What Is the Penalty for Tax Fraud?
Tax fraud can bring civil and criminal penalties. The civil fraud penalty is 75% of the underpayment caused by fraud. Criminal tax evasion is a felony punishable by up to five years in prison and fines up to $250,000 for individuals, plus prosecution costs, and filing a false return can bring up to three years. Honest mistakes and negligence are not fraud; fraud requires intentional wrongdoing.
The tax system distinguishes sharply between mistakes and fraud. The difference is intent.
Mistake, negligence or fraud?
| Conduct | Typical consequence |
|---|---|
| Honest mistake | Tax plus interest; penalties may be waived for reasonable cause |
| Negligence or substantial understatement | 20% accuracy-related penalty |
| Civil fraud (intentional) | 75% penalty on the portion of the underpayment due to fraud (26 U.S.C. 6663) |
| Criminal fraud | Prosecution, prison, fines |
Criminal tax charges
- Tax evasion (26 U.S.C. 7201): a willful attempt to evade or defeat tax is a felony punishable by up to 5 years in prison and fines up to $100,000 under the statute ($500,000 for corporations), plus costs. The general federal fine statute raises the maximum fine for individual felonies to $250,000 (18 U.S.C. 3571).
- False return (26 U.S.C. 7206(1)): willfully signing a return you know is materially false is a felony punishable by up to 3 years.
- Willful failure to file or pay (26 U.S.C. 7203): a misdemeanor punishable by up to 1 year per year.
- Aiding or assisting false returns, often charged against preparers.
Courts also order restitution of the tax owed.
Common badges of fraud
Keeping two sets of books, hiding income or assets, false documents, cash-only businesses with unreported income, fake deductions or dependents, and offshore accounts not reported.
Time limits
There is no limit on assessing tax for fraudulent returns (26 U.S.C. 6501(c)). Criminal tax prosecutions generally must start within six years for most offenses.
Voluntary disclosure
The IRS Criminal Investigation voluntary disclosure practice allows taxpayers who willfully failed to comply to come forward before the IRS contacts them, which can reduce the risk of prosecution, though civil penalties apply. It requires careful handling by a lawyer.
If you are under investigation
If special agents from IRS Criminal Investigation contact you, or a civil audit turns to questions suggesting fraud, stop and talk to a tax lawyer before answering. Attorney-client privilege offers protections that accountants may not.
If you suspect someone else, see how to report tax fraud.
Sources
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This article is general legal information, not legal advice, and reading it does not create an attorney-client relationship. Laws differ by state and change over time; talk to a licensed attorney in your state about your situation.