Using fraudulent or illegal means to avoid paying taxes is generally referred to as tax fraud or tax evasion.
Very few people actually enjoy paying their taxes, but most of them pay anyway. Other people choose a different strategy, opting to to try to get out of paying taxes by using illegal means. While there are numerous ways to minimize your tax obligation through legal methods, unlawful methods can result in civil as well as criminal penalties. Using fraudulent or illegal means to avoid paying taxes is generally referred to as tax fraud or tax evasion.
(Tax evasion is a specific crime that requires proving several elements. For in-depth information on the legal elements and criminal penalties, please see Tax Evasion - Legal Elements, Criminal Penalties, & Defenses.)
Civil or Criminal
Tax cases can be divided into two types: civil or criminal. In civil cases, the government claims that the taxpayer made a mistake, calculation error, or acted negligently in the preparation and filing of his or her taxes. In a criminal case, the government accuses the taxpayer of taking intentional actions in order to avoid having to pay the taxes owed. Criminal cases are much more serious and involve the possibility of substantial fines as well as prison sentences. Civil cases may involve a fine, but they do not involve the criminal justice process or potential prison time.
A civil tax penalty typically arises after a state or federal tax investigator has noticed a problem with a tax return. This problem can be anything from glaring mistakes to simple calculation errors or other problems. Civil tax cases may result in no penalty at all, or may result in a variety of fines. For example, forgetting to file a return will result in a 5% penalty based on the amount of taxes due per month, while intentionally filing a fraudulent return can result in a 75% penalty.
Individuals commonly commit tax fraud by violating any number of federal criminal laws, such as underreporting income, overestimating expenses or deductions, failing to collect employment taxes, making false statements to investigators, violating employer withholding requirements, or not filing a yearly tax return.
Individual federal laws govern each type of criminal offense, and each of these have penalties associated with them. Additionally, each state has its own tax fraud laws and penalties.
- Prison. Prison terms for tax fraud can be significant. For example, a conviction for single count of tax evasion can result in a prison term of up to five years. Convictions on multiple counts of the same crime, or multiple violations of different crimes, can greatly lengthen prison sentences.
- Fines. Fines for violating federal tax laws are very steep. A conviction for tax evasion, as well as several other tax crimes, can result in a fine of up to $250,000 for individuals and $500,000 for corporations. Other tax fraud crimes have maximum penalties of $100,000 for individuals and $250,000 for corporations. Courts can impose fines in addition to, or separate from, prison or probation sentences.
- Restitution. Tax fraud cases also typically involve restitution orders. When a court orders restitution, it orders the person convicted of tax fraud to repay the amount of taxes they failed to pay to the state or federal government. Restitution is typically ordered in addition to any other penalties.
- Costs of prosecution. Federal law also allows a court to order someone convicted of tax fraud to pay for the costs of prosecution, in addition to fines or restitution. The costs of prosecuting a tax fraud case differ, but they can easily reach $5,000 or more.
- Probation. Courts may also sentence someone convicted of tax fraud to probation. Probation sentences usually last at least a year, but sentences of three years or longer are possible. Those on probation have to comply with the court's orders or risk having their probation extended, paying additional fines, being sent to prison, or other penalties. People on probation must comply with specific conditions while serving the sentence. These include regularly meeting with and reporting to a probation officer, contacting the officer if you're ever arrested, maintain employment, and a range of other requirements.
See an Expert
Tax fraud is never a situation you should take lightly. If you have been contacted by the IRS or are charged with a tax fraud crime, you need to speak to a criminal defense attorney immediately. Tax fraud cases hinge upon the government's ability to build a case against you, and you can unknowingly cause yourself harm if you proceed without first consulting a lawyer. A local attorney will be able to advise you on your rights and provide counsel at every stage of your case, from investigation to sentencing and appeal. Even if you believe you have done nothing wrong, you need to speak to an attorney. Federal tax and criminal laws are incredibly complex, and you need someone experienced in both tax and criminal law to give you legal advice.