“Jail? Isn't that just a tiny bit harsh? I'm not a criminal, am I?”
Here’s the truth: Tax fraud is a criminal offense in the US, punishable by penalties and even imprisonment. That said, getting sent to jail by the IRS isn’t the sort of thing that happens to ordinary Americans who make a math mistake. If you don’t commit tax fraud, you have nothing to worry about.
Most tax offenses are classified as civil offenses, not criminal. That means that, even if you end up in hot water, you’ll usually be punished with fines and hefty interest payments — not prison.
But that doesn’t mean you can do whatever you want on your taxes! To help you stay in the clear, let’s take a closer look at exactly what the IRS frowns upon, and just how bad the punishment can get.
What the IRS can’t send you to jail for
Let’s start with the good news: when it comes to determining tax fraud, intent matters. So long as you’re not trying to defraud the government, you’re probably not committing a crime.
These are the situations where the IRS isn’t going to throw you behind bars.
Tax filing mistakes
The IRS isn’t allowed or even interested in sending anyone to jail over simple mistakes.
Math errors, not reading instructions correctly, or forgetting to fill out a form are all bad. But if it’s an honest mistake, it won’t result in criminal charges.
In fact, even an audit is highly unlikely to land you in jail.
Not being able to pay your tax bill
Unpaid taxes aren’t great from the IRS’s perspective. But you can’t be sent to jail if you don’t have enough money to pay.
If you owe more than you can afford, the IRS will work out a payment plan, or possibly even an Offer in Compromise. (Essentially, this lets you haggle for a lower tax bill!)
There are ways you can legally reduce — or even eliminate — the need to pay taxes at all. Doing this is called tax avoidance.
Here’s how IRS describes tax avoidance on its website:
"Avoidance of tax is not a criminal offense. Taxpayers have the right to reduce, avoid, or minimize their taxes by legitimate means. One who avoids tax does not conceal or misrepresent but shapes and pre-plans events to reduce or eliminate tax liability within the parameters of the law".
In short, tax avoidance is just a form of legitimate tax planning. Just like shopping with a coupon doesn’t make you a thief, thinking carefully about your taxes doesn’t make you a white-collar criminal.
Avoiding taxes with write-offs
If you’re self-employed or a business owner, tracking your business expenses and using tax write-offs is a legitimate way to avoid taxes. Our tax laws specifically allow you to deduct the cost of your work-related purchases from your taxable income. If you don’t take advantage of this, you’re actually overpaying the IRS!
To lower your taxes the right way, try Keeper. The app helps self-employed workers find the deductions they legally qualify for — so you can pay less without getting in trouble with the IRS.
Avoiding taxes with a business entity
Here’s another example of legitimate tax planning. As you may know, there are several different types of legal entities in the US, including corporations, sole proprietorships, and partnerships, to name a few.
A taxpayer starting a business can choose to form a certain entity specifically so they’ll owe less tax at the end of the year. (Of course, they’ll only do this if the entity chosen also makes sense from an economic standpoint. If setting it up costs three times as much as they’re saving in taxes, for example, it’s probably not worth it.)
If you’re not legally required to file
Unfortunately, you can’t just decide not to file taxes. Even if you don’t owe anything that year, the IRS requires most people, in most situations, to at least file a return.
That said, sometimes a person isn’t obligated to file taxes in the first place. A few examples of this include:
- A US citizen who earned less than the annual threshold in a given year. (This depends on their filing status and employment type, among other things)
- A non-US citizen who engaged in some types of US activity, assuming US taxes were properly withheld. (This doesn’t apply to all types of US activity)
- An LLC taxed as a partnership that didn’t have any activity (like income, expenses, and assets) during the tax year. (If the LLC is taxed as a corporation, it does have to file every year, even without any activity.)
If you’re not 100% sure that you qualify for not filing, it’s better to be on the safe side and hand in those returns!
What the IRS can send you to jail for
While most tax offenses aren’t criminal, you can’t just ignore tax season and walk away scot-free.
Here are three violations that can be criminal offenses, depending on the severity — factors like how much you owe, how many times they’ve caught you doing this, and whether you’re using a tax evasion scheme.
The IRS can — and has — sent plenty of people to jail for tax crimes like these.
Tax fraud is any activity that hides or falsifies the information on your tax returns to avoid paying the amount you legally owe.
This may seem like something only millionaires and shady Wall Street executives participate in, but common examples include more ordinary offenses, like using a false Social Security number or claiming personal expenses as business deductions.
The IRS obviously takes fraud seriously, whether it’s for hundreds, thousands, or millions of dollars. As far as criminal penalties go, the average jail sentence for tax fraud is somewhere in the range of 17 months. It can go up significantly depending on the scope of the fraud.
Regardless of how long the sentence is, tax fraud is no laughing matter. That’s why it’s a good idea to always report your income and business expenses truthfully.
One specific type of tax fraud is tax evasion.
Unlike tax avoidance, tax evasion is willfully withholding information about your income, bank accounts, or other financial assets just so you can pay less taxes.
A common example in the gig economy is someone working a side hustle and not putting that income on their tax returns.
It may be tempting to slip that money into your pocket without telling anyone — especially if you’re paid in cash. But all income, no matter how small, must be reported to the IRS.
How can the IRS find out about tax evasion?
Even if you think the IRS won’t notice, there are plenty of ways it might find out, like:
- A random audit that reveals something in your books that doesn’t add up.
- A client paying you over $600 and filing a 1099 form with the IRS without you realizing it.
- Your client being audited by the IRS for claiming a sizable contract labor deduction when they didn't file any 1099s.
Even if it seems like you’re in the clear, the IRS has time to catch on later. Typically, it has three years to take action, but the bigger percentage of income you hide, the longer they have to come after you.
Never bank on getting away with tax fraud. And if you do get caught, sooner is actually better than later. Interest builds from the date you originally owed the money, not the date you're caught. So the longer it goes before being noticed, the worse the repercussions will be.
To make sure they don’t come knocking, always report all your income on your 1040. And be sure to file a Schedule C if you’ve made money through any form of self-employment! Filing your self-employment taxes may feel painful, but they’ll be much worse if you’re delinquent.
Failure to file
At this point, it’s critical to understand the difference between someone who willfully refrains from filing and someone who does it by accident. This distinction will dictate what recourse the IRS takes.
As you may have guessed, willfully refraining from filing a tax return is illegal. Accidentally failing to file is a whole different ball game. People make honest mistakes sometimes, and the IRS understands that.
How to get back on track after not filing taxes
Good news for non-willful violators: the IRS wants to help you get back into compliance. That’s why it offers various amnesty programs that can significantly reduce or eliminate the penalties.
Proving reasonable cause
To take advantage of these programs, you’ll have to prove that you didn’t commit a willful violation.
Say you were unable to file correctly because your house and all your financial records burned down in a fire. Or you owed taxes, but were hospitalized during the filing date. In cases like these, you’re not going to jail — as long as you can prove your intentions and circumstances. Such circumstances may even result in all your penalties being waived.
Just bear in mind: you’re much more likely to have a favorable outcome if you approach the IRS before it catches you. Filing late, for example, is always better than not filing at all. Don't let your fear of the IRS prevent you from avoiding bigger problems down the line.
Proving you had reasonable cause can be tricky. If you end up in that situation, you’ll likely have to see a specialist tax attorney to make sure you’re getting the best possible outcome.
Considering government forgiveness programs
Assuming you can prove reasonable cause, the IRS offers several options to help taxpayers who have landed in hot water.
Short- or long-term payment plans
If your offense results in a larger tax bill or significant interest payment, you can apply for a payment plan.
These come with their own associated fees, so it’s not as cheap as having the money to pay upfront. But they’ll still put you back in the good graces of the IRS.
Offer in compromise
If even a payment plan is outside your financial means, the IRS will consider negotiating a smaller tax bill. However, to receive an offer in compromise, you will need to make sure you’re up to date on all your tax filings and estimated payments.
For the most unfortunate taxpayers, the IRS even offers full penalty relief.
These are only granted for extreme circumstances, and you’ll be legally required to pay any interest your tax bill has accrued in the meantime.
Still, it’s good to know that if life really hits you when you’re down, you can get out of paying penalties.… Think of it as an attempted gesture of goodwill from the IRS, while you try to scrape together enough cash to pay the tax and interest. They probably assume your rent can wait.
Let’s all collectively hope the IRS sees the Ghost of Christmas Future soon.
Streamlined filing compliance procedures
For people who live abroad or have foreign income, knowing what to report can be complicated. This program exists to help taxpayers in those situations get back on track.
Assuming you’re not hiding offshore accounts on purpose, the Streamlined Filing Compliance Program is designed to, well, streamline the process of paying back the money you owe.
Of course the best way to avoid financial penalties, interest — and yes, even jail time — is to file correctly and on time.
But even if you do end up falling behind — even years behind — it’s never too late to settle your tax bill and get back on the right track! Just do yourself the favor of taking the first step.
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At Keeper, we’re on a mission to help people overcome the complexity of taxes. We’ve provided this information for educational purposes, and it does not constitute tax, legal, or accounting advice. If you would like a tax expert to clarify it for you, feel free to sign up for Keeper. You may also email firstname.lastname@example.org with your questions.