The tax system in the United States is known as a voluntary compliance one. This means simply you voluntarily report your financial information and hand over the mulla. If you don’t, then the involuntary part of the equation comes into play. This is better known as the IRS audit. The fear of an audit can bring many grown men to tears, but the fear of going to jail from an IRS action is even greater. So, is there any real risk the IRS is going to put you in jail?
Let’s start off with a simple thought. What is the purpose of the IRS? The purpose is to collect tax revenue for the federal government. The agency goes about that in a number of ways. The primary method for “encouraging” compliance is to do audits. In these audits, the agent for the IRS looks for people underreporting income or overstating deductions. So, what if the agent finds something?
In the massively vast majority of cases, an audit that turns up something is going to result in the assessment of further taxes, interest on those taxes and penalties. You’ll not jail time is not mentioned anywhere in that. Why? Well, it is hard to pay the IRS if you are sitting in a cell. The IRS is in the business of maximizing the “milk from the cow”. Putting the cow in jail doesn’t accomplish that.
I can see you thinking it now:
“Yeah, but I’ve heard all kinds of horror stories about the IRS. What about that actor who was put on trial for tax fraud? What about that race car driver? I also read about a tax attorney going to jail.”
These are all true. The IRS does put famous people on trial. Why? Because they are famous! What better way to “encourage” us regular folks to pay than if the IRS puts the winner of Survivor in jail? A certain amount of fear goes a long way when it comes to collecting taxes! As for tax attorneys and CPAs who are indicted, the IRS is definitely going to take a grim view towards those that are promoting strategies to illegally evade paying taxes.
The tax code is complex. Money Magazine used to do study every year where it would send out the finances of a fictional family and ask 10 different CPAs to prepare their taxes. All the CPA would come up with different returns and only one would be close to the correct answer. Did that mean the other nine fictional clients were going to jail? Of course, not. They would have to pay a bit more, however.
As long as you try to play straight on your taxes, you have nothing to fear. Try something clever, however, and all bets are off.
