On October 17, 1931, Judge James H. Wilkerson sentenced Chicago gangster Al Capone to 11 years in federal prison for income tax evasion. The penalty was unusually severe because Capone was really being punished for turning Prohibition-era Chicago into a war zone during the 1920s. Unable to convict him of murder, the authorities worked with the IRS to use the U.S. tax laws to put him away instead.
Nearly 90 years later, Capone’s sentence continues to create assumptions about the average jail time for tax evasion in the United States. Can you go to prison for eleven years even if you’re not a public enemy?
Theoretically, yes. Are you likely to? No.
Let’s take a closer look at the penalties for tax evasion, including incarceration.
Fraud vs. Negligence in U.S. Tax Crimes
Although the IRS estimated that 17% of American taxpayers disregard the tax code in one way or another, the number of tax convictions that occur each year is relatively small. According to the United States Sentencing Commission, 584 tax fraud convictions occurred in 2017.
When it comes to penalties, the IRS distinguishes between income tax fraud and negligence. To be guilty of fraud, you must intentionally do one of the following:
- Fail to file your income tax return.
- Prepare and file a false return. This includes falsifying documents and using a false Social Security number.
- Fail to report all income that you received. According to the IRS, service workers paid mainly in cash or those who receive tips (e.g. wait staff and hairstylists) are frequent offenders.
- Fail to pay all taxes owing. This includes underpayments.
- Make false or fraudulent claims. Examples include overstating exemptions and deductions, presenting personal expenses as business costs, and claiming a nonexistent dependent.
Honest mistakes made due to carelessness are treated as acts of negligence rather than intentional income tax evasion. Although the IRS could theoretically fine you 20% of the underpayment, you probably don’t have to worry about incarceration.
If the IRS believes that you have committed income tax fraud, it will conduct an investigation through the IRS Criminal Investigation, which is its law enforcement division. The tax system relies heavily on voluntary compliance, so any violations are punished by both civil and criminal penalties, such as fines and incarceration.
Federal Penalties for Income Tax Fraud
If you are found guilty of income tax evasion via fraud, whether or not you go to jail will depend on the type of fraud involved. Below are some examples of potential punishments for certain types of income tax fraud.
Attempting to Evade Paying Income Taxes
This offense is a felony and can be punished by:
- Imprisonment for up to five years OR
- A fine of up to $250,000 for an individual offender or $500,000 for a corporation OR
- Both a fine and imprisonment, plus the prosecution costs
False Statements and Fraud
If convicted, you are guilty of a felony and can be:
- Imprisoned for up to three years OR
- Fined up to $250,000 for an individual offender or $500,000 for a corporation OR
- Both a fine and imprisonment, plus the prosecution costs
Other tax crimes are punished as misdemeanors, meaning that you could go to prison for up to a year, be fined up to $100,000 ($200,000 if you run a corporation), or both, plus the cost of prosecution. Examples of misdemeanor tax offenses include intentional failure to:
- File a tax return
- Pay tax when required by law
Unless you are accused of committing multiple violations, the jail time you risk won’t come close to Capone’s sentence. Five years is the usual maximum, but if you made a mistake or the alleged evasion was due to negligence instead of willful fraud, this can be a frightening prospect.
Contact an Experienced New Jersey Tax Attorney
All IRS investigations start with an audit. If you receive a letter indicating that the government wants to inspect your books and records and you know that your tax return had issues like unreported income or personal expenses presented as business costs, contact an IRS audit attorney immediately.
At Paladini Law, we have worked with many clients who worried about mistakes or intentional missteps in their income tax reporting. Attorney Brad Paladini holds a Master of Laws in Taxation from a highly rated tax law program and has handled many risky and complicated audits. He will review your situation, give you the honest advice you need to make informed decisions, and guide you as your case proceeds. For more information, please contact Paladini Law or call 201-381-4472.
