The Internal Revenue Service (IRS) helps ensure that each individual and business pays their fair share in federal income taxes. One of the ways that the IRS tracks tax compliance and enforces income tax law is through annual tax filings and random tax audits. Every income-earning taxpayer must file forms with the IRS at least annually, if not quarterly, to ensure they pay what they should. The IRS will audit or carefully scrutinize some returns at random and others based on potential errors or fraud.
When an individual or business fails to pay the appropriate amount in taxes, the IRS often discovers that oversight through reviewing their paperwork or conducting an audit. In scenarios where the underpayment of taxes appears to be an intentional act, the IRS may initiate an audit or may recommend federal prosecution.
What are the potential consequences for those accused of tax evasion?
Major tax penalties
When the IRS determines that a person or business failed to pay the full amount of taxes they owed, the organization will send formal notice of the tax shortage. Not only will the taxpayer need to cover the outstanding amount still owed in income taxes, but they will also have to pay penalties and interest.
The IRS begins calculating interest from the date that the tax was theoretically due, not the date that someone uncovers the unpaid taxes. There could be several years of interest due all at once when a taxpayer receives notification of an alleged shortfall. A payment plan may be necessary if the taxes still owed are substantial.
Criminal prosecution
The federal government will prosecute those who intentionally misrepresent their situations or otherwise seek to intentionally avoid their tax responsibilities. For an individual tax evasion could mean up to five years in jail and up to $250,000 in fines.
When it comes to business-related tax evasion claims, accounting or executive professionals from the organization might face charges in addition to whatever Financial penalties the organization must cover. Those accused of tax crimes will potentially be able to fight back by providing evidence of their best efforts at compliance or countering claims made by the IRS with personal or business records.
Understanding the penalties possible in a tax evasion scenario can help those accused of underpaying their taxes decide what to do next.
