In all likelihood, nothing causes your stomach to drop like receiving an envelope showing an IRS return address.
Before you panic, however, FindLaw explains that the IRS does not prosecute you for mere mistakes, such as an alleged arithmetic error on your tax return. Nevertheless, they will not let it slide. They will hold you responsible for paying any tax you actually owe, plus interest and penalties from its due date.
Tax evasion, on the other hand, constitutes an alleged deliberate and knowing act on your part to avoid paying taxes. Examples include the following:
- You fail to file your tax return when due.
- You take exemptions or deductions to which you are not entitled.
- You fail to report all of the income you earned during the taxable year.
- You title some of your assets in someone else’s name so as to conceal the fact that you own them.
- You destroy your financial records so as to avoid leaving a paper trail.
If the IRS believes you committed tax evasion, they can sue you civilly, prosecute you criminally, or both. If they win their civil suit, you likely will have to pay not only the taxes you failed to pay, but also interest and penalties from the date when you should have paid them.
Penalties for a criminal conviction depend on the exact type of tax evasion the IRS alleges you committed. For instance, a conviction for failure to file can result in a 1-year federal prison sentence plus a $100,000 fine for each year involved.