IRS Audits can be overwhelming, for obvious reasons. This explains why there is so much anxiety relating to tax filing, and subsequent IRS Audits, in case something goes wrong. Therefore, it is highly important to ensure that all tax filings are carried out after proper consideration of all income and expenses, with a clear-cut idea regarding the red flags and how they can be avoided to the utmost extent.
But the question remains: why is it important to identify audit red flags, and avoid IRS Audits?
IRS Audits can be a daunting incidence, because of the legalities, as well as the technicalities involved. It requires the individual being audited to hire a lawyer, and then go through all the processes in order to justify the stance. It might lead to a loss of repute, with an obvious financial loss in terms of lawyer fees, as well as penalties that might follow in case the audit turns out to be unfavorable.
Having said that, this is the maximum extent of damage that is likely to occur as a result of an IRS Audit. IRS Audit cannot result in an individual being jailed. However, in the case of several malpractices, and constant lies on the tax returns, the extreme outcome can result in imprisonment. However, that is very rare. Therefore, the short answer to the question is that No, IRS cannot send an individual to jail for not filing the tax returns.
However, the best and the smartest move is to ensure that the IRS Audit is altogether avoided so that there is no such risk involved, to begin with.
How can IRS Audits be avoided?
Regardless of the fact that there is no foolproof way to ensure that IRS never audits a given individual, it can be seen that there are some red flags that can be avoided altogether, in order to ensure that the probability of IRS Audits is minimized to a minimum potential. Some of these red flags are as follows:
- Failure to report all taxable income
- Abnormal fluctuations in reported income
- Claiming higher-than average deductions, and credits
- Large charitable deductions
- Improper categorization of business expenses
- Claiming excessive rental losses
What to do in case an IRS Audit is initiated?
It is very important for individuals to understand the fact that while IRS Audits can be daunting, the best course of action is to plan and strategize. A lot of individuals make the mistake of dodging the IRS and ignoring their emails. This never works. In fact, it might lead to more concrete evidence of red flags within the system, and eventually, they might find it out.
In the case where an IRS Audit is initiated, the best course of action is to contact a specialized and seasoned IRS lawyer. It is important to make sure that a clear communication channel is formed with the IRS official, and as much cooperation is extended to the IRS officials, as possible.
Once these preliminary steps have been sorted, it becomes rudimentarily important to ensure that top-notch correspondence is maintained, with complete honesty. IRS never takes offense to honest mistakes. However, if they find out that they are being lied to, or if the financial statements are not accurate, it might result in catastrophic repercussions.
Criminal vs. Civil Proceedings
Making a few honest mistakes on the tax records does not form the basis of being jailed after an IRS Audit. Most tax law violations are considered to be civil offenses, and therefore, they are not categorized under criminal offenses. In case an individual is audited, a civil judgment is placed against an individual to refund the amount owed.
However, it is important to understand that an individual can only go to jail if criminal charges are filed against a given individual, which further escalates into prosecution and eventual sentencing towards the criminal proceedings. In this regard, it is important to understand that the most common tax crimes are tax fraud and tax evasion. Tax evasion mostly occurs when individuals make a conscious attempt to avoid taxes. Tax frauds mostly comprise of individuals trying to deceive the IRS.
Under what circumstances can an individual be jailed followed by IRS Audit?
The IRS itself is not a court. Therefore, it does not hold the power or authority to send anyone to jail. However, in order to have solid grounds of being jailed, the IRS needs to be convicted of tax evasion, and the proof must be concrete for the court to decide if an individual should be jailed.
In order to proceed legally after the IRS Audit, the IRS normally presents the case to the Department of Justice. Based on the facts that are presented, the Department of Justice then decides if it calls for a warrant and if they still want to move forward with it. However, it must be noted that the Department of Justice is only likely to proceed with the case if they feel that there is sufficient evidence that forms the basis of proof beyond a reasonable doubt that the tax law was not upheld by the individual.
After subsequent trials, the court then decides on the magnitude of the offense, and if the individual should be jailed, or a financial penalty be imposed on the given individual.
What is the most likely outcome of an IRS Audit?
In the case where an IRS Audit proves to be unfavorable for the individual, the most likely course of action (or punishment) is regarding civil penalties. In the case where IRS Audits results in a change of civil fraud, the penalties mostly range from a threshold of 15% to 75%. This is mostly contingent on circumstances, willingness, as well as the extent of the offense itself.
Furthermore, it is also important to note that IRS also charges interest on the penalties, in order to ensure that there is an incentive to pay these penalties at the earliest to reduce the interest charge.
Therefore, in the case where an IRS Audit is initiated, it is best not to freak out. Planning strategically is very important, in order to smartly tackle the issue. The probability of an individual going to jail is minute. However, if there are several, and continual proofs of dishonesty and non-compliance, the judge might reason enough to penalize by sending an individual off to jail.