What Is The Punishment For Tax Fraud?

Tax fraud is the deliberate act of falsifying or omitting information on tax returns to evade paying the rightful amount of taxes owed. This illegal activity can involve underreporting income, inflating deductions or expenses, claiming false credits, or using other deceptive practices to reduce tax liability or unlawfully increase tax refunds. Tax fraud is a serious offense that can result in substantial civil penalties, such as hefty fines and interest on unpaid taxes, as well as severe criminal punishment, including imprisonment. The intent to deceive the IRS distinguishes tax fraud from errors or negligence in tax filings.

Civil vs. Criminal Tax Penalties For Tax Fraud

Tax fraud carries both civil and criminal penalties, each with distinct consequences. Civil penalties primarily involve financial repercussions. The most common civil penalty for tax fraud is the accuracy-related penalty, which is 20% of the underpayment due to negligence or disregard of rules. If the IRS determines that the underpayment is due to fraud, the penalty can be much steeper, reaching 75% of the unpaid tax attributable to fraud. Additionally, interest accrues on the unpaid taxes and penalties from the date the taxes were due until they are paid in full. Civil penalties can also include fines for failing to file a tax return or provide necessary information. While civil penalties do not involve imprisonment, they can result in significant financial hardship and long-term debt.

Criminal penalties for tax fraud are more severe and can include substantial fines and imprisonment. Tax evasion, a common form of tax fraud, is a felony that can result in fines up to $100,000 for individuals and $500,000 for corporations, along with imprisonment for up to five years. Filing a false tax return can lead to fines of up to $100,000 ($500,000 for corporations) and imprisonment for up to three years. Willful failure to file a tax return or pay taxes can result in fines up to $25,000 ($100,000 for corporations) and up to one year in prison. Additionally, making false statements under penalty of perjury on tax forms can lead to imprisonment for up to five years. Criminal convictions also carry long-term consequences, such as loss of professional licenses, damage to reputation, and future increased scrutiny from tax authorities.

Civil Penalties for Tax Fraud

The civil penalties for tax fraud include the accuracy-related penalty, civil fraud penalty, and late filing and payment penalties.

20% Accuracy-Related Penalty

Internal Revenue Code Section 6662 imposes a 20% accuracy-related penalty on the portion of tax underpaid due to negligence or a substantial understatement of income tax owed. This penalty is designed to discourage taxpayer negligence in calculating their tax obligations.

75% Civil Fraud Penalty

The civil fraud penalty is one of the most severe under U.S. tax law. Pursuant to IRS Section 6663 the IRS may impose a 75% penalty on the portion of underpaid tax attributable to fraud. 75% is a large sum to impose as a tax penalty, and the draconian penalty is designed to disincentivize tax fraud.

The only silver lining to the civil fraud penalty is that it cannot be imposed in addition to the 20% accuracy-related penalty. In other words, the IRS must choose whether to assess the 20% accuracy-related penalty or the 75% civil fraud penalty; it may not impose both. (IRM 20.1.5.17.3 Coordination with other penalties “The IRC 6662(a) penalty does not apply to (1) Any portion of an understatement on which the fraud penalty (IRC 6663) is imposed.”

5% Failure To File Penalty

A civil penalty is imposed when a taxpayer fails to file his tax return on the annual due date. For reference, this date is usually April 15 or April 19, but it may be extended in some instances. The amount of the failure to file penalty may vary depending on the circumstances. A civil penalty of 5% of the total tax bill for every month (or including partial months) the taxpayer fails to file is imposed initially. An additional penalty of either 100% of the balance due or $210 (whichever is lesser) is imposed if the filing is late for more than 60 days. Lastly, a penalty may be increased to 15% per month (or partial month) if the IRS finds that the late filing is due to fraud. This penalty based on fraud is capped at 75% of your underpayment due to fraud and requires the IRS to provide clear and convincing proof of fraud.  

.5% Failure to Pay Penalty

The failure to pay penalty is different from the ‘failure to file‘ penalty. A failure to pay penalty is imposed when the taxpayer files his tax return on time but does not pay the amount owed by the deadline. The late payment penalty is usually imposed at .5% of the unpaid taxes per month (or partial month), up to a maximum penalty of 25% of the unpaid taxes. There is a six-month extension to pay the balance if the taxpayer has already paid 90% or more.  

Criminal Punishment For Tax Fraud

The punishment for criminal tax fraud is severe and can include substantial fines and imprisonment. Here are the primary criminal penalties associated with tax fraud:

Tax Evasion

Tax evasion is a felony that involves intentionally attempting to evade or defeat the payment of taxes. The penalties for tax evasion can include fines of up to $100,000 for individuals ($500,000 for corporations) and imprisonment for up to five years. Convicted individuals are also required to pay the costs of prosecution.

Filing a False Tax Return

Willfully filing a false tax return is another serious offense. The penalties for this can include fines of up to $100,000 for individuals ($500,000 for corporations) and imprisonment for up to three years. This penalty applies to any individual who intentionally provides false information on their tax return to deceive the IRS.

Failure to File a Tax Return

Willful failure to file a tax return, supply required information, or pay any tax owed is a misdemeanor that can result in fines up to $25,000 for individuals ($100,000 for corporations) and imprisonment for up to one year for each year the return was not filed.

Perjury

Making false statements under penalty of perjury on tax forms can result in severe penalties. Individuals convicted of perjury related to tax filings can face fines and imprisonment for up to five years.

Aiding and Abetting

Individuals who assist others in committing tax fraud can also face criminal penalties. This includes preparers who knowingly submit false returns on behalf of clients. Penalties can include fines and imprisonment similar to those for the principal offenses.