you’re buying multiple luxury cars and making other extravagant purchases, the IRS will notice something doesn’t add up. Conspicuous spending that isn’t in line with your reported income is very likely to trigger a criminal investigation.
5. Making Suspicious Transactions
The IRS often looks for unusual transactions that may suggest money laundering. Things like quickly moving money between different accounts, making multiple transactions just below reporting limits, frequent cross-border transactions, and large transactions from small banks to larger ones may suggest to the IRS that something fishy may be ongoing.
Usually, the IRS pursues criminal charges against taxpayers who have committed egregious violations of tax laws. Criminal charges and sentencing are intended to punish taxpayers for intentional wrongdoing, and they can also be an effective way to deter would-be offenders.
What Does the IRS Consider for Criminal Charges?
There is no single factor that makes the IRS decide to pursue criminal charges instead of just assessing a civil penalty. However, before deciding whether to file criminal charges, the IRS typically considers these three factors: one, intentionality; two, substantial understatement of income; and three, failure to file returns.
The first factor, intentionality, is one of the most important. The IRS understands that taxes are very complex for the average American, and it’s possible to make mistakes. For instance, forgetting to file and pay on time — while it might result in a late payment penalty — is unlikely to get you criminally prosecuted. However, if you include deliberately fraudulent information on your tax return, the fact that you were intentionally deceptive means you face a higher likelihood of criminal prosecution.
The second factor, substantial understatement of income, is often an indication of fraud. The IRS defines “substantial understatement” as understating your tax liability by the greater of 10% of your total tax liability or $5,000.
If there is an isolated incident of underreporting, you will likely only face an accuracy-related penalty. However, if you continue to underreport, the IRS is more likely to view your behavior as deliberate — and more likely to pursue criminal charges against you.
Lastly, failure to file tax returns can be a crime. The IRS generally only pursues criminal charges if you deliberately avoid filing in order to avoid paying taxes. For example, if you make an average income and forget to file your return one year, you probably won’t be charged. However, if you go for multiple years without filing taxes, make millions of dollars from business ventures during that time, and do not make any kind of estimated tax payments, it’s clear that you are trying to avoid having to pay your taxes.
How Do You Know If The IRS Is Investigating You?
If you think you may have triggered an IRS investigation against you, the uncertainty surrounding your situation can be immensely stressful. If you notice one or more of the following, there’s a good chance you’re being investigated — and you should contact a tax attorney immediately.
1. Unexpected Letters From the IRS
The IRS often sends letters to communicate. If you have an installment agreement, you’ll likely receive reminders before each payment is due. If you file taxes and owe additional money, you also might receive a letter asking you to pay the balance immediately. However, if you start getting unexpected letters asking you detailed questions about your past tax returns, that’s usually a good sign the IRS has begun investigating you.
2. Visits From IRS Agents
If an IRS agent takes the time to show up at your door, you can be certain that your situation is serious. Just like when police question you about a crime they think you were involved in, choosing to stay silent is best. If you ask for the agent’s card and give it to your tax attorney, your attorney should be able to help you determine what steps to take next.
3. Receiving a Subpoena or Summons
A subpoena is essentially a legal order. If you receive a subpoena for documents, the IRS is ordering you to hand over certain documents it thinks may be related to your alleged crimes. If you receive a subpoena for testimony, the IRS believes you have information related to an investigation involving you or another individual.
The IRS will also sometimes issue a summons, which is an administrative request for information or testimony. If you do not comply with the summons, the IRS might attempt to have it enforced by a court. If you receive either one, you should reach out to a tax attorney before doing anything.
4. Frozen Bank Accounts or Asset Seizures
If you have unpaid taxes and have repeatedly refused communication with the IRS, the IRS might freeze your bank account or even seize your assets. However, it can do the same if it suspects you are involved in illegal activity.
If you are suddenly unable to make purchases with your debit card or otherwise access the funds in your bank account, it may have been frozen.
5. Contact From Third Parties
When conducting a criminal investigation, the IRS usually won’t only talk to you. It might reach out to your bank, your employer, your accountant, and people you do business with. These contacts may damage your reputation and relationships. In particular, business associates may start to see you as untrustworthy.
What to Do if You’re Under Investigation
It’s easy to panic if you find out you’re under investigation by the IRS — or even if you simply think you are. However, before you do anything, you should take a deep breath. If your anxiety overtakes you, you may be more likely to make irrational decisions that can only hurt your case.
If the IRS begins asking you about a specific tax return or certain activities, say as little as possible. Because you may be asked to produce financial documents, it can’t hurt to make sure your financial records are organized and accessible.
Cooperating with the investigation is also critical. In many cases, your lawyer can help you avoid some of your criminal penalties by voluntarily disclosing information to the IRS. However, the less cooperative you are, the more likely you are to face stiffer penalties.
Being investigated by the IRS can be scary, but you should understand that you still have rights. The right to retain representation is especially relevant during criminal investigations. You also have the right to due process, privacy, and confidentiality.
If the IRS is investigating you, your assets and your freedom are in jeopardy. You need a knowledgeable advocate to represent you when dealing with the IRS’s often thorough and persistent investigators. The Victory Tax Lawyers team has a track record of success against the IRS. Get in touch for a free attorney consultation today.
Consequences of IRS Criminal Investigations
If the IRS singles you out for an audit and finds something worth penalizing, you may end up having more on your hands than you bargained for. Criminal investigations can cause incredible stress, but that’s only the beginning. Beyond the emotional toll, you risk facing jail time, having penalties trailing you, and, of course, having your reputation damaged.
Even misdemeanor tax crimes can lead to fines as high as $25,000 and as much as a year in jail. The most serious offenses may lead to five years in prison and a $100,000 fine. However, these penalties are on a per-count basis, so you can easily find yourself facing astronomical fines and many years in prison.
Can you really go to jail as the result of an IRS criminal investigation? The answer is yes. The records are out there. Not too long ago, multiple defendants served 24 months in prison for an $11.5 million fraud scheme. In another instance, a California man was sentenced to 14 years in federal prison for tax evasion and investment fraud. According to a recent U.S. Department of Justice press release, a Texas man was sentenced to almost four years in prison for evading more than $1 million in taxes. Even high-profile individuals are not exempt—two television personalities were sentenced to 12 and seven years for bank fraud and tax evasion.
Beyond these punitive penalties, criminal felony charges cause personal and professional reputational damage. Most criminal charges involve fraud, and when you’re well-known, you know better than anyone that goodwill is as good as money in the bank. Being indicted for fraud automatically makes you seem less trustworthy. Employers and business associates may be hesitant to work with you, which could affect your livelihood, earning potential, and future prospects.
How to Avoid IRS Criminal Charges
Proactively avoiding getting into tax trouble is a great way to minimize your risk of prosecution. While keeping up with tax laws can be a challenge, if you work with a reputable tax preparer when you file your taxes, you can make sure you don’t accidentally violate any laws.
When it comes to avoiding tax charges, a skilled attorney with in-depth knowledge of tax law will often make a major difference. At Victory Tax Lawyers, we’re prepared to fight the IRS for you in both criminal and civil matters. If you’re facing a criminal investigation by the IRS, there’s no time to waste — get in touch for a free consultation.
If you spot an error on a past tax return, your best course of action is to file an amended return to correct the mistake. Usually, you can do this online by filing Form 1040-X. The IRS gives you three years from the date you filed your original return or two years from the date you paid the tax owed (whichever is later) to file an amended return. When you file Form 1040-X, you aren’t just submitting a correction. You must fill out the entire form and attach all documentation you included with the original 1040 — even if that documentation hasn’t changed.
A voluntary disclosure program allows you to avoid prosecution by disclosing tax non-compliance before the IRS discovers it. The process is somewhat complex and involves several steps:
- You fill out and submit Part 1 of Form 14457 (an application for the voluntary disclosure process)
- The IRS determines if you are pre-cleared to disclose voluntarily
- If you receive a pre-clearance letter, you then complete and send Part II of Form 14457
- If you’re approved, you receive a Preliminary Acceptance Letter and your case is forwarded to a civil examiner
- When the civil examiner contacts you, you must cooperate
However, before admitting tax violations, you should consult with a tax lawyer to ensure your rights are protected.
Need Help From a Skilled Tax Attorney?
If the IRS sees that you have repeatedly failed to file and pay taxes, finds you are deliberately giving false information, or observes suspicious behavior, there’s a chance it will open a criminal investigation.
When you work with qualified tax preparers and take care to ensure your reporting is accurate, you can keep your risk of investigation at a minimum.
However, if you find yourself facing an investigation despite your best efforts, you need to find the best tax lawyer you can to represent you. At Victory Tax Lawyers, we represent clients in civil and criminal tax matters alike, and we can help you solve even the most complex tax situations. Get in touch for a free attorney consultation today.
FAQ
How Much Do You Have to Owe the IRS to Go to Jail?
The IRS doesn’t decide whether to pursue criminal charges based on how much you owe. Instead, it generally looks to see if you have a pattern of taking deliberate actions to avoid having to pay your taxes.
How Long Does an IRS Criminal Investigation Take?
The length of time it takes to investigate a tax offense varies widely based on the complexity of the case. Simple cases can often be investigated efficiently, but if the IRS needs to investigate multiple potential offenses going back years, the investigation might take several years as well.
How Do You Stop an IRS Criminal Investigation Division?
One of the best ways to limit your likelihood of facing criminal charges is “voluntary disclosure,” which is where you inform the IRS of any inaccuracies or past failures to pay before the IRS discovers them for itself. However, before doing anything, you should consult an experienced tax attorney.
Can the IRS Pursue Charges for Old Tax Returns?
Yes, but the statute of limitations for tax crimes is usually six years.
Can I Negotiate With the IRS to Avoid Criminal Charges?
In some cases, yes. However, it’s unwise to try to negotiate on your own. Tax attorneys have extensive experience dealing with the IRS, and they are more likely to be able to negotiate a favorable outcome.
