Tax Code Violations Penalties Explained

Taxes are taken super seriously by the government. While the IRS may sometimes seem overly harsh in its methods of prosecution, measures such as the penalty for tax evasion and the penalty for filing a false tax return are put in place to deter individuals from performing elicit tax activities.

Even though these punitive actions seem bad enough on their own, breaking the tax law can also lead to jail time. 

Since the penalty for filing a false tax return and alike can land you in all sorts of trouble, we’ll break down the fines and what exactly constitutes a tax crime.

What is tax fraud?

Tax fraud is the intentional falsification of information on a tax return with the goal of limiting the amount of tax liability. This may include claiming personal expenses as business expenses or the more common example of filing false returns. 

According to 26 U.S.C. § 7206 (1) and (2), it’s illegal to create (or assist someone in creating) IRS documents that are not correct. 

A good example would be if you made $86k annually and rounded the number down to $80k when you were filling out the tax return. Upon sending the tax return to the IRS, you would be charged and hit with the penalty for filing a false tax return. The $6k might seems like an insignificant amount of money in the grand scheme of things, it's still enough to put you in a completely different tax bracket - which is why the amount you left out doesn't really matter. 

The same applies if you hired someone who told you to round down the number. Under section 7206(2), this person could be charged for assisting fraud.

What is tax evasion?

Per federal law, tax evasion is a willful attempt to defeat or evade the assessment or payment of a tax. For instance, holding your assets under another person’s name or transferring assets to someone else makes it harder for the IRS to determine tax liability. 

The key phrase here is willful as it must be proven beyond a reasonable doubt that someone performed actions in an effort to evade taxes. 

There are many examples of tax evasion, such as (but not limited to):

• Hiding income from a second job

Many American citizens have a second job these days, from selling stock photos to driving for Uber on the weekends. This is completely legal and you’re allowed to have a significant source of income apart from your regular job. Nonetheless, you need to declare it in your taxes as failing to do so is considered wilful tax evasion.

• Not disclosing offshore bank accounts

If you have business dealings overseas, you are obliged to pay taxes on foreign income. Concealing these assets in an offshore bank account is illegal and can lead to hefty fines or a prison sentence.

Tax crime penalties and prison sentences

If you’re prosecuted for tax crimes, you will not only have a criminal record to deal with, but may also pay quite a bit of money as a result of a fine. Here are the typical penalties for different types of tax crimes:

• Penalty for evasion and fraud

Keep in mind that while the law describes a maximum penalty for tax fraud and evasion, it doesn’t mean you’ll have to pay the full amount. Based on the facts of your case, you may receive a lower penalty or in the best case scenario,  a civil penalty (typically 75% added on your tax due).

Generally speaking, if you’re convicted of tax fraud or evasion, you can receive a fine of up to $100k. In the worst-case scenario, you may also go to jail for up to five years. 

• Penalty for filing a false tax return

Although it doesn't seem as severe as willful evasion, the penalty for filing a false tax return is also a form of fraud and a felony. The penalty for filing a false tax return can leave you with a fine of up to $100k and a prison sentence of up to three years.

You might think this is too harsh, but it’s simply a deterrent for taxpayers to not commit tax fraud. In fact, without the penalty for filing a false tax return, many married taxpayers would just file their returns as head of household filers to receive refunds they’re not entitled to..

• Penalty for not filing returns

In contrast to the penalty for filing a false tax return, the penalty for not filing is significantly less strict. Since this transgression is considered a misdemeanor, you can expect to pay a fine of $25k for each year you didn’t file a return. It’s still possible to face criminal charges if you fail to file a return that was due in the last six years. If convicted, you can receive a prison sentence of up to a year.

• Penalty for paying estimated tax or keeping records

If you avoided paying the estimated tax due or failed to keep proper records of assets claimed in your returns, you may receive a civil tax penalty. This usually triggers an IRS audit where you’ll have a chance to show documentation that supports your deductions and claims. 

However, in case you don’t have any supporting documentation such as receipts, you may receive a $25k fine. In the worst-case scenario, the IRS may prosecute you and if convicted, you can receive a one-year prison sentence.

• Penalty for concealing offshore accounts

Out of all tax crimes, the penalties for concealing offshore bank accounts are the harshest. If the IRS successfully proves you willfully committed this crime, they may fine you up to $500k with a ten years jail sentence. For those who didn’t willfully conceal these accounts, they may receive a one-time penalty of $10k or multiple smaller penalties ($500 for each account).

Keep yourself safe

According to the IRS, about 17% of taxpayers don’t comply with the tax code in their returns. Though many instances of fraud can be categorized as honest mistakes, the IRS will crack down on anything that closely resembles an illegal activity. 

So if you’re facing tax fraud charges or being accused of tax violation, you should consult an attorney with expertise in tax law. Even if you’re completely innocent, you do need to ensure you walk away with the least amount of damage, which is where professional legal advice will aidt you.

Here at the Law Offices of Mary E. King, we’ve spent years protecting the interest of individuals facing tax fraud charges or IRS audits. The experience we cultivated during this time can help you avoid any mistakes that can set you back and minimize the financial impact of different types of tax code violations. 

Call 941-906-7585 or fill out our online contact form to schedule a free consultation. 

Note:

The information in this blog post is for reference only and not legal advice. As such, you should not make legal decisions based on the information in this blog post. Moreover, there is no lawyer-client relationship resulting from this blog post, nor should any such relationship be implied. If you need legal counsel, please consult a lawyer licensed to practice in your jurisdiction.