Yes. Not paying taxes can get you in serious trouble, and in some cases, even jail. But before you panic, not every tax mistake leads to prison. The IRS is more interested in getting the money you owe than locking people up.
So, when does unpaid tax become a crime? Let’s break it down.
Tax Evasion vs. Tax Mistakes
There’s a key difference between an honest mistake and willfully trying to avoid taxes. The IRS distinguishes between civil tax issues (mistakes or oversights) and criminal tax issues (intentional fraud).
It’s only when someone deliberately tries to evade taxes that they run into criminal trouble.
Tax evasion happens when someone intentionally underreports income, falsifies deductions, or hides earnings to lower their tax bill. Under 26 U.S. Code § 7201, willfully evading taxes is a felony.
The penalties are serious. Up to 5 years in prison and fines of up to $100,000 for individuals (or $500,000 for corporations).
What does this mean in everyday life?
For example, if you intentionally underreport your income or claim deductions you don’t qualify for, and the IRS catches on, you could face criminal charges.
Civil Penalties vs. Criminal Penalties
In many cases, the IRS isn’t looking to send people to prison.
If you miss a tax payment or make an honest mistake, the IRS typically handles it with civil penalties, not criminal charges. Civil penalties are fines and interest on the amount owed.
For example, if you miss a filing deadline, you may face a failure-to-file penalty of 5% per month of the unpaid amount, capping at 25%. Similarly, a failure-to-pay penalty of 0.5% per month can apply if you don’t pay on time, with the same cap at 25%.
The IRS is much more likely to charge people with civil violations for missing payments or making simple mistakes. Criminal charges are reserved for more serious cases where there’s clear intent to deceive the IRS.
How the IRS Handles Criminal Tax Cases
The IRS doesn’t jump straight to criminal investigations. It starts with audits to figure out whether you owe taxes. If they find evidence of fraud, like hidden income or misleading information on your tax return, they may escalate the situation to a criminal investigation.
The Criminal Investigation Division (CID) of the IRS handles criminal cases, and they take them seriously.
However, criminal investigations are rare.
The IRS only pursues criminal charges in about 2% of cases. But when they do, the consequences can be severe. The average sentence for tax fraud is 3 to 5 years in prison.
The IRS typically goes after individuals who owe a significant amount. Around $70,000 or more and have shown clear intent to avoid paying taxes.
The Role of the IRS Criminal Investigation Division (CID)
In 2023, the CID initiated 2,676 investigations, uncovering $37.1 billion in financial crimes. Of these cases, 88.4% resulted in convictions.
While the IRS focuses on cases where fraud is clear, they don’t pursue criminal investigations lightly. The agency usually focuses on individuals who owe large sums and have made deliberate efforts to evade taxes.
Examples of Tax Fraud in Real Life
There are some high-profile cases that show how serious tax evasion can be:
⦿ Al Capone:
The notorious gangster was convicted of tax evasion in 1931. Despite being involved in numerous crimes, Capone was sentenced to 11 years in prison for failing to pay taxes on his illicit income.
His case proved that even the most powerful criminals can be caught by the IRS.
⦿ Ayodele Arasokun:
In 2023, Arasokun was sentenced to 34 years in prison for filing over 1,700 false tax returns, claiming $9.1 million in refunds.
This case is an example of how the IRS goes after those who intentionally defraud the system.
⦿ Sophia Loren:
In 1982, the famous actress spent 18 days in prison for failing to pay taxes in Italy. Even high-profile figures aren’t immune to the consequences of tax evasion.
Types of Tax Crimes and Their Penalties
There are several tax crimes that can lead to jail time, each with its own penalties:
➡ Willful Evasion:
This felony charge occurs when you intentionally try to avoid paying taxes. It can result in up to 5 years in prison and fines up to $100,000 for individuals or $500,000 for corporations.
➡ Failure to File, or Pay Taxes:
If you deliberately fail to file your returns, don’t supply requested information, or don’t pay taxes, you could face misdemeanor charges.
This carries a penalty of up to 1 year in prison and fines up to $25,000.
➡ Filing a False Return:
Filing a false tax return with the intent to mislead the IRS is another serious crime. Conviction can result in up to 3 years in prison and fines of up to $100,000.
Does Owing a Small Amount Lead to Jail?
You might wonder whether owing a small amount in taxes can land you in jail. Generally, the IRS doesn’t go after people for small amounts of tax evasion.
However, if you consistently underreport your income or engage in fraudulent activity, even smaller amounts could lead to criminal charges.
As we have seen above, the IRS usually targets individuals who owe a substantial amount about $70,000 or more. And who have intentionally misled the agency. If the IRS believes you’ve been trying to avoid taxes on a large scale, they may pursue criminal charges, no matter the amount.
How to Avoid Tax Problems
The chances of going to jail over an honest tax mistake are pretty low, but it’s still important to know what could actually land you in legal trouble. The main rule? Be honest. Don’t hide income or submit false tax returns.
Another smart way to stay out of trouble?
Make sure you’re filing your taxes correctly and have the right documents in order. Here’s what you need to know, whether you’re an employee or self-employed:
Filing Taxes as an Employee
Employees typically receive a W-2 form from their employer, which reports their annual earnings and the taxes withheld.
Filing taxes as an employee is simple:
➼ Gather Documents: You’ll need your W-2, any 1099 forms (if applicable), and receipts for deductions or credits.
➼ Choose a Filing Method: You can file online through the IRS Free File, tax software like TurboTax or H&R Block, or work with a professional.
➼ Submit by Deadline: The deadline for filing individual taxes is usually April 15.
Filing Taxes as a Self-Employed Individual
If you’re self-employed, your tax responsibilities are different. You don’t receive a W-2 but must track your own income and expenses.
Here’s what you need:
⦿ Income Records: Any 1099-NEC forms from clients or personal bookkeeping records.
⦿ Expense Receipts: To claim deductions, keep records of business expenses, home office costs, and mileage.
⦿ Estimated Tax Payments: Since taxes aren’t automatically withheld, you may need to make quarterly tax payments using Form 1040-ES
⦿ Self-Employment Tax: This covers Social Security and Medicare and is calculated using Schedule SE (Form 1040).
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FAQs
We have answered common questions about whether not paying taxes can land you in jail.
