Criminal vs Civil Tax Fraud Penalties: Who Goes to Jail?

Tax fraud can happen in a lot of different ways, but it’s essentially an act of scamming the Internal Revenue Service (IRS) out of paying your full amount of taxes. The severity of the penalties will vary greatly based on the extent of the crime committed, even being the difference between criminal and civil charges. Only one of these charges, however, will result in jail time.

What Is Tax Fraud?

Any time there is a case of someone trying to cheat the tax system, it’s considered tax fraud. This can vary in a wide range based on how far the deceit goes and how much money they now owe the IRS, and it will also require a few specific aspects for a conviction of tax fraud. This can take place on a grand corporate level or by individuals on their regular yearly income taxes. On a more common taxpayer level, some common scenarios that constitute as tax fraud include:

• Misreporting facts: Knowingly providing inaccurate, partial, or outright false information is a form of tax fraud. Omitting a source of income, hiding money in offshore bank accounts, or concealing a bank account are examples of this.
• Not filing or paying: Just flat out not filing taxes at all is tax fraud, as well as refusing to pay the tax required – or at least make arrangements with the IRS.

If the IRS gets a tip, has a suspicion, or is doing a random check, an auditor may contact an individual or corporation and ask questions and possibly collect proof that everything was filed correctly. If the individual refuses to comply, they can use summons to obtain the information themselves. If anything is found, they will likely dig deeper into previous tax filings, looking for patterns of fraud. They will then build a case up against the defendant and decide if it’s worthy of civil or criminal charges – or in some cases, both. Penalties that may accompany these charges can include:

• Prison
• Fines
• Seizing assets
• Filing a tax lien
• Wage garnishment

There are some aspects of the fraud that prosecution will have to prove in order to obtain a conviction, however. First off, federal tax law specifies that the fraud must be committed “willfully,” meaning that someone can’t be held responsible for a true accident. Another thing that they’ll have to show is that the defendant had a legal responsibility to report certain information or file or pay said taxes, as well as that they were fully aware that they had that responsibility – something unique to tax law. However, when using the defense of ignorance, the story must be reasonable and believable.

Criminal Tax Fraud Charges

Tax fraud is punishable federally by 26 U.S. Code §?7201, which defines someone guilty of tax fraud as:

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof

Just as in the case of most criminal trials, the burden of proof is on the prosecution to convince the jury or judge beyond a reasonable doubt that the defendant is guilty of all aspects required of tax fraud, meaning a rational person would view the defendant’s guilt as the only explanation for the facts presented.

However, the IRS will typically reserve criminal charges for the big cases, ones that occurred repeatedly over the course of many years and with huge error amounts. Additionally, criminal tax fraud does have a statute of limitations of three years, but that doesn’t mean that civil charges can’t be pressed after those three years are up.

Penalties

A criminal tax fraud conviction can result in some serious sentences, as well as a felony conviction on the record. Under 26 U.S. Code §?7201, individuals can be fined up to 100,000 dollars, while corporations’ fines may reach 500,000 dollars, as well as to include any prosecution costs. Additionally, a criminal tax fraud conviction can land you prison time of up to five years.

Slightly more specific, 26 U.S. Code §?7203 covers “willful failure to file return, supply information, or pay tax” and is only a misdemeanor charge. These fines can reach 25,000 dollars for an individual and 100,000 dollars for a corporation, as well as the cost of prosecution. As it’s a misdemeanor, jail time can only reach one year.

Defenses

A good defense is to show holes in the story the prosecution is telling that will cause the jury to have some doubt on the absoluteness of the defendant’s guilt, especially since a criminal case requires proof beyond a reasonable doubt. That also applies for all aspects required for a conviction, including whether the defendant intentionally deceived the IRS. If doubt can be place in the jury’s mind, there may be no grounds for a conviction. Additionally, if the charges simply have no grounds and the defendant did in fact correctly file and pay all taxes required, providing proof of that is grounds to dismiss the case.

Civil Tax Fraud Charges

Civilly, charges for tax fraud are outlined in 26 U.S. Code §?6663. For a conviction of civil tax fraud, it must be demonstrated that “any part of any underpayment of tax required to be shown on a return is due to fraud” willfully and knowingly committed by the defendant.

For civil cases, it’s only required that the IRS prove with clear and convincing evidence that the defendant is guilty. This is slightly less evidence required than in a criminal case, but it should still be much more likely that the defendant is guilty than not. However, it should be noted that civil cases can follow criminal cases, and vice versa, and when a civil case follows a guilty criminal conviction, the prosecution no longer has to prove that the defendant is guilty of tax fraud, as this was already proven beyond a reasonable doubt in criminal court. Yet an innocent verdict in a prior criminal case will not necessarily result in an innocent verdict in a following civil case. Also, civil charges have no statute of limitations, so charges can be pressed any number of years down the line.

Penalties

A civil tax fraud conviction won’t come with a prison sentence. Instead, it is punishable financially, usually requiring the defendant to pay the taxes owed, plus interest, and with a fine of 75 percent of the amount owed. Additionally, in a less serious case, they could potentially face up to 20 percent of unpaid taxes if it’s proven that the defendant was reckless in the filing process.

Defenses

It may be a bit harder to defend civil charges, as the standard of evidence required isn’t as high as a criminal case, but many of the same defenses still apply here. As such, showing how the fraud was unintentional and that the defendant truly believed they filed and paid their taxes correctly can be an option for defense. Additionally, the defense may show that no underpayment occurred in the first place.

Examples of Tax Fraud Cases

Over the years, there have been quite a few high profile cases of tax fraud, often celebrities and criminals alike. Evaluating these cases and the penalties they received can help provide a basis to judge the scale of tax fraud punishments.

Al Capone

Perhaps the most famous case of tax fraud is that of Al Capone, who despite gaining a reputation of a ruthless, dangerous mobster boss, was taken in on tax evasion charges. Capone was only reporting a small, legitimate income and neglecting to report, for obvious reasons, his illegal side income. He was found guilty of five counts of criminal tax fraud in 1931, sentencing him to 11 years in Alcatraz, of which he only actually served about 7.5 years after being released to receive treatment for his brain syphilis. Additionally, his conviction required him to pay his 215,000 dollars in owed taxes, a 50,000 dollar fine, and 7,692 dollars in court costs.

Spiro Agnew

Spiro Agnew became the first US vice president to resign from office as a result of tax fraud charges against him. To avoid being charged with political corruption, Nixon’s ex-vice president Agnew agreed to pay a fine of 10,000 dollars and serve three years on probation.

Willie Nelson

Willie Nelson paid a pretty large amount back to the IRS after suspected of being responsible for up to 32 million dollars in taxes owed. The IRS seized his assets and charged him with a repayment of 16.7 million dollars, with 10.2 million dollars of that being interest and fines. After meeting with the star, they settled on nine million dollars, with Nelson making three million dollars of the payment then.

O.J. Simpson

While in prison for charges of kidnapping and armed robbery, the IRS informed O.J. Simpson that he owed over 500,000 dollars in taxes and fines for unpaid taxes for 2007-2011. This is on top of the 33.5 million dollars Simpson was found responsible for paying to his victims’ families in a civil court case.

Nicolas Cage

After being caught inappropriately deducting personal expenses from his taxes, the actor was found guilty of tax fraud with over six million dollars in back taxes owed. Cage fought the charges at first, claiming that his financial advisor had steered him wrong, which his financial advisor then denied, saying he told Cage he was living outside of his means by buying over a dozen mansions, dinosaur skulls, islands, castles, and more. Cage is still paying off his debt to the IRS, which amounts to over 14 million dollars.

What If You Can’t Pay Your Taxes?

If you’re unable to pay your taxes, you’re not going to be thrown in to jail, and you certainly aren’t alone – 37 percent of taxpayers have reported that they don’t have the funds to pay for their 2019 taxes, even though the IRS extended the deadline this year from April 15 to July 15, 2020. The IRS suggests that you still file your taxes accurately and make an effort to may as much of what you owe as possible before the deadline. It’s also in your best interest to contact the IRS and see if you can work out some sort of deal with them. They may provide payment options, such as an installment plan, smaller offer to pay, short-term extension, or even a temporary hold on collection. This does not mean that you won’t be responsible for interest on the amount owed while you attempt to fulfill the payment. However, they may be able to waive penalty fees that could come as a result. Overall, it’s definitely best to talk with the IRS about what you’re able to do in your situation, as it seems they’re willing to work with you.

If you want to apply for a payment plan, you can fill out Form 9465: Installment Agreement Request. There won’t be any fee if you set up a payment plan for 120 days or less, but that doesn’t include penalties and interest that you receive during that period. Longer term options include paying over the span of six years. Setting up automatic withdrawals comes with a 31 dollar start up fee that’s waived for low income payers. Not using a direct bank account withdrawal requires a 149 dollar fee, while those who qualify as low income will have a possibly reimbursable 43 dollar fee. This will also come with all penalties and interest gained.

A compromise payment is considered a last resort option. It’s stated on their website that they will consider several factors to determine how best to help you make your needed payment, such as how much you’re able to pay, how much you make, your various expenses, and how much your assets are worth. They generally want to decide if the payment would case “economic hardship or would be unfair and inequitable because of exceptional circumstances.”

Additionally, you may want to consider charging your taxes to your credit card if possible. This may come with a fee, though.

What to Do If You’re Being Audited

There are several things to keep in mind if you’re approached by the IRS, whether for suspected tax fraud or not. First of all, it’s best to be entirely honest all of the time to avoid being held responsible for a lie down the road. Always pay attention to all notices and take communication attempts seriously. You don’t want to ignore them. Consider first meeting with a tax expert to look over anything that they might find, especially if you’re unaware of any mistakes. You don’t want to be surprised. When meeting with the auditor, it’s best to have a lawyer present, and they must inform you of your rights in the meeting. Then, meet with the tax expert again following the meeting in order to confirm that the IRS is giving you correct information – they aren’t always completely right.

Can You Go to Jail for Tax Fraud?

You absolutely can go to jail for tax fraud, however, only in criminal cases. Civil cases will have penalties in the form of restitution and court fees. Criminal charges will comes with fines, court fees, and possible prison time, as well a serious felony charge. Criminal charges are usually reserved for the more severe cases though.

Your chances of serving time in prison can vary greatly, but to give some perspective, in 2016, out of 3,395 suspected tax fraud cases that the IRS looked into, they only convicted 2,672. However, 80 percent of those convicted serve a jail sentence. Yet it may be reassuring to know that, in many of these cases, the convictions were instigated first by the discovery of another crime, such as drug charges.

If you’re worried about inadvertently committing tax fraud, it’s best to always use truthful information on all documents, not keep any financial secrets from the IRS, stay informed on what you’re responsible for filing and paying, and speak to an account to file your taxes and advise you through the process if necessary. Also, it’s good practice to save all important financial information and only take deductions that you’re sure you qualify for.

The burden of proof will lie on the prosecution, and they must prove the defendant’s guilt beyond a reasonable doubt in criminal cases and with clear and convincing evidence in civil cases. Arguing the success of this, as well as whether it’s determined that the act was intentional, can be the key to a strong defense against tax fraud in both criminal and civil cases. It’s best to speak to your lawyer about what the best defense is for your case and whether or not you’re facing jail time. However, overall, it’s best to just be honest and accurate with your taxes from the start to ensure that you can avoid any run ins with the IRS.