The Most Common Tax Charges in IRS Criminal Prosecutions

The Most Common Tax Charges in IRS Criminal Prosecutions

Getting charged with a tax crime by the IRS can be scary. But it’s pretty rare – only about 2,500 Americans get convicted each year, out of over 150 million taxpayers[3]. That’s less than 0.002%! Still, it’s good to understand the most common criminal tax charges so you can avoid them. This article will explain the basics in simple terms, so you know what to watch out for. We’ll also look at penalties and defenses.

Tax Evasion

Tax evasion is purposefully not paying taxes you owe, usually by hiding income. It’s a felony with up to 5 years in prison and $100,000 in fines for individuals ($500,000 for corporations) [4]. The IRS has to prove you knew you owed more tax and tried to avoid it on purpose. Just making a mistake usually won’t count as evasion.

Examples:

• Not reporting cash income from side jobs or tips
• Using fake businesses to claim bogus deductions
• Hiding money in offshore accounts to avoid taxes

Tax evasion charges are rare – the IRS usually goes after big cases with clear evidence of intentional cheating. But it does happen, so don’t take chances!

Tax Fraud

Tax fraud is falsifying information on your return to reduce how much tax you owe. It includes[3]:

• Claiming false deductions or credits you don’t qualify for
• Lying about your income
• Using a fake Social Security number

Tax fraud can lead to up to 3 years in prison and $100,000 in fines (or $500,000 for corporations). The IRS will look for a pattern of lying over several years with big tax savings. Just one mistake is unlikely to trigger charges.

Failure to File a Tax Return

It’s illegal to not file a required tax return. Charges are rare and usually only if you owe significant back taxes. Fines are up to $25,000 and 1 year in prison. The IRS mainly wants the unfiled returns, not jail time[5].

Defenses:

• You had a good reason, like illness or family emergency.
• You didn’t realize you had to file.

Employment Tax Fraud

Businesses have to pay employment taxes on worker wages to fund Social Security and Medicare. Avoiding these taxes is a felony with fines up to $10,000 and 5 years in prison per offense[3].

Examples:

• Not reporting cash wages
• Misclassifying employees as contractors
• Not paying payroll taxes

Employment tax cases often involve long-term schemes with large tax losses. Negligent errors rarely end up as criminal charges.

Willful Failure to Pay Estimated Taxes

Self-employed people and those with non-wage income usually have to pay estimated taxes quarterly. Not making the payments can lead to misdemeanor charges if it was willful. This is rare – most cases just get civil penalties[5].

Not Keeping Proper Tax Records

Businesses must keep records of sales, expenses, payroll, etc. for the IRS to verify tax returns. Intentionally not keeping adequate records can result in up to 1 year in jail and $25,000 in fines if it obstructed the IRS[5].

But most record-keeping problems just lead to civil penalties, not criminal prosecution.

How Tax Crimes Get Discovered

The IRS finds potential tax crimes through:

• Audits – a pattern of errors or fraud might trigger a criminal referral
• Whistleblowers – people can report tax cheating for a reward
• Law enforcement – FBI, DEA, etc. may share information with the IRS

If the IRS Criminal Investigation Division finds enough evidence, they’ll recommend prosecution.

Avoiding Tax Crime Charges

To steer clear of tax crime charges:

• File all required returns and pay on time
• Report all income accurately
• Keep good records to support tax return info
• Ask a tax pro if you’re unsure about anything

Most tax penalties are civil, not criminal. The IRS mainly wants people to pay what they owe, not go to jail. But intentional and long-term tax cheating can cross the line into criminal charges. Take tax compliance seriously and you likely have nothing to worry about!

Sources:

[1] IRS Tax Crimes Handbook

[2] Tax Evasion Penalties Guide

[3] Most Common Tax Charges in IRS Criminal Investigations

[4] Understanding Tax Fraud

[5] IRS Criminal Penalties

[6] Who Goes to Prison for Tax Evasion?