Many taxpayers and small business owners feel anxious about the prospect of being audited by the IRS. Even when they know they've done nothing incorrect, they still worry, "Will I go to jail if I am audited?" To address this concern, it's essential to understand what an audit entails, the potential for tax evasion charges, and when it's crucial to seek legal counsel.
Understanding Tax Audits and Potential Outcomes
An IRS audit is a review/examination of an organization's or individual's tax filing, plus their accounts and financial records, to ensure information is reported correctly according to tax laws and to verify the reported amount of tax is correct. While audits themselves are not accusations of wrongdoing, they can uncover errors or discrepancies in your tax returns.
Willful vs. Unintentional Errors
Intention is the critical factor that differentiates a simple error from a crime in the eyes of the law. While unintentional mistakes may result in penalties and interest owed, they do not usually lead to criminal charges. Even fairly significant discrepancies, if born out of ignorance or an honest mistake, are unlikely to lead to criminal charges.
On the other hand, if an audit uncovers intentional attempts to evade tax obligations, this could escalate to income tax evasion charges. The IRS looks for patterns and evidence of willful or deliberate deception rather than punishing taxpayers for minor mistakes.
What Constitutes Tax Evasion?
Tax evasion, a form of tax fraud, involves deliberately misrepresenting or concealing information to reduce your tax liability.
Examples of actions that could be considered tax evasion if discovered during an audit:
- Underreporting income: Deliberately omitting income from your tax return.
- Keeping false financial records: Maintaining books that intentionally hide or falsify information about your finances.
- Claiming excessive or false deductions: Reporting false expenses to decrease taxable income.
- Intentionally failing to file tax returns: Not submitting annual tax returns as required.
It's crucial to note that negligence or ignorance of tax law is not the same as fraud. However, if solid evidence of fraud is found, the case may be referred to the Internal Revenue Service Criminal Investigation Division for potential criminal prosecution.
Penalties for Tax Evasion
Under 26 U.S. Code § 7201, individuals or entities found intentionally avoiding tax payments could face severe consequences. This includes being charged with a felony, which may result in fines of up to $100,000 for individuals and up to $500,000 for corporations. Additionally, offenders could face imprisonment for up to five years.
When to Involve a Tax Fraud Defense Lawyer
If you are undergoing an IRS audit, you may not initially need an attorney. The process can often be navigated with the help of a tax professional. However, if, during the audit, you become concerned that the IRS might accuse you of tax evasion or another form of tax fraud, consulting with a defense lawyer, like ours at Brad Bailey Law should be your immediate next step.
An experienced tax attorney can provide legal advice, represent you in dealings with the IRS, and help develop a strategy to address any accusations of wrongdoing. The earlier a lawyer is involved, the better your chances of a favorable outcome.
Knowledge Is Your Best Defense
The prospect of facing tax evasion charges can be frightening, but understanding the distinction between simple mistakes and willful fraud can alleviate some of the stress associated with IRS audits. For taxpayers and small business owners, staying informed about your obligations under tax law, maintaining accurate records, and consulting with tax professionals can help prevent the inadvertent errors that trigger audits. And if you find yourself in a situation where legal issues might arise, seeking legal advice sooner rather than later can make all the difference.
Whether you're currently facing tax evasion charges or are concerned about potential future charges, our team is here to provide the guidance and support you need. Don't hesitate to reach out.