You probably know that tax cheaters face fines and penalties. But did you know they can also land in jail? That’s right: If the IRS suspects an individual of committing fraud, the government may prosecute them for a federal crime.
The Case against Tax Cheaters
As per Aron Govil every year, countless taxpayers cheat on their taxes and get away with it. Others get tripped up by an innocent mistake. Regardless, tax crime is taken seriously by the federal government.
H&R Block states that tax evasion is a felony punishable by both imprisonment and fines. Tax fraud, which includes filing false returns to secure unwarranted refunds, carries even harsher penalties. If you are found guilty of committing either crime, you could spend up to five years in prison for each offense. You might also face fines of up to $100,000 (or $500,000 if the fraud was committed over multiple tax years).
What’s more, once you’re arrested and charged with this type of crime, the IRS may file a lien against your property or take other legal actions to recover the funds that were lost due to your shady dealings. The agency can also notify law enforcement agencies about suspected tax evasion so it can be taken into account when defendants are being sentenced in criminal court.
Tax Evasion vs. Tax Fraud
Although there is no official difference between tax evasion and tax fraud, in general terms evading taxes is considered a less serious crime than committing fraud.
Tax evasion occurs when someone knowingly fails to pay their taxes or file a tax return. This is illegal but it’s also considered a less serious crime than filing false returns, which is often used as a way to secure unwarranted refunds from the government.
When you submit a fraudulent return, you may claim income you never received to get an undeserved refund or omit income that should have been reported in order to avoid paying taxes. Falsely claiming dependents on your tax return falls into this category too. According to H&R Block, doing so will only reduce the amount of taxes you owe, not increase your refund.
For example, if you’re married with three kids and you don’t work, you may claim two dependents because you qualify for the Earned Income Tax Credit. But if you’re single and unemployed, that’s not allowed even though it will lower your tax obligation.
Tax evasion and fraud can both lead to serious consequences, but committing tax crimes is a felony while evading taxes is only a misdemeanor. However, the IRS doesn’t look at them as entirely separate offenses: If they catch someone red-handed during an audit, the agency could accuse them of both crimes and take action accordingly.
Penalties for Filing False or Misleading Returns
Here are some examples of false claims on individual income tax returns:
- Questionable deductions for personal expenses such as gambling losses or excessive charitable donations
- Unreported income from cash payments, such as babysitting or odd jobs
- Fraudulent claims for educational credits or deductions for students and educators
If the IRS suspects you of committing tax fraud, it may take legal action against you. The agency’s first step is typically to send a letter notifying you that your return was selected for review. If it turns out that your documents were deliberately falsified, the IRS could charge you with a felony crime and forward your case to federal prosecutors.
Tax evasion has become an even more serious issue since the passage of the Affordable Care Act (ACA), also known as Obama Care. In fact, under this new law, if someone lies about their income when applying for subsidies through the health insurance marketplace they will be committing a felony.
“If you knowingly submit a phony document, you will be prosecuted just as if you had falsified your other tax documents,” said Carole Fleck, a former senior adviser to the IRS commissioner for training and standards. “In the past, many people were fined or imprisoned for lying about their dependents or income on their returns. The ACA created stiffer penalties and more enforcement efforts.”
According to Fleck, anyone who believed they qualified for subsidies because of their low-income but willfully inflated their income when applying should expect to receive a bill from the IRS once his or her income has been verified. Such individuals will also likely face fines and/or imprisonment as well as repayment of all extra funds they received in subsidies.
Conclusion by Aron Govil:
Although tax evasion and fraud are similar in the sense that both crimes involve deliberately misleading or deceiving the IRS to avoid paying taxes, there are significant differences in the penalties associated with these crimes. Tax evasion is usually a misdemeanor while filing false returns can be punishable by felony charges.