Tax Evasion Penalties and Other Consequences

By now, you probably know that having unpaid taxes is a serious problem. The fees and penalties can really add up, significantly increasing the amount you owe the government. The good news is it's typically not a criminal offense to owe back taxes.

However, when you attempt to avoid the assessment or payment of taxes owed by using illegal means, you may face criminal charges for tax evasion. Common examples of tax evasion include: failing to report income, deliberately overstating expenses or deductions, or not filing income tax returns when you have taxable income.

What Is Tax Evasion?

Tax evasion applies to both the nonpayment and underpayment of taxes through illegal means. It is important to note that to be found guilty of tax evasion, you must be found to have acted intentionally. That means you will rarely be subject to charges of evading taxes if you simply underpay your taxes by mistake or due to a reasonable error. 

In most cases, the government must show you falsified your returns or other documentation submitted to the Internal Revenue Service with the goal of underreporting your income or otherwise reducing your tax bill.

Tax evasion is different than tax avoidance. Tax avoidance is when a taxpayer takes legal steps to reduce their tax bill by structuring their finances or asset ownership in a manner that lowers their tax bill. If you have any questions about whether your efforts at tax avoidance could be viewed as tax evasion, contact a local tax attorney for legal advice on the matter.

Tax Evasion vs. Tax Fraud

The terms tax evasion and tax fraud are often used interchangeably but are treated differently under the U.S. Internal Revenue Code (tax code). Individuals or organizations who commit tax fraud may face either civil or criminal fraud penalties, but tax evasion is usually treated as a criminal act. That means an individual charged with tax evasion will often face jail time and harsher financial penalties.

Tax Evasion Penalties

There is a long list of potential penalties and consequences for tax evasion. Just reporting your income and paying your tax liability will almost always cost you significantly less money than any of the following outcomes.

Pay a Civil Penalty

If you act with the intention of avoiding or defeating any tax owed to the IRS, you could be fined up to $250,000. Even if you're not formally charged with tax evasion, you will be assessed fines if you file your return more than 60 days after the due date. The failure-to-file penalty is up to 10 times more than the failure-to-pay penalty. The IRS recommends that even if you can't pay in full, you should file your tax return and pay as much as possible.

Pay Interest

The IRS is required by law to charge interest when you don't pay on time. The interest accrues from the due date of your return regardless of extensions until you pay the amount you owe in full, including all interest and any penalty charges. Interest rates are variable and may change quarterly.

Face Criminal Charges

Tax evasion is a felony criminal offense. If you are charged with tax evasion, the United States Attorney's Office will prosecute you in federal court. As with most criminal prosecutions, before you can be sent to jail, you must be found guilty beyond a reasonable doubt in court. That is a lower standard than the "clear and convincing evidence" standard used for financial penalties associated with tax fraud.

Go to Prison

If you're found guilty of tax evasion, you can go to federal prison for up to five years.

Lose Social Security Benefits

If you owe the IRS, 15% of your Social Security benefits can be taken each month until the tax debt is paid in full. The government uses the Federal Payment Levy Program to garnish your payments.

Tax Lien on Your Property

A federal tax lien is a legal claim to your property. The tax lien arises automatically when you don't pay the taxes you owe in full within 10 days after the IRS makes a tax assessment. The agency will then send you a notice of tax due and demand for payment.

The IRS may also file a notice of federal tax lien in the public records. The notice lets your creditors know the IRS has a claim against your property, including property acquired by you after the filing of the notice of federal tax lien. Once a lien arises, the IRS generally can't release it until the tax, penalty, interest, and recording fees are paid in full or until the IRS can no longer legally collect the tax owed because the statute of limitations has expired.

Lose Your Property

A levy is a legal seizure that takes your property such as your house or car, or your rights to property such as your income, bank account, retirement account, or Social Security payments, to satisfy your tax debt. When property is seized or levied, it will be sold to help pay your tax debt.

Damage to Your Credit

The filing of a Notice of Federal Tax Lien will not appear on your credit report. However, it is a public record and may make it difficult to secure a loan.

Lose Your Passport

The Department of State will not issue or renew your passport if you've been certified by the IRS as having a seriously delinquent tax debt. It may also revoke a passport previously issued to such individual.

Additional Questions? Talk to a Lawyer

The possible civil and criminal penalties for tax evasion are severe. If you have been contacted by the IRS about possible tax evasion or are concerned that your actions might be considered tax evasion, you want to speak to a local tax lawyer. 

It's important to understand your rights in a tax case, and an attorney can ensure that the government follows all of the rules. A local tax attorney can also give you insights into the possible consequences of an IRS investigation and can help resolve your tax problems as quickly and inexpensively as possible.