August 31, 2020
Jail Time for Not Paying Taxes?
Jail Time for Not Paying Taxes?
If you make money in the United States, yes, chances are you will need to file and pay your taxes each and every year. Remember the saying, there are two constants in life; death and taxes. It’s true as many Americans will have begun paying taxes starting at the age of 18 and will continue to do so for the next 60+ years. It’s a fact of life and a fact that has been brought down through many generations.
The question, will you go to jail for not paying taxes? Most likely not, but in some cases, yes, it’s a real possibility. For many, the most common consequence for not paying taxes is being assessed penalties and interest, which can amount to a large amount very quickly.
If you are reviewing this article, you may be thinking about not paying your taxes; we’ll show you why that is a bad idea, no matter your income level.
What Happens If I Don’t?
If you filed your tax return, but neglected to pay, the IRS will certainly be aware and begin to send notices starting with penalties. There will be a due date of 30 days to pay or the penalty will begin to increase and interest will then begin to accrue.
Here are some of the most common penalties and how interest accrues:
- Interest: The interest rate is determined quarterly and is the federal short-term rate plus three percent. Interest compounds daily and cannot be removed. Interest only goes away once the balance due has been paid in full.
- Failure to Pay or Underpayment: This penalty is .5% for each month, or part of a month, up to a maximum of 25%, of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. This percentage increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property. Additionally, the IRS applies any payments you make to the tax first, then penalty, then to interest. So, if you filed a return with a balance due, you can expect to pay the balance + 25% + 3%+Rate in penalties and interest.
- Failure to File: The IRS charges a Failure-to-File penalty, which is usually 5% of the tax owed for each month, or part of a month that your return is late up to a maximum of 25%. If your return is over 60 days late, there is also a minimum penalty for late filing, which is the lesser of $435 or 100% of the tax owed.
- Failure to Pay Estimated Taxes: Estimated Tax Payments are for those who, typically, are not W-2 employees in that they do not have a certain amount of taxes automatically withheld. These tax payments are for those who are self-employed, those who earn tips, collect rental income, dividend or interest income, etc. These taxes must be made on a quarterly basis to ensure you have paid enough taxes into the system in an effort not to owe next tax year. The general rule is the total amount you must pay to avoid the penalty is the smaller of 1. 90% of your total expected tax for 2020, or 2. 100% of the total tax shown on your previous tax years tax return.
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If you fail to respond to any notices received, they will escalate to the following:
- A Federal Tax Lien: A tax lien secures the governments interest in your property. A federal tax lien will be filed after your balance due posts, you are sent a bill stating how much you owe, and you neglect or refuse to pay the debt.
- Levy of property: A levy permits the legal seizure of your property to satisfy a tax debt. No, the IRS does not need a warrant to do so. An IRS levy is much the same and does the same amount of damage to you and your credit. The IRS could levy property that is yours, but held by someone else, such as:
- Wages
- Retirement accounts
- Dividends
- Bank accounts
- Licenses
- Rental income
- Accounts Receivables
- Cash loan value of your life insurance or commissions
- Seize and sell property that you hold, such as car, boat or house
Yes, you could go to jail for not filing or paying taxes, but for the above scenarios as the IRS considers these civil charges, and in most cases they won’t lead to criminal proceedings.
Scenarios That Could Lead To Jail Time
There are a few scenarios where the answer to “can the IRS put me in jail?” may be yes.
When it comes to determining whether a situation with your taxes will lead to jail time, the main determination is whether you committed an offense that the IRS views as civil or criminal. The aforementioned scenarios are considered dealt with in civil proceedings, meaning they likely won’t land you in jail. The IRS knows that tax laws can be excruciatingly complex and that mistakes happen, which is why the IRS considers these offenses to be negligence, i.e. carelessness, rather than tax fraud, which is intentional deception. Let’s review tax fraud and its potential consequences.
What Is Income Tax Fraud?
Tax fraud is when you intentionally file an incorrect return in order to avoid paying taxes, or to receive a larger refund. If you file a fraudulent return to avoid paying taxes, this is known as tax evasion, which does carry a hefty sentence. Tax fraud includes:
- False exemptions or deductions
- Kickbacks
- A false or altered document
- Failure to pay tax
- Unreported income
- Organized crime
- Failure to withhold taxes
- Failure to follow the tax laws
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Consequences of Income Tax Fraud
If you’ve committed tax evasion or helped someone else commit tax evasion, you can expect to go to jail for five years and the helper anywhere from three to five years. If you continue to fail to file a tax return as required, you can expect to go to jail for one year up to each year you didn’t file. However, the IRS will not put you in jail for not being able to pay your taxes if you file a return, interestingly enough.
Abusive Tax Shelters
Tax shelters are a place to legally store assets (money, usually) so that current or future tax liabilities are minimized. Some examples include retirement accounts, some insurance products (typically life insurance), and real estate. If you have abused a tax shelter, the IRS can charge you a penalty of 75% of your underpaid tax amount or even send you to jail.
IRS Phone Scams
Unfortunately, there is a new IRS scam on the rise stating they are from the Taxpayer Advocates Office. Here is the recent article from the IRS website:
The Internal Revenue Service today warned the public about a new twist on the IRS impersonation phone scam whereby criminals fake calls from the Taxpayer Advocate Service (TAS), an independent organization within the IRS.
Similar to other IRS impersonation scams, thieves make unsolicited phone calls to their intended victims fraudulently claiming to be from the IRS. In this most recent scam variation, callers “spoof” the telephone number of the IRS Taxpayer Advocate Service office in Houston or Brooklyn. Calls may be ‘robo-calls’ that request a call back. Once the taxpayer returns the call, the con artist requests personal information, including Social Security number or individual taxpayer identification number (ITIN).
TAS can help protect your taxpayer rights. TAS can help if you need assistance resolving an IRS problem, if your problem is causing financial difficulty, or if you believe an IRS system or procedure isn’t working as it should. TAS does not initiate calls to taxpayers “out of the blue.” Typically, a taxpayer would contact TAS for help first, and only then would TAS reach out to the taxpayer.
In other variations of the IRS impersonation phone scam, fraudsters demand immediate payment of taxes by a prepaid debit card or wire transfer. The callers are often hostile and abusive.
Alternately, scammers may tell would-be victims that they are entitled to a large refund but must first provide personal information. Other characteristics of these scams include:
- Scammers use fake names and IRS badge numbers to identify themselves.
- Scammers may know the last four digits of the taxpayer’s Social Security number.
- Scammers spoof caller ID to make the phone number appear as if the IRS or another local law enforcement agency is calling.
- Scammers may send bogus IRS emails to victims to support their bogus calls.
- Victims hear background noise of other calls to mimic a call site.
- After threatening victims with jail time or with, driver’s license or other professional license revocation, scammers hang up. Others soon call back pretending to be from local law enforcement agencies or the Department of Motor Vehicles, and caller ID again supports their claim.
Here are some things the scammers often do, but the IRS will not do. Taxpayers should remember that any one of these is a tell-tale sign of a scam.
The IRS will never:
- Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes.
- Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
- Demand that taxes be paid without giving taxpayers the opportunity to question or appeal the amount owed.
- Ask for credit or debit card numbers over the phone.
- Call about an unexpected refund.
For taxpayers who don’t owe taxes or don’t think they do:
- Please report IRS or Treasury-related fraudulent calls to [email protected] (Subject: IRS Phone Scam).
- Do not give out any information. Hang up immediately. The longer the con artist is engaged; the more opportunity he/she believes exists, potentially prompting more calls.
- Contact TIGTA to report the call. Use their IRS Impersonation Scam Reporting web page. Alternatively, call 800-366-4484.
- Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add "IRS Telephone Scam" in the notes.
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