A tax audit can be a scary and stressful experience for anyone. The idea of having the IRS closely examine your financial documents and look for errors or omissions understandably makes people nervous. While the vast majority of audits result only in the taxpayer owing additional money or penalties, some people worry that an audit could potentially lead to criminal charges and maybe even jail time. So can a tax audit actually send you to jail? Let’s take a closer look.
What triggers a tax audit?
The IRS audits only a small percentage of tax returns each year. Out of the over 150 million returns filed, less than 1% are audited. The IRS uses computer programs to flag returns that show patterns associated with non-compliance. Things that may trigger an audit include:
- Math errors in calculations
- Large, unusual deductions or business losses
- High business or personal expenses
- Unreported income
- Discrepancies between your return and forms filed by your employer or other third parties
Audits are more common for high-income earners who have more complicated returns. The IRS also targets certain occupations like small business owners who tend to have more opportunity for unreported cash income. However, anyone can be selected for an audit at random or due to an error, regardless of income level.
Most common audit outcomes
If selected for an audit, the IRS will send a letter explaining what they will examine and what documentation you need to provide. In most cases, the audit is handled by mail and does not require an in-person interview. The auditor will compare your provided information to your original tax return and look for any discrepancies.
Possible audit outcomes include:
- No changes: The auditor verifies that your return was filled out accurately.
- Small tax amount owed: You made some minor errors like forgetting some interest income, so you end up owing a small amount of additional tax.
- Additional tax + penalties: The auditor discovers unreported income or disallows certain deductions. You pay the back taxes plus penalties that typically equal 20% of what you owe.
According to IRS data, over 70% of audits result in the taxpayer owing additional tax. However, the overall majority of audits find only relatively small errors that lead to less than $5,000 in extra tax owed.
When could an audit potentially lead to criminal charges?
Most tax audits are civil administrative matters and not criminal cases. The IRS initiates a criminal investigation only if they find clear evidence of intentional tax evasion or fraud. Some red flags that could prompt a criminal probe include:
- Filing false tax documents like fake W-2s or 1099s
- Claiming the same deductions multiple times
- Using multiple Social Security numbers
- Not filing returns or paying any taxes for many years
- Using complex schemes to hide income like offshore accounts
The IRS Criminal Investigation Division conducts extensive investigations building an evidence case before recommending prosecution. Examples of criminal charges that may result from a tax audit include:
- Tax evasion
- Filing false returns
- Identity theft
- Employment tax fraud
These charges all involve intentionally deceiving the IRS in a willful attempt to avoid paying taxes owed. The IRS does not pursue criminal charges for taxpayers who simply made mistakes on their returns.
Tax penalties vs. jail time
Most tax audits stay civil and the worst outcome is owing back taxes plus penalties. While criminal tax charges can technically result in jail time, in reality most cases get settled through pleas that involve probation, fines and repayment of back taxes. Only a small minority of criminal tax cases end up with the defendant serving jail time.
According to analysis by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University, in Fiscal Year 2018:
- 587 tax cases were prosecuted in total
- 96% pleaded guilty
- 4% were convicted at trial
- Prison sentences were imposed in 54% of cases
- The average prison sentence was 16 months
Here is a table summarizing the different potential outcomes from a tax audit:
Audit Outcome | Likelihood | Consequences |
---|---|---|
No changes | 25-30% of audits | None |
Small amount of tax owed | 40-50% of audits | Pay additional tax + interest |
Additional tax + penalties | 20-25% of audits | Pay back taxes + ~20% penalty |
Criminal prosecution | Less than 1% of audits | Probation, fines, jail in rare cases |
As the table shows, the vast majority of audits result only in owing some additional money and the possibility of criminal charges is very low.
Who is at greater risk of criminal prosecution?
While criminal tax charges are rare overall, there are certain types of taxpayers who face increased risk:
Tax protesters – Individuals who openly refuse to pay taxes or file returns for ideological reasons are at high risk of prosecution. Arguments that the income tax is unconstitutional or illegal have been consistently rejected in court.
High-income taxpayers – Wealthy individuals with complex returns tend to attract more scrutiny if they are found to have underreported or not reported income. Unpaid taxes over $100,000 raise the stakes.
Small business owners – There is more opportunity for fraud such as not reporting cash income. False deductions also attract attention.
Repeat offenders – Taxpayers with a history of multiple past audits or issues are treated more harshly if problems are found again.
Mitigating risk
If you are concerned about potential criminal prosecution from an audit, there are steps you can take to minimize risks:
- Be responsive – Fully comply with the auditor’s requests rather than avoiding them.
- Hire representation – Have a tax professional advocate on your behalf.
- Be cooperative – Don’t be obstructionist, aggressive or dishonest.
- Self-report issues – If you realize you made a mistake, let the auditor know upfront.
- Watch what you say – Anything said or written can potentially be used against you.
Portraying good faith and willingness to correct errors or omissions can go a long way to avoiding escalation to criminal charges.
How to avoid audit risks
The easiest way to avoid any problems from an audit is to take steps to minimize your audit risks in the first place:
- Report all income – Remember to include interest, dividends, freelance and side income.
- Keep documentation – Have receipts, invoices, bank records etc. to support all deductions and credits claimed.
- Double check figures – Verify that all calculations are done correctly before filing.
- Be conservative – Only make deductions you are clearly entitled to without stretching interpretations.
- Disclose offshore assets – If you have foreign accounts or assets, disclose them properly on your return.
- File on time – Missing filing deadlines flags your return for potential audit.
Preparing an accurate return with all income reported and deductions properly documented is the surest way to avoid any issues down the road.
Conclusion
While the idea of a tax audit leading to criminal charges is unnerving, in reality most audits result only in owing some additional tax and penalties at worst. Less than 1% of audited returns have problems egregious enough to warrant criminal prosecution. For ordinary taxpayers who avoid intentionally evading taxes, the chances of jail time from an audit are extremely low. Taking care to accurately report all income and claim only valid deductions is the key to minimizing audit risk and avoiding any criminal exposure. With the right tax preparation, you can spare yourself the stress of worrying about an audit leading to criminal consequences.