In 2024, understanding tax evasion penalties and their implications is crucial for business owners. With a 90% conviction rate in IRS criminal prosecutions, the stakes are high.

Let’s explore the nuances of tax evasion, penalties, and their legal impact in today’s fiscal landscape.

Key Takeaways:

1. File for Extensions if Necessary

If meeting the tax filing deadline poses a challenge, requesting an extension until October 15 can be a lifesaver. This action helps avoid the failure-to-file penalty, which amounts to 5% of the unpaid tax for each month or part of a month your return is late.

2. Settle Tax Debt Promptly

Ensure you pay your tax liability in full by the tax deadline to sidestep the failure-to-pay penalty. This penalty accrues at a rate of 0.5% of the tax owed per month. Alternatively, consider setting up an IRS installment agreement, a viable option to reduce your penalty while managing your payments.

3. Manage Estimated Tax Payments

Avoid penalties for underpayment of estimated tax by taking proactive steps. Increase withholding from your paycheck or make estimated quarterly payments throughout the year. This strategy helps prevent potential penalties for not paying enough tax during the year.

4. Ensure Funds for Tax Payments

When paying taxes via check, make certain that your account holds sufficient funds to cover the amount. This precautionary measure prevents a dishonored check penalty, which could be imposed if the check is returned due to insufficient funds.

What is the Difference Between Tax Fraud, Tax Evasion, and Negligence? 

In short, the biggest difference between tax fraud, tax evasion and negligence is intent. 

Tax Fraud

Tax fraud is, “an intentional wrongdoing, on the part of the taxpayer, with the specific purpose of evading a tax known or believed to be owing.” 

A person or a business purposefully or intentionally manipulates information on a tax return to reduce or avoid the amount of taxes owed. Forms of tax fraud include: 

  • Claiming false deductions 
  • Claiming personal expenses as business expenses 
  • Using false Social Security numbers 
  • Underreporting income
  • Failure to report income 
  • Neglecting reporting payroll taxes 

The Internal Revenue Service (IRS) investigates these tax fraud cases to determine if the person or company under question intentionally avoided their taxes owed. Parties who are found guilty are required to pay fines, penalties or, in the case of criminal prosecution, serve prison time. 

Tax Evasion 

Tax evasion is a branch of tax fraud. Committing tax evasion is, “using illegal means to avoid paying taxes.” There is still intentional concealment to avert paying taxes. Different forms of tax evasion include: 

  • False or improper claims
  • Omitting or concealing revenue 
  • Purposely underpaying taxes 
  • Hiding interest 

The line between tax penalties and fraud criteria can be thin, often centered on the harm caused or criminal elements involved, like workers’ compensation fraud leading to insurance fraud charges. The IRS scrutinizes financial history for signs of deliberate tax evasion. Deliberate evasion is a federal crime, inviting hefty fines up to $250,000 for individuals and $500,000 for businesses, along with a possible five-year prison term.

Negligence

The key difference between tax evasion and negligence charges lies in intent. In the case of negligence, elements can include insufficient payment in taxes due to miscalculations or unintentional errors when submitting tax forms. In order to receive this result, you must prove that omissions were done purely out of error.

Although negligence determination is better than one of fraud or evasion, there is still the possibility of being fined up to 20% of the underpayment. 

To learn more about the difference between tax evasion, fraud and negligence, read on to our guide, here.

Now, let’s talk about penalties.

Understanding IRS Penalties for Tax Evasion

When dealing with tax evasion, the Internal Revenue Service (IRS) has its own set of penalties and consequences. Here’s an in-depth look at what individuals or corporations could face:

Civil Penalties

Failure to File Penalty: If you fail to file your tax return by the deadline, the penalty can be 5% of the unpaid tax amount for each month or part of a month the return is late, up to 25% of your unpaid taxes.

Failure to Pay Penalty: If you don’t pay your taxes in full by the tax deadline, the penalty is typically 0.5% of the tax owed per month, but it can increase to 1% if the IRS issues a notice demanding payment.

Underpayment of Estimated Tax Penalty: If you don’t pay enough tax through either withholding or estimated tax payments, you might face a penalty for underpayment.

Dishonored Check Penalty: Writing a check to the IRS that bounces or is returned for insufficient funds can result in penalties.

Criminal Penalties

Tax Evasion Penalty (26 U.S.C. 7201): Willfully attempting to evade paying taxes due is a felony and can result in a fine of up to $100,000 for individuals or $500,000 for corporations, along with imprisonment for up to 5 years.

Fraudulent Return Penalty (26 U.S.C. 7206): Filing a false return, statement, or other document with fraudulent information can lead to a fine of up to $100,000 for individuals or $500,000 for corporations, and imprisonment for up to 3 years.

Willful Failure to File or Pay Penalty (26 U.S.C. 7203): Willfully failing to file a return, pay taxes, or keep records can result in a fine of up to $25,000 for individuals or $100,000 for corporations, along with imprisonment for up to 1 year.

Learn more about the average jail time for tax evasion, here. 

Final Notes

Understanding the intricate landscape of tax evasion penalties in 2024 is crucial for business owners navigating tax obligations. With the IRS’s heightened scrutiny and stringent penalties for non-compliance, staying abreast of these regulations is imperative.

This year’s tax evasion penalties underscore the significance of timely filing, prompt payment, and accurate reporting. The potential ramifications of non-compliance extend beyond financial penalties, encompassing reputational damage, credit rating impact, and legal repercussions that can severely impact businesses and individuals alike.

To mitigate the risks associated with tax evasion, it’s essential for businesses to adopt proactive measures. Establishing robust compliance protocols, seeking expert counsel, and ensuring a thorough understanding of tax regulations are pivotal steps toward safeguarding against inadvertent non-compliance.

Need Assistance With an IRS Audit?

At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.Interested in learning more? Read on to learn how to respond to an IRS audit.

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