Owe the IRS? Here's How To Stay Out of Jail and Settle Your Debt

When tax time rolls around, those who forgot to file at some point in the past feel fear. Maybe you couldn’t afford it, or life got in the way. A year turned into two or three, and now you’re afraid to file because you owe more than you can afford. You’ve heard so many horror stories. Can you go to jail for not paying taxes?

The answer is maybe, but it’s unlikely. In general, the IRS only files criminal charges for intentional acts such as criminal tax evasion, fraud, and underreporting income. The IRS prosecutes these actions as serious tax crimes. Nonpayment because of inability to pay is a civil issue. The IRS is usually willing to work with you if you are willing to be honest with them.

Tax Evasion vs. Tax Avoidance

Tax evasion is a criminal act, subject to criminal prosecution by the IRS and by state tax agencies. Tax avoidance is what people do to lawfully reduce their tax burden. It is legal to do some things to lower your tax liability, as long as you file tax returns and list what you have done.

If you reduce your taxes lawfully and file your taxes on time, you have not broken any laws. While it’s common to believe doing this is “cheating on your taxes,” it is not.

When It Becomes Criminal

Willful failure to pay income taxes is a serious crime. Deliberate fraud, lying on your returns, or unreported income can all result in criminal penalties. If the IRS determines you defrauded the government, you will face jail time and stiff financial penalties. Some of the charges may include:

• Tax evasion: Falsifying your return, underreporting income, or other acts are serious crimes with stiff prison sentences
• Conspiracy to commit tax fraud: Helping someone else avoid paying taxes via money laundering or other methods can result in up to five years’ imprisonment
• Intentional failure to file a return: Failing to file a return can result in up to one year’s imprisonment for every year you fail to file

These are penalties for deliberate acts of tax evasion. Honest mistakes on your tax return will not land you in prison. The Internal Revenue Service (IRS) does not initiate civil or criminal proceedings against taxpayers unless they intentionally violate U.S. tax laws.

What Happens When You Can’t Pay

If you can’t pay or have just made a mistake, the IRS would rather work out a solution than hit you with a criminal charge. They prefer that taxpayers be free to pay their taxes rather than face jail time. Here are some examples of how the IRS collects back taxes:

• Before they send you any notices, the IRS simply attaches late payment penalties and interest to your existing tax bill. Unless you have a business or owe a very large tax debt, the IRS will not file collections immediately.
• If you miss one year and file the next, the IRS may use your refund from one tax year to offset any owed taxes. The money you would have received is instead applied to what you owed the previous tax year.
• At some point, they will send you a Notice of Taxes Due or a Tax Lien. At this point, they have started formal collections. You should consider contacting a tax attorney for guidance and assistance.

The IRS can place a tax lien or tax levy on your property. A tax levy allows the IRS to seize any property they want to pay off your back taxes. They may file a wage garnishment, force a property sale, and do other things to pay off the bill.

Resolving Your Tax Debt

If you have more tax debt than you can afford to pay, ignoring it won’t make it go away. Disregarding IRS notices is where most people get into trouble if they have not deliberately committed tax fraud.

The IRS will locate you and start collection proceedings. The longer you wait, the higher the civil penalties and fines you will face. A CPA, tax attorney, or other tax professional can help you arrange a payment plan with the IRS and avoid other penalties.

Installment Agreements

The IRS has arrangements based on your assets and ability to pay over time already set up on its website. Some types of installment plans include:

• Individual agreement: If you owe less than $10,000 and can pay back the amount in less than three years, this plan lets you pay the taxes back in monthly installments
• Streamlined installments: If you owe less than $50,000 and can pay the amount back in 72 months with the minimum payment, streamlined payments are available with payment of a fee
• Partial payment installment: Lets you pay off part of your tax liability with a financial review every two years, and the possibility of selling off some assets to pay part of your tax debt
• Non-streamlined installment agreement: Can be negotiated if you owe more than $50,000 in taxes, you and the IRS can agree on the payment amount, and the IRS doesn’t reject your proposal if it disagrees with your living expenses and other costs

All installment agreements require taxpayers to provide detailed information, including bank account details, living and business expenses, assets, and other debts.

Offer in Compromise

If you are unable to pay your debt via a payment plan, you may make an offer in compromise (OIC). This is an agreement to pay a lump sum that is less than your total debt but more than you could pay under a payment plan. The IRS will not accept an offer in compromise unless:

• Your assets and income are not sufficient to cover the tax debt through a regular monthly plan: The IRS cannot garnish more than a certain percentage of your gross wages, so if you lack the income and assets to pay the debt, an OIC is preferable
• You may not be liable for the taxes: If you are not sure you owe the full tax amount but are unwilling to go to litigation, you can offer an OIC to settle the dispute without admitting guilt if you have enough evidence to support your claim and offer enough in compromise to clear the debt
• There are special circumstances: Even if you genuinely owe the tax and could pay, you can make an argument that paying the full taxes on a monthly installment plan would cause you undue financial hardship or otherwise be unfair

Negotiating an OIC requires legal assistance. You should contact a tax attorney before attempting any sort of offer in compromise to reduce your tax liability.

Statute of Limitations for Criminal Charges

If the government is going to file criminal charges against you for failing to pay your taxes, there is a limited time for doing so. Depending on the nature of the alleged wrongdoing, criminal charges must generally be filed within six years of the violation.

The IRS also has a time limit on collections. In most instances, the IRS will not take collection action after 10 years from the date of the assessment. If you filed a return 10 years ago but never paid the associated taxes, the IRS will not try and collect on the unpaid taxes. You also will not be criminally charged.

Still Have Questions? Talk to a Tax Lawyer

Failing to comply with IRS or state taxation rules can result in serious civil and criminal penalties. The longer your taxes go unpaid, the more serious the situation becomes. This can intensify if you are the subject of an IRS audit or criminal investigation. 

If you have not filed a tax return, have filed a return that may include incorrect information, or believe you owe money to the IRS, it’s a good idea to contact a local tax attorney about resolving your tax problems. An experienced tax lawyer can advise you on how best to proceed in resolving your tax issues, be with you if you have a meeting with an IRS agent, and represent you in court.