Tax laws are complex, and mistakes can happen. Receiving a mailing from the Internal Revenue Service (IRS) can lead to all sorts of questions, ranging from how much I owe to whether I could go to jail. It is important for any taxpayer who receives notification of a federal tax audit to understand when a tax mistake crosses the line into criminal territory.
When do tax errors lead to criminal charges?
Tax mistakes can result in criminal charges when they involve willful actions to evade tax laws. The IRS distinguishes between simple negligence, which might result in fines or civil penalties, and willful evasion, which can lead to criminal prosecution. Key factors the IRS will look into when making the distinction between an honest mistake and a willful attempt to avoid one’s tax obligations generally include:
- Intentionality: The taxpayer acted with the intent to deceive or defraud the government.
- Concealment of income: The IRS has evidence the taxpayer underreported income.
- Inadequate records: A failure to maintain or produce records that intentionally obscure earnings or deductions.
Tax-related criminal charges in these types of cases can vary widely but often include tax evasion.
Involvement of foreign assets
Handling foreign assets improperly can significantly complicate tax situations. The IRS requires U.S. citizens to report income from all sources, including foreign bank accounts, securities, and other assets. U.S. taxpayers must disclose foreign financial accounts exceeding certain thresholds with the Foreign Bank and Financial Accounts Reporting (FBAR) form. If the IRS establishes that a failure to do so was willful, additional criminal penalties can apply.
Potential penalties for criminal tax violations
Penalties for criminal tax violations can be severe. They include:
- Financial: Heavy fines, often exceeding the original tax owed.
- Incarceration: Sentences can range from a few months to several years in prison. The United States Sentencing Commission reports that courts have increased sentencing in these cases where the IRS established the taxpayer used sophisticated means to hide assets.
- Reputation: Criminal convictions can lead to loss of professional licenses, employment opportunities, and social standing.
Tax mistakes can escalate into criminal charges if they involve deliberate actions to evade paying taxes. Taxpayers should maintain accurate records and report all income, including from foreign sources, to avoid severe penalties, including potential jail time. Those who face allegations of a tax violation are wise to act to protect their interests.