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A tax crime is when you take willful action to evade taxes or defraud the government. If you're convicted of a tax crime, you can face imprisonment and large fines. This article explains what tax crimes are. It looks at situations where you may go to prison for tax crimes, and it outlines the penalties for the most common tax crimes.
Although tax fraud and tax evasion are often used interchangeably, they are slightly different. Tax fraud is when you provide false documents or false statements to defraud the government, and tax evasion is a type of fraud that specifically deals with the evasion of the assessment or payment of taxes.
Making mistakes on your tax return, filing your tax return late, or not paying your tax bill is not a criminal act. The majority of taxpayers will never face criminal charges for tax-related decisions. However, if you have committed a tax crime or are worried that you may face charges, you should contact a tax attorney as soon as possible.
Key Takeaways
In 2022, IRS Criminal Investigation dealt with 2,550 investigations related to over $31 billion in losses due to tax fraud, money laundering, and cyber crimes, and they obtained a 90.6% conviction rate for cases that were accepted for prosecution. However, when you narrow the scope down to tax fraud (which includes evasion), there is a much smaller number of convictions. In tax year 2022, there were 324 tax fraud cases with median losses of $339,071. Just over two-thirds of these people were sentenced to prison with an average sentence of 16 months.
The IRS resolves most issues with civil penalties or collection actions, but criminal charges are possible in some cases. Here is an overview of federal tax crimes.
Tax evasion is always criminal. Tax fraud, in contrast, can be criminal or civil. Most tax fraud cases lead to civil penalties of 75% of the unpaid or underreported tax. However, if you're charged with criminal tax fraud, you can face significantly higher penalties and imprisonment.
The following sections outline some of the most common types of tax crimes and their penalties:
Title 26 USC § 7201 concerns the willful evasion of tax. This crime can be committed in two ways 1) by attempting to evade the assessment of tax or 2) by attempting to evade the payment of tax. Most cases involve the first scenario where a taxpayer files a return that shows substantially less tax due than it should.
However, proving that the taxpayer acted willfully can be difficult, and thus, prosecutors often look at other potential tax crimes such as filing false returns, endeavoring to obstruct the IRS, or conspiracy to defraud the United States.
Penalties: Up to 5 years in prison and/or up to $250,000 fine for individuals and up to $500,000 fine for corporations
Outlined in Title 26 USC § 7202, this crime often relates to payroll tax, but can also include excise taxes or any other taxes collected from one person by another person who fails to pay that tax to the government. For example, if an employer withholds FICA taxes and income taxes from their employee's paychecks but never remits them to the government, they may face charges for tax fraud under this statute. In addition to the penalties listed below, you may be responsible for prosecution costs if you are convicted.
Penalties: Up to 5 years in prison and/or fines up to $10,000
Title 26 USC § 7203 outlines misdemeanor charges for individuals who have failed to file a tax return. This law also applies in situations where a business fails to report large cash transactions as required in Section 6050I of the Internal Revenue Code, and in these cases, the crime becomes a felony with up to 5 years imprisonment.
Penalties: Up to one year in prison and/or a fine of up to $25,000 for individuals and $100,000 for corporations
If you do not provide your employees with a W2 or if you provide them with a false W2, you can face criminal charges under 26 U.S. Code § 7204.
Penalties: Up to 1 year in prison and/or fines of up to $1,000
Title 26 USC 7205 says that it is a crime to give your employer a false W4 form or to withhold information that would increase your withholding. In other words, if you willfully complete this form incorrectly so that your employer withholds less tax from your check then they should, you can face charges.
Penalties: up to 1 year in prison and/or fines up to $1,000
Title 26 USC § 7206 concerns felony tax crimes related to fraudulent or false returns or statements. This includes when taxpayers knowingly include false information on their tax returns, and it also applies to someone who helps or advises a taxpayer to file a false return.
This statute also deals with fraudulent bonds, permits, and entries, as well as the removal or concealment of goods or commodities that tax should be imposed or that are subject to a levy. For example, if the IRS has decided to seize your vehicle and you hide it, you may be charged with a crime for fraud or false statements.
Statute 7206 also outlines several crimes related to the IRS offer in compromise program. When you apply to settle your debt for less than owed through an offer in compromise, you must give the IRS a complete financial picture of your situation. You can face criminal charges for withholding, falsifying, or destroying records but also for concealment of property.
Penalties: Up to 3 years imprisonment and/or up to a $100,000 fine for individuals and up to $500,000 fine for corporations
Title 26 USC 7207 usually comes into play if you're dealing with an audit and you provide the IRS with false or altered documents when the IRS asks for substantiation of the deductions you claimed. However, more broadly, this crime can include any time you willfully deliver a false list, return, account, or statement to the IRS. Typically, the IRS relies on this statute in cases where the issue is a misdemeanor rather than a felony.
Penalties: Up to 1 year imprisonment and/or fines up to $10,000 for individuals and up to $50,000 for corporations
If you illegally disclose information that you received while doing another person's or business's tax return, you can face misdemeanor charges under 26 U.S. Code § 7216. You can also be convicted if you used their information in any way other than to complete their tax return.
Again, however, most cases don't rise to the level of a crime, and the IRS often relies on tax preparer penalties to deal with these types of situations. However, if the disclosure of the information is made in connection with identity theft, the possible penalty increases to $100,000.
Penalties: Up to 1 year in prison and up to $1,000 fine or $100,000 fine if section 6713(b) applies
Title 18, US code § 371 applies when two or more people knowingly and willingly work together to defraud the United States. You can face charges for conspiracy if you conspired with another person to commit tax fraud. However, even if you're not convicted of a tax fraud charge, the government can still bring conspiracy charges against you.
Penalties: Up to 5 years in prison and/or up to $250,000 fine for individuals and up to $500,000 for corporations.
Criminal fine provisions outlined in 18 USC 3571 allow the courts to assess larger fines for many of the above tax crimes. For example, if the IRS applies this provision to tax evasion charges, the potential penalty jumps to $250,000 for individuals and $500,000 for corporations. With other crimes, this provision can increase the potential fines even more dramatically.
For example, providing a false W2 to an employee usually carries a maximum fine of $1,000, but if 18 USC 3571 is applied, the fine can jump up to $100,000 for individuals and up to $200,000 for corporations. Additionally, if this provision is in place and you are convicted, you may also be responsible for any pecuniary gains you earned from the offenses or any losses you caused to other people, and in some cases, you may face fines of double the gain or loss.
Because the IRS has a lot of power, people worry about agents knocking on their doors and arresting them if they don't file returns or pay taxes. Luckily, that is not going to happen—the IRS stopped the majority of unannounced house calls, and as explained above, the agency deals with most issues through civil means rather than criminal charges.
The majority of tax problems are not criminal. Making a mistake on your return, forgetting to report some income, and not being able to afford your tax bill are not crimes. Even if you file a return that grossly overstates the value of an asset (for example, an asset that you donated to charity and claimed a deduction for), you're more likely to face a 40% gross negligence penalty than a civil fraud penalty, and if the IRS suspects fraud, it's more likely to levy civil fraud penalties on your than recommend criminal fraud charges.
However, there are certainly actions that are criminal in nature. As explained above, criminal tax fraud includes defrauding the government by filing false returns or statements, defrauding an employee by not providing a correct W2, or helping someone else commit tax fraud. Tax evasion is when you attempt to evade paying taxes by evading the assessment of taxes, and tax evasion is always criminal, never civil. To charge someone with a tax crime, though, the government must prove that the taxpayer acted willfully and with intent.
The IRS Criminal Investigation investigates violations of the Internal Revenue Code including all of the tax crimes outlined above, but the agency also deals with crimes related to the Bank Secrecy Act and money laundering statutes. There are multiple sources that may contact CI about tax crimes, and once that happens, the case goes through numerous reviews before the taxpayer is prosecuted.
If an IRS auditor, revenue officer, or investigative analyst believes that someone has committed a tax crime, they contact CI to start a preliminary investigation. CI also receives information from the public, law enforcement agencies, and US attorneys. A CI supervisor analyzes the information and decides whether to move forward with the case. Then, the special agent in charge reviews the materials and decides whether or not to approve the decision to initiate a subject criminal investigation.
To conduct a criminal investigation, the special agent uses a variety of techniques to gather information, including interviewing witnesses, doing surveillance, obtaining search warrants, subpoenaing bank records, and reviewing financial data. The agency works with the IRS Chief Counsel Criminal Tax Attorneys to ensure that the investigation is above board and that it meets the recommendations of the prosecutor.
After gathering evidence, the special agent and the supervisor review everything to decide whether or not to pursue criminal charges. If not, they discontinue the investigation, and if they decide on prosecution, the agent prepares a report about the laws that have been broken and the prosecution recommended. Multiple government officials review the special agent report, and they again decide whether or not to recommend prosecution. If they believe a tax crime has been committed, they send the case to the Department of Justice, Tax Division, and if they believe another type of financial crime has occurred, they send the case to the US Attorney.
At that point, the prosecutors manage the rest of the investigation. Approximately 3,000 criminals are prosecuted every year. Because of the detailed review process that happens before the case, the majority of prosecutions lead to guilty verdicts or pleas.
the IRS has a voluntary disclosure program for people who think they may have committed a tax crime and want relief. The program does not guarantee immunity, but it can help you avoid criminal prosecution, fines, and imprisonment. You may be able to benefit from this program if you have unreported crypto, unreported offshore accounts, or significantly underreported income. To qualify, you must make your disclosure before the IRS contacts you about the issue, and you cannot be in the midst of an audit.
The IRS advises taxpayers to consult with an attorney before taking advantage of this program. When you talk with an attorney, they will be able to tell you if this is the right option for your situation. If no tax crimes were involved, the attorney may advise you to pursue another route such as amending a tax return or filing a new tax return.
Tax evasion is a type of tax fraud that applies when you willfully evade paying taxes. Tax fraud includes tax evasion, but it also includes other acts such as not filing a tax return, filing fraudulent returns, and making false or fraudulent statements to the IRS, your employee, or your employer.
Tax evasion is when you willfully evade paying taxes that you are legally required to pay. Tax avoidance is when you use legal strategies to reduce your tax bill.
You can go to prison for up to five years if found guilty of tax evasion. However, the penalties can stack, and if you are convicted on multiple accounts of tax evasion, you can face a longer prison sentence.
No, the IRS cannot put you in jail, but they can recommend criminal prosecution and send your case to the IRS Criminal Investigation. Then, multiple people will review your case, and if they agree that a crime was likely committed, your case will get sent to the Department of Justice, Tax Division. If the DOJ finds you guilty of a tax crime, you may be imprisoned.
Title 26 U.S. Code § 7608 gives IRS investors, agents, and revenue officers the right to arrest people without warrants if they see an offense against the United States committed in front of them. These IRS employees are also allowed to execute and serve arrest warrants. However, this only applies in relatively rare circumstances. If you're dealing with an auditor or a collection officer, they are not going to arrest you.
No, a tax warrant has nothing to do with an arrest. It is another name for a tax lien, which is a legal claim to your property. Typically, the IRS doesn't use the phrase tax warrant but many states do. For example, if you don't pay your New York State taxes, the Department of Taxation and Finance may issue a tax warrant against you.
The IRS has said that it's going to increase its focus on unreported crypto transactions, which can fall under the fraud umbrella. In March 2024, the agency accused Frank Algren III from Texas of failing to report the sale of $4 million in crypto, and this case is the first where someone was charged just for failing to report crypto transactions.
However, the agency has already pursued criminal charges in other cases that involved not reporting crypto as well as other crimes. In April 2024, Roger Ver was indicted for mail fraud, tax evasion, and filing false returns. Arrested in Spain and extradited to the United States, Ver is accused of evading nearly $50 million in taxes related to unreported crypto transactions.
Not usually. In most cases, if you fail to report foreign bank accounts (FBAR) as required, the IRS assesses civil penalties as outlined in Title 31 U.S. Code § 5321. For non-willful violations, the penalty can be the greater of $16,117 or 50% of the value of the unreported foreign accounts. As of 2024, willful violations can lead to a civil penalty of $161,166. These penalties are indexed to inflation and increase every year.
In very rare cases, these cases can lead to criminal charges. Generally, that only applies if money laundering or other financial crimes were involved, or if a taxpayer took deliberate actions to hide the offshore accounts and also failed to report income.
If you are worried about a tax crime, you need an experienced tax attorney in your corner. Using TaxCure, you can search for a tax attorney based in your area, and you can narrow down the search to look for someone who has experience dealing with tax fraud and tax evasion charges.
The majority of people who are worried they have committed a tax crime have most likely not done anything that rises to the level of criminal tax fraud. However, even if you don't face criminal charges, you may need to worry about negligence penalties or civil fraud penalties. In either case, a tax attorney can provide critical guidance. To get help now, use TaxCure to find and contact an attorney.
