If you committed accidental tax evasion, you may not have as much to worry about as you think, but you still need to pay the taxes you owe.
What is tax evasion?
Tax evasion is when you use illegal means to avoid paying taxes. This usually means lying about your income and/or deductions.
So it’s not really technically possible to accidentally commit tax evasion. However, even accidentally not paying your taxes could cause you to owe penalties and interest.
You also want to be careful when filing your taxes because you don’t want to have to be in a position where you’re trying to convince the IRS you weren’t committing tax evasion.
What is tax fraud?
Tax fraud is similar to tax evasion but covers more. Tax fraud is when you give false information on your taxes.
Many times, the purpose of tax fraud is tax evasion. Other times, people might overstate their income to get benefits like the Earned Income Tax Credit or additional Social Security payments.
Like tax evasion, tax fraud requires an intentional act. You technically can’t commit accidental tax fraud. You may still owe taxes and penalties even if you made a mistake.
What do I do if I committed accidental tax evasion or tax fraud?
If you thought you committed accidental tax evasion or tax fraud, you can breathe a sigh of relief knowing that you haven’t committed a tax crime that can land you in jail. However, you do need to make the situation right as soon as possible.
You’ll usually need to file an amended tax return for the years you filed incorrectly. You’ll also need to pay the additional taxes you owe. Once the IRS gets your amended tax return and payment, it will send you a bill for the interest and penalties.
If you didn’t file at all, you’ll need to file a tax return for that year. You’ll need to use tax forms or software for that year rather than the current year since tax rates and other calculations change each year.
How far back do you need to correct your taxes?
The IRS has different amounts of time to go after you for not filing your taxes correctly. It depends on exactly what happened.
- General rule: The general rule is that the IRS can go back three years from the due date. So for tax year 2021, due on April 18, 2022, the IRS has until April 18, 2025, to audit those tax returns.
- Substantial understatements of income: If you have a substantial understatement of income, the IRS gets six years instead of three. A substantial understatement is if your income is off by 25% or more. This can be from underreporting your income, claiming too high deductions, or a combination of both.
- Never filed a tax return: If you never filed a tax return for a certain year, the IRS can go after you for that year forever. An example of this situation is if you thought you didn’t make enough to have to file a tax return but actually did.
- Fraudulent tax return: The IRS also has no time limit if they can prove civil or criminal tax fraud. Even though you can’t accidentally commit tax fraud, you should still take note. The burden of proof for civil tax fraud is a preponderance of the evidence. If your tax situation is bad enough, the IRS might be able to convince a judge that it’s just a little above 50/50 likely that you committed civil tax fraud.
What will you owe in penalties?
If you made a mistake and underpaid your taxes, the typical penalties are:
- Paying all the taxes you owe
- Paying interest from the date your taxes were due until the date you pay
- Paying additional late payment penalties of 0.5% per month
- If you understated your taxes owed (not income) by the greater of 10% of what you owed or $5,000, you may owe an additional penalty of 20% of the understated taxes.
In some situations, you may be eligible for penalty relief that can reduce or take off the penalties.
When should you not file amended or missing tax returns?
You may not want to file amended or missing tax returns if you’re beyond the three-year or six-year limit for the IRS to come after you for owing taxes. However, there’s a risk that the IRS might say the six-year limit applies instead of the three-year limit or that it’s a situation where there’s no limit.
The best thing to do is to discuss the situation with a tax lawyer, CPA, or Enrolled Agent. Explain that you made a mistake or didn’t file taxes in previous years. They’ll help you figure out if the statute of limitations (time limit for the IRS to go after you) applies. They can also help you make sure you do your taxes properly and avoid mistakes in future years.