Can the IRS Send Me to Jail?

main in jail

Cheating on your taxes is a crime. No doubt about that. However, a mere 0.002% of all taxpayers are convicted of tax crimes, even though roughly 16% of Americans are found not complying with the tax laws every year, in one way or another. 

As for the number of convictions for tax crimes, it has stayed relatively stable over the most recent 5-year period (less than 1% increase). This means that a person is rarely sent to jail for tax fraud. 

However, there is some fine print you do need to read, as not all cases end up being punished with penalties and fines. Some may as well put you behind bars. This is a topic that we get asked about a lot so we wrote this article to answer some commonly-asked questions.

 

Can You Go to Jail For Lying to The IRS?

The majority of cheating cases comes from tax evasion, which is the deliberate underreporting of income (willful or actual). This is the type of tax crime that is charged the most often. Truth be told, it can be tempting for some taxpayers to fudge the numbers to improve their tax refund. Nevertheless, misrepresenting yourself on your tax return can get you into trouble as it is considered tax fraud. So, you could be (1) audited, (2) fined considerable amounts, or (3) put to jail.

Remember that the IRS knows whether you report all of your income or not as it gets all of the 1099s and W-2s you receive. Your financial activity may also raise some red flags with the IRS (in case you are thinking of hiding income in the form of cash payments). All these may trigger a tax audit, which is an in-depth review of your financial records and taxes to make sure everything has been reported accurately. 

Although there is less than a 1% chance of being audited, most of the time, at least, undergoing an audit is simply not worth the risk as it involves a costly and time-consuming procedure, where you are called to present years of documentation. You may even be called in for multiple in-person interviews. 

Now, whether you go to jail for an IRS audit or not, it all depends on how the IRS finds you – guilty of tax fraud or evasion (so charged with an offense that carries jail time) or not. In general, an incorrect tax return case (i.e., under-reporting your income) comes with late payment penalties, while you may also be charged interest on the underpayment but you will not go to jail for it.

And, don’t fool yourself into thinking that tax fraud or evasion affects high earners only. Everybody should be careful, even those with low income. This is because the IRS does NOT differentiate its cases based on how much you underpaid your taxes or between income amounts. Falsifying any information on a tax return can end up with you being fined up to $250,000. 

 

Can the IRS Put You In Jail?

In a nutshell, no. The IRS cannot send you to jail. However, the court can. When an IRS auditor audits your tax returns and detects possible fraud, they can initiate a criminal investigation. It should be noted that around 3,000 taxpayers are convicted of tax fraud every year. So, lying on your taxes is, indeed, a big deal for the IRS. Overall, though, the IRS rarely charges taxpayers with fraud. Therefore, even if you are investigated, you will probably not face a criminal charge.

That being said, though, lying on a tax return carries potentially severe consequences that are just not worth the risk; you may end up having to pay way more than the sum you are attempting to hide. 

 

How Much Taxes Do You Have to Owe To Be Sent to Jail?

As already mentioned, the chances of facing criminal fraud penalties are very slim. In the overwhelming majority of cases (at least 98%), the IRS punishes this type of fraud with CIVIL penalties. This simply means that you will be called to pay a 75% fine that will be added to the tax due, plus interest on both the fraud penalty and the tax. So, if you owe $10,000 from tax fraud, you will have to pay an extra $7,500 as a penalty. 

Things change dramatically, though, when the IRS suspects that you have gone too far. In this case, it may call the CID (Criminal Investigation Department) to investigate your situation. The CID then has two options: (1) recommend that the Justice Department prosecute you or (2) drop it forever, depending on its findings. The good news is that the CID does not usually recommend prosecution except in very rare cases. 

Of course, the larger the sum you tried to hide, the more likely CID agents will recommend prosecution. In criminal cases, the typical amount of taxes owed is at least $70,000 and usually refers to tax cheating activities over a three-year time span (or more). 

To sum up, the IRS itself can NOT prosecute you, but the CID can recommend prosecution. If  it does, and you get convicted by the Justice Department, you may be fined, put on probation, imprisoned, or all three. The bad news is that if you are brought to court, there is more than an 80% chance of getting convicted and a high chance of going to prison even if you have a spotless criminal record. 

 

Tax Crimes That CAN Put You In Jail

Individuals that are recommended prosecution by a CID agent are typically charged with one of the following three crimes: (1) failing to file a tax return, (2) filing a false return, or (3) tax evasion. Here are some details about each:

Failing to file a tax return. This is the least serious tax crime of the three and is defined as not filing a return intentionally. So, if you must file tax returns and you do not, the maximum prison time you can get is 12 months and/or a $25,000 fine for each year you have not filed. However, most non-filers only get civil penalties and are rarely prosecuted criminally.

Filing a false return. This is the case where you file a tax return that contains a material misstatement. This is less serious than tax evasion and can get you behind bars for up to 36 months. Also, according to the Internal Revenue Code §7206 (1), you will be fined a maximum of $100,000. 

Tax evasion or fraud. This is the most serious thing you can be charged with as it is considered a felony rather than a misdemeanor, which is the case with the two situations mentioned above. Tax fraud or evasion is when you try to defeat the income tax laws intentionally, and carries a maximum prison sentence of five years. The fine you will also be called to pay per the Internal Revenue Code §7201 is up to $100,000. 

Important Note: The CID can also recommend prosecution for filing false claims against the IRS and for money laundering. Although these are not tax crimes in a technical sense, they tend to be charged in the same case as a tax crime against the same taxpayer (entity or individual). 

 

When Can the IRS Send You to Jail?

The truth is that failing to pay your taxes can eventually initiate a process to send you to prison. But, the IRS does not have the power to put you behind bars or file criminal charges against you if you have not paid your taxes, as already explained. Nevertheless, some exceptions apply. 

It all depends on the reason for not paying the due amount. If you can’t because you do not have the money, you are in the clear. But, if you intentionally try to deceive the IRS or lie on your tax return, this is regarded as tax fraud, and you could end up serving jail time. 

Let’s take things from the beginning, though. Bear in mind that most tax crimes are NOT criminal cases; they are considered civil cases. This is because the IRS understands that taxes can be confusing, and you could fill out your return incorrectly due to the complexity revolving around filing tax returns. So, if you get confused or forget to include an important document on your tax return, the IRS will most likely send you a letter asking you to address your mistakes and amend them. 

If you made a more serious error, the IRS will probably audit you and place a civil judgment against you. Again, this will NOT put you in jail as it is NOT a criminal act. It is simply a notice that you need to change your tax return and pay back your unpaid taxes. 

This is not the case when you intentionally change your taxes or file fraudulent taxes or fail to file. If the IRS thinks that you are failing to file your return altogether or intentionally fill out your tax return incorrectly (which is tax evasion in any case), you may face jail time. 

 

Should You Be Concerned That the IRS Is Going to Send You to Jail?

Generally speaking, it is extremely rare for the IRS to charge a person with a tax crime and attempt to send them to jail.  So for the most part, you don’t have to worry about the IRS sending you to jail.

But with that said, not filing your tax return or trying to hide income from the IRS is not worth it in the long run, as you will probably end up paying much more than the taxes you want to evade. And, if you are in a tight financial situation where you cannot meet your tax obligations, there are several tax relief strategies to help you get out of it. Feel free to contact us and we’ll help you find the best solution to your problem. 

What Is The IRS Offer In Compromise?

IRS Offer In Compromise form

Offer in Compromise is an IRS program that enables taxpayers to get a fresh start with the Internal Revenue Service. In doing so, they have the chance to settle their tax debt for less than the overall amount of money they owe. Therefore, if you are struggling to pay your federal or state tax debt, this could be a useful program to consider. In 2018 alone, the IRS accepted around 24,000 offers (up 24% from 2010) while rejecting just as many.

So, how can you determine if Offer in Compromise (OIC) is an initiative that could solve your tax issues? How can you get an offer accepted? How much should you offer to the IRS? We give you all the necessary details and answer these concerns below.

How Much Should I Offer in Compromise to the IRS?

This is perhaps one of the most challenging parts of submitting an Offer in Compromise. On the one hand, you don’t want to come forward with an unrealistically low offer that could ruin your acceptance chances. On the other hand, you do aspire to pay as little as possible to the IRS so that you can finally settle your tax debt. Given that each case is different, there is really no magic formula. In fact, it requires a lot of experience to be able to recognize when an offer is too low.

That being said, there ARE some ways to get some idea of how much is probably enough when you make an Offer in Compromise. Let’s start with the basics – the bare minimum offer sum. Note that it will NOT guarantee that your offer gets accepted by the IRS. It will, however, give some confidence that your offer is in the right ballpark.

What the IRS is primarily focused on is to receive offers of at least the same amount of the taxpayer’s Reasonable Collection Potential (RCP). This is a number the IRS uses to determine your ability to pay the owed taxes, and takes into consideration several liabilities, such as your:

  • Assets
  • Monthly living expenses
  • Monthly income

So, generally speaking, you can begin with an estimate of 12 months’ worth of your disposable income. Then, calculate any additional cash you can get from selling valuable assets and submit an offer with an amount higher than your RCP. This is critical, especially if you are planning on submitting an Offer in Compromise on the basis that you are unable to pay the due tax (as opposed to Effective Tax Administration or Doubt as to Liability).

The problem lies in calculating your Reasonable Collection Potential. Here are some steps to follow:

  • Estimate the income you have from all sources within a month and then subtract the full sum that corresponds to your living expenses (the necessary ones only, such as car payment, groceries, utilities, rent, etc.). The number you will get is your monthly disposable income.
  • Multiply your monthly disposable income by 12 to get your annual disposable income.
  • Add to that amount any assets that you could sell, such as valuable collectibles, investments, and an extra car. At this point, note that determining how much these assets are worth is a point of negotiation with the IRS for many taxpayers.

The result of these calculations will give you the bare minimum you can offer.

Should You Pay Installments or All At Once?

Many taxpayers wonder if they should pay the offer amount in installments rather than with one lump sum payment. Although the IRS enables monthly payments for this purpose, it is best to pay the offer in fewer than five monthly installments if it is possible. This is because the IRS will use 24 months of your disposable income for anything beyond five installments to calculate your Reasonable Collection Potential (with five or fewer installments, they will use 12 months of your RCP). If that happens, the amount the IRS will want from you will essentially double.

How To Get An Offer in Compromise Approved

As already mentioned, the IRS is highly likely to turn down offers that do not meet (even better, exceed) the taxpayer’s RCP. That being said, some factors play a leading role in making an Offer in Compromise quicker. These include:

  • Low Income W2 Earnings – You make less than $30,000 annually, and your only income source is a wage-earning job.
  • Fixed Retirement Income – You are a 55+ years of age retiree and receive a fixed income.
  • Social Security/ Disability Income – You only get a Disability or Social Security income.

Some factors, on the other hand, can contribute to longer-than-average decisions about your Offer in Compromise, such as:

  • High Balance – Offers with balances $25,000+ usually take much longer to process than those with lower balances.
  • Self-Employment – The IRS conducts in-depth research on your expenses, making sure you don’t mix your personal and business expenses.
  • Initial Rejection – If you have already submitted an offer that got rejected and want to have it reevaluated, you could be adding up to six more months to the overall procedure.
  • Other Circumstances – If you own multiple vehicles, have lots of loans, or many different deposits all over the place, you will need to do some explaining to the IRS. This pushes the process further back in time.

So, is everything lost? Not at all. You can still boost the Offer in Compromise process by doing the following:

  • Ensure you have all the necessary details – The IRS will request things like bank statements. Check that the ones you submit have all the pages, even those that you may find useless (i.e., a blank page). Then, send your Offer.
  • Provide good explanations – If your financials, for some reason, does not look right, make sure that you give a sound reason for it in the cover letter.
  • Reply fast and accurately – It is paramount that you respond to IRS requests for further clarification as timely as you can. The information you provide should also be accurate.
  • Propose the presumed maximum amount of money – The IRS expects to collect some money from you within a reasonable time period. Offering them the max sum of the presumed amount will most likely get your offer approved

To get there, ensure that you have filed all tax returns, made the required estimated tax payment for the current year, and include a bill of one or more tax debt in your offer. Business owners with employees must have made the needed federal tax deposits for the current quarter.

Besides what is reported to Form 433-A, the IRS will investigate several other factors, such as your level of education, age, asset equity, expenses, income, Collection Statute Expiration Date, and, of course, your lifestyle. If something about the way you live is contradictory to the fact that you are unable to pay your taxes, the IRS may reject your offer.

How Can I Submit An Offer In Compromise Application?

To apply for an Offer in Compromise, you will need the following Offer in Compromise Forms:

    • Form 656 – You need this to make your offer.
    • Form 433-A – This Collection Information Statement for Wage Earners and Self-Employed Individuals helps the IRS determine whether you are facing financial strain and to what extent.
    • Form 433-B – This is the same as with Form 433-A with the difference that it is a Collection Information Statement for Businesses. It serves the exact same purpose as Form 433-A.

Common Mistakes to Avoid when Filling out your OIC Application

The IRS will get all the information they need about your financial situation from Form 433-A (see above). It is, therefore, crucial that you ensure you don’t make any math errors on that form, although the form indeed requires a considerable amount of complex calculations. You certainly don’t want to put your OIC process to a halt to have incorrect calculations sorted out.

Other mistakes on OIC forms we usually see and either cause confusion or have a dramatic impact on a case are as follows:

  • Leaving empty/blank spaces – Never leave a field on a 433 or 656 empty. It is best to write “N/A” in these spaces.
  • Writing negative equity – It is essential that any negative equity is reported as zero. Many tax accountants subtract the negative equity from the taxpayer’s NRE (Net Realizable Equity) when the taxpayer’s asset (property, in this case) is worth less than they owe on it, which is wrong.

 

How Long Does It Take To Get a Response From the IRS?

Although there are no set timelines for exactly how long it will take the IRS to decide whether to reject or approve an Offer in Compromise, our experience has shown that it usually requires between 4-9 months. However, some more complex Offers in Compromise may need much more time to get resolved, which could reach 48 months from the day the OIC process was completed, which usually takes roughly 6 months. The most common factors that could drag a response from the IRS are related to self-employment. Regardless, the IRS does respond within two years.

If the IRS accepts your offer, you need to stick to your part of the deal and pay the agreed sums. Now, if your offer gets rejected, know that you can file an appeal via Form 13711 (hence, renegotiate your OIC under more favorable terms) within 30 days of the rejection notice date.

Is an Offer In Compromise the Best Option for You?

Although an Offer in Compromise is an excellent collection solution, it is not the only option you could consider. To determine that, you will need to have a trusted tax professional evaluate your tax situation, the IRS collection alternatives, and your personal finances as a means to develop the optimal approach to repay your debt. Don’t hesitate to call or contact us for a free tax consultation to see how we can help you get out of debt as painlessly and swiftly as possible while negotiating the best terms for you.