The thought of not paying taxes can be a stressful one! And the question on many people’s minds is, “Can you go to prison for not paying taxes?” There can be multiple reasons; your taxes are unpaid, and the question can become a nightmare.
Well, the matter is serious, but answers differ for each person and business. Consult with a professional tax accountant to know what your odds say.
Although on a typical basis, going to jail for not paying taxes isn’t a common outcome for most people. Furthermore, there is a difference between simply owing tax and tax evasion.
The Core Question, Is Not Paying Taxes Illegal?
Yes, not paying your taxes is illegal. There is no exception unless you have enough credits or your taxes are prepaid by a company via Form W2. However, the IRS has civil penalties for non-repayment (the most common consequences). If you fail to pay, there are penalties in the form of interest on your owed amount.
IRS Failure to Pay Penalty:
The IRS imposes penalties if you fail to pay the full amount you owe or a portion of the taxes obligatory. The penalty charged for failure to pay is 0.5% for each month you owed taxes. Bear in mind that the IRS doesn’t impose a penalty above 25% in any case. The penalty can decrease to 0.25% though (if you have an IRS payment plan).
Furthermore, consequences depend on how much tax you owe and the duration it’s unpaid. For instance, the tax amount over $100,000 has stricter penalties and a shorter due date as compared to lower tax bills.
Think of it like a speeding ticket. While speeding is illegal. You usually get a fine, not a prison sentence, unless you’re a repeat offender or a reckless driver.
When Does it Become a Criminal Offence?
If you intentionally attempt to evade the tax system, it will be considered tax evasion (a criminal offence). Tax evasion means a deliberate act of not paying taxes or showing less income than you actually make.
Case Study:
Let’s understand it with an example. John is the owner of a successful small business. The company is structured as an LLC (Limited Liability Company). And the industry is performing well. However, John is always looking for ways to save money, including on taxes. He knows he can legally reduce his taxable income through things like business deductions for office supplies, employee salaries, and equipment.
However, John decides to take it a step further. He starts paying some of his employees “under the table” with cash. So, he doesn’t have to report those wages to the IRS or pay employment taxes on them. He also uses his business account to pay for personal vacations and luxury items, claiming them as “business travel” and “office furniture.”
This is a deliberate, intentional act to deceive the tax system. By hiding a portion of his payroll and falsifying his business expenses, John has crossed the line from legal tax-saving strategies to criminal tax evasion. The consequences for him would not be a simple fine and interest. He would be facing substantial penalties, potential prison time, and a criminal record.
Factors That Point to Criminal Tax Evasion:
Typically, any act of paying under the table and underreporting is considered an illegal and punishable tax evasion. Most common scenarios include:
- Hiding income (Underreporting)
- Using a fake SSN (Social Security Number)
- Creating a false deduction on the name of the business
The Consequences of Criminal Tax Evasion
While having no money to pay tax isn’t considered criminal tax evasion but falsifying your income can have serious consequences. In short, yes, you can go to jail for tax evasion.
According to the IRS “tax gap” estimate of 2022, the total tax gap is $696 billion. It’s the sum of the non filing ($63 billion), underreported ($539 billion) and underpayment ($94 billion).
Technically, here are three major consequences you might face for tax theft.
- Jail Time
- Financial Penalties
- Legal Status
Let’s explore them one by one to understand better.
Tax Evasion Jail Time:
Tax evasion is the most serious crime in the USA. There is no fixed sentence for tax theft, though. The federal government decides on prison time on a case-by-case basis. The maximum prison time you can expect for willfully attempting to evade tax is five years. Furthermore, keep in mind that tax-related offences have different sentences. For example:
- Filing a false return can result in three years in prison.
- Willful failure to file a return, supply information, or pay tax can result in one year in prison.
Tax Evasion Penalty:
Tax evasion penalty is also imposed on a case-by-case basis. However, there is a maximum limit for both individuals and businesses.
- Individuals: Up to $100,000 for individuals.
- Corporations: $500,000 for corporations.
Legal Status (Tax Evasion Charges):
Deliberate tax theft is a felony and a federal crime. The federal government takes strict actions against tax evasion. You can get arrested (jail time) and fined at the same time.
Who Gets Sent to Jail for Not Paying Taxes?
The IRS has a specific CI (Criminal Investigation) division for tax evasion cases. Typically, the targets are big sharks (outstanding amounts of tax theft). These can be:
- High-profile individual (celebrities, politicians).
- People who have intentionally and significantly hidden large amounts of income.
- Individuals who have used sophisticated schemes to evade taxes.
- Repeat offenders who have ignored all previous IRS attempts to collect.
Most of the tax theft falls in these categories. If you simply owe tax or were in tax evasion but now want to pay your tax bill, communicate with a tax attorney and get tax preparation services.
I Owe Back Taxes. What Should I Do?
Take a deep breath! You are not going to jail for owing taxes. Even if the due date has passed, you can still pay tax without getting into major trouble.
Simply, hire a qualified tax preparer. Provide as many details as you have. It will help the preparer understand your specific tax situation. Also, explain if you are eligible for any tax credits. The professional accountant will work closely with you to lower your tax bill.
Remember: Clear communication is necessary with the IRS to avoid further penalties.
Summary: So, Will You Go to Jail?
The bottom line is that the vast majority of people who owe back taxes will not go to jail. The path to a prison sentence is through intentional, willful criminal tax evasion.
So, if you owe taxes regardless of being a business or an individual, contact Tax King to get your case solved! We offer exceptional professional accountants who handle taxes in a breeze.
FAQs:
Yes, tax evasion is a serious crime. You can be jailed for it depending on your specific case. The more taxes you underreport, the higher the prison time.
Maximum five years. Prison time can vary depending on the time and the amount of tax evasion.
Tax evasion is a felony. It’s a deliberate attempt to deceive the tax system. However, the willful failure to file (supply information) is considered a misdemeanour, which can lead to one year in prison.
Typically, it’s up to $100,000 for an individual and $500,000 for corporate businesses.
