Do People Go To Prison For Not Paying Taxes?
Use this website for informational purposes only.
Like in almost all countries, payment of taxes is mandatory in the US. If you are earning money while living in the US, it is up to you to gauge whether you are fit to pay taxes. Also, if you are a non-resident, you have to return taxes duly.
Irrespective of your status, you are obliged to file and pay up taxes every year before the elapse of the federal tax payment deadline date to the Internal Revenue Service (IRS). Failure to honor this moral obligation has consequences depending on each situation, from penalties and property seizure to a jail term. So, can you end up in jail because of failing to pay up taxes? Yes, you may.
We will delve into the different situations that may land you in jail and several other consequences arising from tax payment failure in the US.
What are the Scenarios that may lead to Jail Time?
To be handed a jail sentence, the tax offense you have committed should be a criminal offense rather than a civil offense. Tax laws are complex. The IRS or state attorneys must convince the court of law that you have committed a crime, in this case, tax fraud.
If the offense is viewed as civil, i.e., a matter to be handed a jail sentence of negligence, the IRS may take steps such as imposing penalties on you, property seizure, among others. If it is satisfied that the offense committed is intentional, then that is a criminal offense or, instead, tax fraud and will call for criminal proceedings, which may land you in jail.
Tax fraud may occur in the following ways:
1. Committing Tax Fraud
Tax fraud occurs when you intentionally falsify or fabricate information to limit your tax liability. You may do this when you incorrectly fill in tax return forms to either inflate amounts due or owe the IRS less taxes.
Misrepresentation of personal expenses as business expenses may also count as tax fraud. To be convicted of tax fraud, the IRS must sufficiently prove beyond doubt that you committed the fraud deliberately and intentionally and support the allegation with evidence.
It is hard to cross the line on whether it was intentional, so cases are hard to prosecute and determine as they may quickly go unnoticed. For example, one may claim to have played a part in charity.
2. Committing Tax Evasion
There are two categories of tax evasion; evasion of payment and evasion of assessment.
i) Evasion of Payment
Tax evasion refers to a situation where you conceal the money you owe the IRS. Unlike failure to pay what you owe to the IRS, which may land you in jail, tax evasion will land you into serious trouble. Evasion of payment involves lying that you have run bankrupt to avoid tax payment.
Bankruptcy may only hold in federal income tax cases, unlike any other tax such as capital gains or self-employment taxes. Additionally, hiding money in proxy accounts when you have a tax debt or not maintaining business cash records, or operating on all-cash means of payment may not end well with you when the IRS comes calling!
ii) Evasion of Assessment
Evasion of assessment refers to preventing the IRS from being able to determine how much tax you owe. It could also mean taking undue deductions or falsifying your income. When you mislead the IRS in calculating your due tax, you are committing tax fraud. Withholding information such as destroying business documents or even registering a business under several names to conceal your identity may land you in a court of law. The best policy is honesty.
If you aid someone to commit any of the above offenses, you could also be liable for a jail term.
Although failure to file your returns is not taken as tax fraud, the IRS may consider it tax evasion and could lead you into trouble.
While the above cases are critical, lying in your tax returns to get a tax return when you owe nothing is a more serious criminal offense than the above three scenarios.
Consequences of Income Tax Fraud
The IRS can press criminal charges anytime between three and six years from when they detect anomalies in your returns. Committing any act of tax fraud or abetting tax fraud will land you in jail. Any person who commits tax fraud will end up serving a jail term of five years.
If you sanction or assist a person file a fraudulent tax return, you might end up doing a three to five years jail term. If you are found guilty of any tax evasion offense or aided someone else to commit tax fraud, you will likely end up serving a jail term. Several great personalities have ended in jail for committing tax fraud.
What Will Happen If I Do Not File My Taxes?
If you do not file your taxes before the set deadline, you will be liable for penalties and interests. In the most extreme situation, you could be prosecuted though it’s quite rare.
What Happens If I Do Not Pay Back Taxes?
When it is clear that you owe the IRS, you may not be sent to jail, but the IRS may take one of the following actions depending on the nature and reason behind your failure to pay the taxes.
Get notices from the IRS
When you fail to pay or file taxes, the IRS will first send you a notice before they can take any action. Tax cases are pretty complicated, so the IRS will first try all possible ways to get you to pay. Once you get the notice, you should respond in 30- 60 days of receiving the letter. Failure to respond to the notice could see the IRS commence further action on you.
Pay interest
The IRS may also impose an interest if you are unable to pay, such that you end up paying the penalty as well as interest. The rates could range from 1%-4%, with an addition of 3% for a total of 4%-6% as determined by the federal government.
IRS may summon you
The IRS may summon you or any person from whom they can get your financial information for clarifications if they require doing so. They could invite your employees or associates, but they will let you know that they are doing so.
Pay a penalty fee
The IRS may place a penalty of 5% on the tax owed up to five months if you do not file your taxes up to a maximum of 25%.
Receive a federal tax lien
The IRS may place a lien, a legal claim on your property, ten days after you’ve received a notice for a penalty. The federal tax lien may be filled to creditors, employers, and landlords and affect your credit score.
Through the lien, the IRS lays a claim on all your property and applies to all the other properties that you may acquire in the future for as long as you have not settled your dues with the IRS. So if you wish to dispose of your property, the IRS will first have to settle the debt before letting you take the remainder, if any.
Forfeit your refund
If you do not pay taxes because you did not file them, you might owe the IRS money. The IRS will, however, not bother to let you know and will hold onto it. You will not receive the amount due until you pay, so you could end up forfeiting a refund.
IRS may seize your property
When you cannot pay your taxes, the IRS may levy your property, such as the house, car, and income. They will only stop seizing your property when it is clear that they might cause you an economic hardship leading to your inability to cater to your basic needs such as housing, food, etc.
Poor credit score.
Once a federal tax lien has been placed on you, you will end up with a bad credit report. A tax lien is a debt like any other debt, so it will reflect on your report until you clear your due taxes.
You may be declared bankrupt.
If you stay for years without paying taxes and cannot service your other loans and expenses, you may be forced to declare bankruptcy, and then the IRS may suspend your debt until you can pay.
What Can I Do If I Cannot Pay Taxes?
If you cannot pay your back taxes, it is much safer to reach out to the IRS for an alternative means of payment other than waiting for action on non-payment by the IRS. With the help of your attorney, you can agree on either of the following options.
i) Individual Installment Plan
You can arrange with the IRS so that you pay your debt in monthly or weekly installments. To make it possible, the IRS will require information on your assets, income, and expenses.
ii) Seek a short-term extension for payment.
You can reach the IRS to give an alternative payment date, but with compelling reasons and surety to pay on the requested date.
iii) Offer in Compromise
If the Internal Revenue Service thinks you cannot settle your debt through a payment plan, the IRS may allow you to pay a smaller amount rather than rely on other punitive measures such as placing a lien or property seizures.
What Happens When I Pay My Taxes Late?
If you do not pay your taxes on time, you will suffer penalties and interests. For each month, the IRS places a 5% of the unpaid taxes penalty for returning your taxes late, maxing at 25%. The IRS will charge you 0.5% every month you fail to pay, up to 25%. However, if you do not file and pay, the failure to file the amount is subtracted from the failure to pay the amount.
To avoid late payment penalties, you can simply request the IRS for a filing extension. You will not suffer these taxes if you are due for a refund; instead, your refunds will only be late. You will have three years to collect your refund, after which you will have forfeited them to the government.
Final Words
Although tax cases are complicated, it is much safer to pay and file before the set deadline. Failure to pay taxes may land you a jail term, which is uncalled for. In addition, you will spend lots of money hiring a tax expert and suffer legal costs of acquiring the services of an attorney and spend so much time running into years in courthouses.
This site is not owned or operated by any state government agency, read more.