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Tax Fraud and Tax Evasion Penalties Explained

Male hands locked in handcuffs on white, With Clipping Path.
Male hands locked in handcuffs on white, With Clipping Path.

Tax fraud is a criminal offense that can result in stiff penalties and even jail time. It’s your legal responsibility to pay taxes — if you don’t, the IRS is entitled to hit you with civil and criminal sanctions including prosecution and prison sentences.

But what is tax evasion, exactly? And what is tax fraud? Find out what these crimes are, and make sure you’re not committing them. Learn how to avoid these issues — then you can legally cheat your tax bracket, instead.

Tax Evasion

By definition, tax evasion is the failure to pay taxes at all, or the deliberate underpayment of taxes using illegal means. You have the right to decrease your tax liability by claiming lawful deductions and charitable contributions, but you can’t avoid paying what you owe. If you’re aware of any business or individual committing this crime, you should act — always report tax fraud to the IRS.

Don’t confuse tax evasion with tax avoidance. Tax avoidance is legal — as long as you claim legitimate deductions that qualify with the IRS. Evading tax, however, falls into the same category as tax fraud because in both cases cheating the taxman is deliberate.

See: 50 Tax Write-Offs You Don’t Know About

Penalties for Tax Fraud

Committing tax fraud or tax evasion is a felony that includes deliberately refusing to file your taxes, filing incorrect returns, making false claims and failing to declare your full income. If you’re caught committing tax fraud or evasion, a tax audit will likely take place in your near future.

If you haven’t done anything wrong, you won’t have problems during an IRS audit. If you’ve cheated, however — and you’re wondering what happens if you don’t pay taxes — here’s what you might be in for:

  • Not filing a return: Failing to file carries a maximum sentence of one year in prison and/or fines of $100,000 for individuals and $200,000 for corporations. You’ll also have to pay all taxes owed, plus legal fees.

  • Filing a falsified return: A fraudulent tax return can result in IRS fraud penalties of up to $250,000 for individuals and $500,000 for corporations, plus up to three years in jail and the cost of legal fees.

Those who intentionally evade paying income taxes might be charged with a civil penalty, too, which can add up to 75 percent of the unpaid tax that’s attributable to fraud plus whatever taxes are owed. As a taxpayer, it’s important you remember that if you’re not honest with the IRS, you could run into stiff IRS tax fraud penalties.

Learn: What to Do When You Can’t Pay Your Tax Bill

Penalties for Tax Evasion

If you don’t file a return or pay the taxes you owe, you could be subject to tax evasion penalties on top of basic fees. Penalties are decided based on how the IRS views your failure to file and pay.

Your failure to file can fall into one of three categories:

  • Negligence: If the IRS believes you have neglected to file or pay taxes, you could face a penalty of 20 percent of the portion of the underpayments considered to be attributable to the negligence.

  • Civil fraud: If the IRS believes you have committed tax evasion, but the offense is not considered criminal, you could face a penalty of 75 percent of the tax underpayment attributable to fraud.

  • Criminal fraud: If you evaded paying your taxes and the act is considered criminal, you could face heavy court fines, imprisonment — or both.

The last two penalties are on the severe end of the spectrum. The difference between civil and criminal fraud is the degree of proof required. In civil fraud cases, the government must prove fraud by presenting clear and convincing evidence. In the case of criminal fraud, the government has to present sufficient evidence to prove guilt beyond a reasonable doubt. An IRS criminal investigation is a lengthy and expensive process, as you will likely need to hire a tax attorney.

You could also face an IRS tax audit from previous years, so ensure you accurately filed your past returns.

Tax Evasion FAQ

Here are answers to some frequently asked questions about tax evasion:

1. What qualifies as tax evasion?
Tax evasion is using illegal means to avoid paying taxes, such as underreporting income, inflating deductions or hiding money in offshore accounts.

2. Can I challenge an audit?
If you disagree with the outcome of an IRS audit, you have the right to file an appeal. You might want to enlist an attorney or CPA to help you prepare your defense because both tax avoidance and tax evasion are federal crimes.

3. How long does an audit last?
The length of an audit depends on many factors, including its type and level of complexity, your ability to provide any requested information and your acceptance — or rejection — of the findings. There is no standard length of time an audit lasts, so keep your necessary receipts for several years of tax returns to streamline the process should an audit occur.

4. What happens if I don’t file taxes?

Not filing taxes will result in a failure-to-file penalty, as well as interest on unpaid taxes. At worst, you could face jail time and hefty fines.

Get the Details: This Is the Penalty for Filing Taxes Late

This article originally appeared on Tax Fraud and Tax Evasion Penalties Explained