Penalty for Filing a False Tax Return

penalty for filing a false tax return

It can be quite tempting for people filing returns or even a professional tax preparer to fudge the numbers a little to get a bigger refund during tax season. While the IRS overlooks many minor inaccuracies, they come prepared with everything they have when they do launch an enforcement action. 

When you’ve been suspected of fraud or making false statements on tax returns, you could face serious consequences and should speak with a tax lawyer as soon as possible. As such, you could be liable for criminal or civil penalties if you file fraudulent tax returns. 

Moreover, civil penalties are more common as the government has to meet a lower burden of proof and dedicate fewer resources to the criminal tax investigation. For understating your income, there are multiple levels of accuracy-related penalties. The most common is negligence (failing to make a reasonable effort to comply with tax laws) and severe understatement of income, both of which carry a penalty of 20% of the tax underpayment.

Meanwhile, a more serious problem is civil fraud. It could be a case of civil fraud if there is clear and persuasive evidence that some of the understatement of tax was due to fraud, and that the taxpayer’s motive was to escape the assessment of tax that he or she believed was owing. The civil fraud penalty is equal to 75% of the tax underpayment.

The IRS’s most potent enforcement tool is felony criminal legislation. When the IRS files a criminal complaint, it most certainly has a lot of evidence. A criminal conviction for tax evasion can result in a five-year prison sentence, as well as significant fines and levies to cover the cost of prosecution.

What Happens if You Lie on a Tax Return?

One of the most common criminal tax violations is when you commit tax fraud. Under Internal Revenue Code I(IRC) 7201, anybody who knowingly seeks to evade or defeat any tax or payment imposed by federal tax law is guilty. As such, committing tax fraud is a federal offense that carries stiff penalties and the possibility of prison time. Furthermore, you committed tax fraud if you lied on your tax return. 

Moreover, tax fraud is defined by the IRS as “the deliberate and material submission of false statements or fake documents in connection with an application and/or return.” Investigators will look for any signs of fraud, including but not limited to:

  • Underreporting income
  • Using a false Social Security number
  • Falsifying documents
  • Intentionally failing to pay taxes

Since tax regulations are complicated, auditors are trained to uncover purposeful fraud, such as overstating deduction amounts, manipulating records, or concealing income. If the auditor discovers intent, it could be considered fraud, and you could face penalties, which vary from case to case basis. If the auditor finds that the discrepancy was caused by carelessness, you may still be punished, albeit at a reduced amount. 

As mentioned, the consequences of criminal tax fraud vary depending on the circumstances. There are five different types of potential outcomes, each with varying degrees of severity:

  • The IRS will contact you if there are any inconsistencies.
  • You will be audited by the IRS.
  • Certain credits and deductions will be denied in the future.
  • Interest and civil penalties.
  • Criminal or civil charges.

The IRS Will Contact You If There are Any Inconsistencies

The US Internal Revenue Service (IRS) may send you a CP2000 notice, which is a notice of potential changes to your tax return. This notice is not a formal audit, but rather a notice that the IRS is proposing a change in your tax filing status.

You’re Being Audited by the IRS

The IRS is auditing your tax return in order to verify the financial information you provided. An irregularity on your tax return, which could be as simple as a little error, frequently triggers an audit. You may avoid or quickly pass an audit if you are honest when submitting your return.

Certain Credits and Deductions will be Denied in the Future

You could be restricted from utilizing certain credits or deductions in future returns for up to ten years if you claimed them incorrectly.

Interest and Civil Penalties

You may suffer civil penalties depending on the circumstances. The severity of the situation determines the fines and interest rates. The bigger the fraud, the greater the penalty. A civil fraud penalty of up to 75% of excess tax could be imposed.

Criminal Penalties or Civil Charges

The IRS may seek civil or criminal felony charges for tax fraud in the most egregious situations. Although the IRS does not prosecute many cases each year, they do pursue more serious tax fraud.

Can you go to Jail for an Incorrect Tax Return?

Making a mistake or filing your tax return erroneously will not put you in jail. If, on the other hand, your taxes are incorrect by design and you purposefully omit items that should be included, the IRS may see your actions as fraudulent and pursue you criminally. 

The intent is what determines whether or not criminal action will be taken. If you simply make a mistake and take action to correct it, then it is not unlawful – but if you do not intend to commit a crime, it does not mean you are breaking the law.

In comparison to non-filers who do not pay, the IRS is more lenient with those who file but cannot pay. Late payment penalties are substantially higher than failure to file penalties. If you file your return, the IRS will not throw you in jail for not paying your taxes.

Furthermore, the following actions can result in a one to five-year prison sentence:

  • Committed Tax Evasion: Any action made to evade tax assessment, such as filing a false tax return, can result in a five-year prison sentence.
  • Helped Someone Evade Taxes: Depending on the circumstances, assisting other people in evading their tax obligations can result in up to 5 years in prison.
  • Failed to File a Return: Failure to file a return can result in a one-year jail sentence for each year you fail to do so.
tax evasion penalty

Tax Evasion Penalty

The penalty for tax evasion is no joke. There are civil consequences (like fines and penalties) and criminal consequences (like prison time).

Subscribe to our newsletter for updates that will save you tax

Related topics

irs 10 year rule

What is IRS 10 Year Rule

The IRS 10 year rule limits a beneficiary receiving IRA distributions. But there are differences between Traditional and Roth IRAs.

types of tax evasion

Types of tax evasion

There’s a difference between tax evasion and tax avoidance. One is legal, and the other will get you jail time. Learn the different types of tax evasion.