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How Much Do I Have to Owe the IRS to Face Jail Time?

Taxpayers face multiple possible consequences for delinquent payments to the Internal Revenue Service. But just how far does the government go, and how quickly, in order to collect late tax bills?

This article will outline the limits for frozen accounts, wage garnishments and jail time for tax penalties. It will also discuss remedies for taxpayers to settle with the IRS for more favorable treatment.

Summary

Although a possible penalty for not filing or remitting taxes to the IRS, jail time is a fairly uncommon outcome for tax violations.

Generally, the IRS will pursue imprisonment only for tax evasion. Tax evasion, unlike most tax penalties, is a criminal violation in which the taxpayer takes concrete actions to evade payment of taxes at either the federal or state level.

Jail Time

Although a possible penalty for not filing or remitting taxes to the IRS, jail time is a fairly uncommon outcome for tax violations. That said, there are certain cases and scenarios where the IRS will in fact place a taxpayer in jail.

Generally, the IRS will pursue imprisonment only for tax evasion. Tax evasion, unlike most tax penalties, is a criminal violation in which the taxpayer takes concrete actions to evade payment of taxes at either the federal or state level. When the violation is of federal law, the prison sentence could be for up to five years. It is likewise a federal crime to assist in someone else's tax evasion. Lastly, the IRS may pursue jail time for failure to file a tax return. In general, this offense carries a one-year sentence for each year for which a federal tax return is not filed.

One caveat to consider is the statue of limitations. The government can pursue criminal complaints against delinquent tax payers up to six years after the underlying violation.


Tax Liens

Usually the government will not resort to jailing up late tax payers. A tax lien is a more common sanction used to collect tax liabilities. A federal tax lien represents the government's claim against your assets. A lien essentially secures the government's interest in your assets; the lien can be against any asset, from your home or stock portfolio to any other physical property.

Before the government places a lien on your property, the IRS will send you a bill detailing the extent of your outstanding liability. The legal name for this letter is the "Notice and Demand for Payment." If you still do not make the required payment in response to the demand, the IRS will file another document called the "Notice of Federal Tax Lien" which will notify creditors that the federal government has a lien on a portion of your property.


Tax Levy

Whereas a lien gives the government interest in your assets, a tax levy is when the government actually seizes your property and sells it to raise the money you owe. As with a lien, the IRS will first send you a "Notice and Demand for Payment" detailing the outstanding liability. If the IRS determines that it must seize some of your property to satisfy the tax payment, it will then send a Final Notice of Intent to Levy and Notice of Your Right to A Hearing. If there is no action or payment within 30 days, the IRS will likely proceed to levy assets you either own or maintain interest in. The IRS has the right to levy your wages, funds held in an IRA or other retirement account, dividends on stocks, money in bank accounts, other forms of income, or assets. The IRS could also seize physical property such as your home or automobile and sell it for cash.


How to resolve with IRS

The IRS has immense powers to resolve non-payment through liens and levies on your assets. However, there are ways to reach an agreement with the IRS to pay less than the amount initially owed. This is called an offer in compromise or OIC.

An OIC represents an agreement between a taxpayer and government in which the taxpayer can reduce the amount paid to the IRS. Generally, taxpayers who are capable of paying the liability, even if through an installment agreement, will not be eligible for OIC.

An offer in compromise is available to taxpayers who have filled all of their tax returns, have paid estimated taxes for the calendar year, and are current on any federal taxes if the taxpayer is a business proprietor who pays employees.

Broadly, there are three circumstances which justify an offer in compromise. The first is where there is doubt to the size of the liability, meaning there is legitimate uncertainty about the dollar amount owed in taxes. The second criteria is doubt as to the taxpayer's ability to make the payment. This occurs when the taxpayer's assets, even if seized and levied, may not be sufficient to pay the initial liability. The last criteria, known as "effective tax administration," is sort of a catch-all: it describes all situations where the IRS has no doubt to liability or ability to pay, but nevertheless determines it is not feasible to collect the entire outstanding liability, for instance because doing so would create exceptional economic hardship or be otherwise unfair.


Conclusion

Taxpayers who do not pay outstanding debts face several possible sanctions from the Internal Revenue Service. The government can issue liens or levies on your property, or even place you in prison for tax evasion in especially egregious cases. However, for most tax disputes, it may be possible to achieve an offer in compromise where there exists legitimate doubts as to liability, ability or pay, or tax administration equity concerns.