Fear Versus Fact: Can I Go to Jail for Unpaid Taxes?

If you owe money to the IRS for back taxes, you already know that you face the prospect of IRS collection actions, such as liens and levies. But you might also wonder if you need to worry about going to jail for owing money to the IRS.

The short answer is that it’s highly unlikely you’ll face criminal charges for unpaid taxes unless you took deliberate steps to avoid paying a tax you legally owe. This is far different than simply owing a tax debt that you can’t afford to pay.

In this blog post, we’ll focus on the rare cases where jail time could occur for back taxes and what you can expect in a typical IRS tax debt collection case. To learn more about how to handle unpaid taxes, contact Nashville Tax Solutions today.

Key Takeaways

• Going to jail for a tax debt is rare and usually only occurs if the unpaid taxes are the result of willful misconduct.
• What’s more likely are tax collection efforts by the IRS that may include numerous letters and notices, followed by tax liens and/or levies.
• Even if you can avoid tax liens and levies, you should still expect to pay penalties and interest for the underpayment of taxes.
• You can limit the penalties and interest charges, as well as find an optimal resolution to your tax problem, by consulting with a tax pro who has experience handling delinquent tax matters.

Understanding the Difference Between Unfiled and Unpaid Taxes

Even though jail time is possible for either not filing required tax returns or not paying your taxes, these are two different types of wrongdoing.

• Unfiled tax returns: when you don’t file a required tax return.
• Unpaid taxes: when you file the required tax return, but don’t fully pay the taxes due.
• Unpaid and unfiled taxes: When you don’t file the required return, and also don’t pay any tax balances stemming from that unfiled tax return.

When It’s Possible To Go to Jail for a Tax Debt

As alluded to earlier, the government doesn’t arrest people for not immediately paying their tax debts when due. However, if the unpaid taxes are the result of criminal actions, then criminal proceedings could occur.

Generally speaking, three conditions must be met before someone is charged with criminal tax evasion: willful intent, a substantial tax liability, and sufficient evidence to win at trial.

Willful Intent

There must be an affirmative act by the taxpayer to avoid paying the taxes they legally owe. Examples of willful acts include:

• Keeping two sets of books.
• Misrepresenting the taxpayer’s financial situation, such as creating false invoices or concealing assets.
• Lying about information that can affect tax filing status, like the number of dependents or marital status.
• Claiming a tax benefit the taxpayer isn’t entitled to receive, such as a business tax deduction for a personal expense.
• Knowing there’s a requirement to file a tax return for a particular tax year, then making the conscious decision not to file that tax return.

Substantial Tax Liability

The criminal act must result in a “substantial” tax deficiency. For example, if you claimed to have made a $20 tax-deductible charitable donation and you never made this donation, it’s unlikely you’ll face criminal charges. At this level of money, criminal prosecution isn’t a realistic possibility. In a case like this, your actions didn’t create a substantial tax deficiency, and there’s also not much evidence for a prosecutor to argue willful intent.

Sufficient Evidence

Criminal investigators may truly believe that a taxpayer intentionally chose not to report income they knew was taxable. But unless they have enough evidence to prove this intent beyond a reasonable doubt, they probably won’t seek criminal charges.

Keep in mind that even if there’s no arrest, the IRS will still attempt to collect the outstanding tax balance and could seek civil tax fraud penalties. These are more severe than regular penalties for things like unpaid taxes or unfiled tax returns.

What’s More Likely: IRS Tax Collection Enforcement Actions

While the risk of getting arrested for unpaid taxes is small, the risk of the IRS using the collection process to recover your tax debt is very high.

The IRS Tax Collection Process

This process can take several years to fully run its course, and it normally begins with notices.

These will become increasingly urgent the longer they go ignored. Eventually, you’ll receive a Notice of Federal Tax Lien and/or a Notice of Intent to Levy. These could result in major financial headaches, including the inability to sell property and asset seizure (such as wage garnishment and bank levies).

The IRS provides you with an opportunity to make arrangements to pay off your tax debt at each stage in the tax collection process. Yet the sooner you act, the easier it’ll be to work something out and save money.

Tax Penalties

If you respond promptly to the various IRS notices and letters reminding you to pay your taxes, you can avoid many of the tax collection actions described earlier. However, you may not be able to avoid all penalties and interest for the unpaid tax balance. The most likely penalties you could face are:

• Failure-to-Pay penalty: This penalty applies when you don’t pay your full tax balance by the due date. This is 0.5% of the unpaid tax balance for each month the tax remains unpaid, up to a maximum of 25%. This penalty is halved if you set up a payment plan to pay your tax balance over time.
• Failure-to-File penalty: This penalty only applies for not filing a required tax return. However, this penalty often accompanies a failure-to-pay penalty, as many unpaid taxes stem from unfiled tax returns. The failure-to-file penalty is 5% of the unpaid tax balance for each month the tax return is late, up to a maximum of 25%.

If your nonpayment of taxes is the result of civil tax fraud, you could face a penalty equal to 75% of the unpaid balance that’s attributable to the fraud. But remember, that’s civil tax fraud, not criminal. Even in these cases, the IRS has deemed the problem to be civil and not criminal.

In addition to these penalties, you will also have to pay interest. The IRS interest rate is adjusted each quarter and differs based on which tax category applies.

Solutions for Resolving Unpaid Taxes

Avoiding jail for unpaid taxes doesn’t mean you’re off the hook. You’re still obligated to make arrangements with the IRS to settle your tax debt, even if you can’t afford to do so immediately. Depending on the reasons for having unpaid taxes and your financial situation, you’ll have several options, such as:

• Offer in Compromise (OIC): Settle your tax debt for less than the full amount.
• Installment Agreement (Payment Plan): Pay off your tax debt over time with monthly payments.
• Currently Not Collectible (CNC) Status: The IRS agrees to temporarily halt tax collection efforts due to your severe economic hardship.
• Innocent Spouse Relief: Avoid paying off the portion of a marital tax debt that’s due to your spouse’s mistaken or wrongful conduct.

These options don’t necessarily provide tax forgiveness, but they allow you to be in good standing with the IRS and stop aggressive tax collection actions.

Avoid Getting Into Tax Debt

The best way to deal with unpaid tax debts is to avoid them in the first place. Even if there’s a tax bill you can’t afford to immediately pay off, you can still do things to limit the financial damage:

• Always file your required tax returns. If you can’t afford to pay the tax balance shown on these returns, you can at least avoid failure-to-file penalties and the dreaded substitute for return (SFR).
• Promptly respond to IRS notices. The IRS is more likely to escalate a tax collection case more quickly if they don’t hear from you.
• Don’t be afraid to ask for help. Given how complicated taxes are, you might assume the worst-case scenario, even if it turns out to be incorrect. Talking to a tax professional can provide a clearer picture of what you’re facing and discuss possible solutions.

Contact Nashville Tax Solutions for Help With Unpaid Tax Bills

If you’re dealing with a tax debt, you probably don’t need to worry about going to jail because of it. The IRS exists primarily to collect revenue, not put taxpayers in jail. As a result, the IRS will work with taxpayers to resolve tax debts, as long as the taxpayers put forth a good-faith effort to negotiate a realistic settlement solution.

Before contacting the IRS to begin discussions, it helps to fully understand the potential consequences for the unpaid taxes, the available options, and which of those options are best for your unique situation. To gain this understanding, contact the tax professionals from Nashville Tax Solutions.