Tax Evasion Penalties and Other Consequences

One of the roles that the tax collected by the government has is to pay off its national debt. What is the national debt? National debt refers to the funds borrowed by a country. When a government’s expenditure exceeds its income via tax collection or other resources, the government needs to borrow money. This debt can only be paid off by levying taxes. An increase in national debt is not good for the economy of the country. Moreover, it has a direct effect on the daily life of the country’s citizens.

Paying your taxes on time no only makes you a good citizen, but also prevent you from committing fraud or crime. Yes, you heard right. Failure in paying taxes is considered as a crime by almost all countries. Moreover, penalties, fees and other consequences which one has to face for not paying taxes are quite high.

When an individual uses illegal means to avoid payment of taxes he or she might have to face criminal charges for Tax evasion. But do all tax violations are considered as Fraud?

We need to understand the distinction between tax fraud and negligence.

Income Tax Fraud- Definition

When an individual intentionally tries to defraud the IRS or evade Tax, it is considered as an Income Tax Fraud. The following acts of an individual or company are considered as tax fraud:

  • Purposely fails to file an income tax return
  • Intentionally fails to pay taxes due
  • Deliberately fails to report all income received
  • Makes fraudulent or false claims
  • Prepares and files a false return

Differentiation between tax evasion and negligence

Rules and regulations of tax code are quite tricky. Even the IRS understands that for a common man, it is not easy to decipher the tax code. Hence, in the absence of any sign of fraud, the IRS considered it as an honest mistake on the part of the taxpayer. Under such condition, the auditor declares is a pure act of negligence. However, IRS may charge the taxpayer a penalty for failure to pay tax on time. This penalty is generally around 20% of the underpayment.

IRS auditors are more than capable of differentiating an honest mistake from intentional and purposeful tax evasion. They generally look for following activities while auditioning:

  • Exaggeration of deductions and exemptions
  • Misrepresentation of documents
  • Concealment or transfer of income
  • Keeping two sets of financial records
  • Fabricating personal expenditures as business expenditures
  • Using a false Social Security number
  • Claiming an exemption for a non-existent dependent
  • On purpose underreporting earnings.

Some of the common criminal tax penalties are discussed below:

Willfully failing to pay estimated taxes or keep records

When a taxpayer fails to pay final or estimated tax or maintain proper records, he is guilty of a misdemeanor. Normally, the taxpayer is subjected to civil tax penalties. However, in some cases, the individual may have to pay around $25k in as a fine and may even have to face a jail term of 1 year. An individual may either get be subjected to either one of the two penalties or in extreme cases may be subjected to both the penalties that too along with the prosecution’s cost.

Failing to file a tax return (Not filing) penalty or charge

This is also considered as a misdemeanor. Upon conviction, an individual or corporation is assessed with civil tax penalties. A taxpayer could face up to $25000 as a fine or can be sentenced up to 1 year in prison. An important point to note is that the criminal charges are applicable for not filing tax returns which are due for anytime less than six years. There is no time limit, in case of civil tax penalties.  If the taxpayer files the tax return before the IRS contacts him/her, there won’t be any problem. This kind of charge is quite common.

Pay now or pay double later

If the taxpayer intentionally avoids paying tax to the IRS, then the individual/corporate may end up paying a penalty of $2,50,000. Even If the taxpayer is not officially charged with the evasion of tax, he/she will be liable to pay fine if the return is filed after passing of 60 days above the due date. Hence, failure to file penalty is much more in comparison of failure to pay the penalty.

Willfully failing to Disclose Offshore bank accounts

In cases where IRS proves that the taxpayer deliberately failed to unveil offshore financial details or bank accounts then the taxpayer can be subjected to criminal prosecution where he/she can be sentenced up to 5 years of a prison sentence. A taxpayer might have to pay a fine more than $124,588 per year per violation or half of the balance that was present in the taxpayer’s account at the time of the violation.

IRS criminal investigation into income tax fraud

CI or Criminal Investigation is the law enforcement branch of the IRS that deals which the cases involving evasion of the tax code. IRS conducts all its investigations through CI only. The cases investigated by CI include:

  • Cases related to tax crimes
  • Money laundering cases
  • Bank Secrecy Act Violations cases

To carry out its investigations, IRS investigators don’t leave any stone unturned. Even the information stored in computers is uncovered irrespective of their protective security measures like passwords, encryptions, etc.

The entire system is based on the principle of self-assessment of income earned or voluntary compliance. IRS tries to discourage defilements by assessing penalties, fines, and taxes. In extreme cases by asking for imprisonment for offenders.

Face criminal charges

Evasion of tax is considered as an offense. Hence if any individual is charged for committing this felony criminal offense, he/she would be prosecuted in the federal court by the United States Attorney’s Office.

Lose your property and passport

In order to settle the tax debt, the property of the tax evader (fixed assets like house or car) or the right to property (income, retirement and bank account or Social Security Payments) are seized.  The levied property will be sold and the amount received will be used to settle the tax debts.

If IRS certifies that the individual is involved in serious tax evasion cases, then The Department of State will neither renew nor issue the passport. In fact, IRS may even revoke the existing passport of such individuals.

Either pay tax or go to prison

If an individual is proved to be guilty of tax evasion, then that taxpayer can be sentenced to imprisonment for up to 5 years.


Hence, tax evasion is not at all the right option. No one likes to pay taxes on their income. However, purposely trying to evade tax would only create more problems in the future. An individual may end up with a much higher penalty amount or even end up in prison. Moreover, if IRS certifies that it was the conduct of tax evasion than it will also have a great impact on the credit score. To have a clear understanding of the tax code and its related penalties and consequences, it is advisable to consult an attorney.



Jackson Maven

Jackson Maven

Focused on providing information for anyone in need of debt relief, Jackson writes a blog on debt settlement, debt consolidation, tax and student loan debt which helps to find the debt solution that fits their unique needs no matter the amount of debt they are in.
Jackson Maven

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