When it comes to tax crimes, most people assume they only apply to corporations or high-profile cases involving millions of dollars. But the truth is, anyone can face charges for tax-related offenses, and the penalties can be severe.
Whether you’re a small business owner or an individual taxpayer, it’s helpful to understand the most common tax crime charges and how to avoid them.
- Tax Evasion
Tax evasion is one of the most serious and well-known tax crimes. It occurs when a taxpayer deliberately avoids paying taxes that are legally owed. This might involve underreporting income, inflating deductions, hiding assets, failing to report offshore accounts, or any number of other issues.
The IRS considers tax evasion a felony, with penalties that can include up to five years in prison, hefty fines, and repayment of the taxes owed, plus interest and penalties. These charges often stem from intentional actions rather than honest mistakes.
To avoid a situation where you’re being accused of evasion, keep detailed financial records and be sure to report all sources of income.
- Failing to File a Tax Return
Failing to file a tax return is another common tax crime. While many people assume that skipping a tax filing deadline isn’t a big deal, it can result in criminal charges if the failure is deemed willful.
As attorney Peter Katz explains, “Failing to file a tax return is not sufficient proof of one willfully evading or failing to pay taxes. Nevertheless, that does not mean that failing to file does not come with a criminal penalty. Title 26 U.S.C. Section 7203 makes it a crime when one who is required to file a tax return willfully fails to file such a return at the time required by law (often that time is April 15, ‘Tax Day’).”
The penalties for failing to file a tax return include fines, interest on the unpaid taxes, and in some cases, up to one year of prison time per unfiled year. The best way to avoid this charge is to file your tax returns on time, even if you can’t pay the full amount owed.
- Filing False Returns
Submitting false or fraudulent tax returns is another common charge. This occurs when taxpayers knowingly provide inaccurate information on their tax returns, such as overstating deductions, underreporting income, or fabricating expenses.
Filing false returns is considered tax fraud, which is a felony. Penalties include up to three years in prison, fines of up to $100,000 for individuals (and $500,000 for corporations), and the repayment of taxes owed with interest.
- Failure to Pay Taxes
Failing to pay taxes owed is a misdemeanor under U.S. law. While this charge is less severe than tax evasion or fraud, it can still result in significant penalties.
This crime typically applies to individuals or businesses that file their returns but don’t pay the full amount owed. Penalties include fines of up to $25,000 for individuals, $100,000 for corporations, and up to one year in prison for each year of nonpayment.
If you’re unable to pay your taxes, the IRS offers options like installment agreements or offers in compromise to help you settle your debt without facing criminal charges.
- Structuring
Structuring, also known as “smurfing,” involves breaking up large financial transactions into smaller amounts to avoid IRS reporting requirements. This crime is commonly associated with money laundering but can also apply to everyday taxpayers who unknowingly engage in this behavior.
For example, depositing $9,000 in cash multiple times to avoid the $10,000 reporting threshold could be considered structuring, even if the money is earned legally. Structuring is a felony, and penalties include up to five years in prison and significant fines.
- Failure to Withhold Employment Taxes
Employers are required to withhold federal income taxes, Social Security, and Medicare taxes from their employees’ paychecks and remit them to the IRS. Failing to do so, either intentionally or negligently, can result in criminal charges.
The IRS takes these violations seriously because employment taxes fund critical government programs. Penalties include fines, imprisonment, and personal liability for the unpaid taxes.
How to Protect Yourself
While the penalties for tax crimes can be severe, there are steps you can take to protect yourself:
- Keep Accurate Records: Maintain detailed records of your income, expenses, and financial transactions to ensure your tax returns are accurate and complete.
- File and Pay on Time: Avoid penalties by filing your tax returns and paying any taxes owed by the deadline. If you’re unable to pay, work with the IRS to set up a payment plan.
- Consult a Professional: Tax laws can be complex, and mistakes are easy to make. Hiring a qualified tax professional or CPA can help you stay compliant and avoid costly errors.
- Be Honest: If you make a mistake on your taxes, report it and correct it promptly. The IRS is often more lenient with taxpayers who voluntarily disclose errors.
If you follow these suggestions, you shouldn’t have much to worry about. The IRS isn’t out to “get” you – they just want to make sure every taxpayer is paying what’s required under the letter of the tax law. By making smart choices, you can put yourself in a position to avoid trouble.
