IRS Penalty for Undeclared Income
"Undeclared income" is a term that refers to the refusal to disclose one's annual earnings in a yearly tax return. Doing so in the United States is a federal offense. Yet every year, people deceive the Internal Revenue Service in order to pay less taxes. Undeclared income---also known as tax evasion or tax fraud---can manifest itself in several ways. For example, an individual might simply misrepresent the amount of taxable income they made during the course of a fiscal year. Some prepare false statements to make it appear as though they earned less. Others overstate tax-deductible donations made to churches or civic organizations. Still others avoid declaration because of illegal business ventures such as drug trafficking and smuggling. The stiff penalties imposed by the U.S. government vary from count to count.
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What Counts as Income
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The IRS has many rules and regulations that determine what is and what is not taxable income, which is partly responsible for the yearly "tax gap," which is the amount of money owed to the IRS that citizens forget or refuse to pay. Sometimes citizens are simply unaware that the amount they did not declare was taxable. For example, scholarships awarded to university students are not taxable if they are spent on books, fees and supplies. However, the income must be reported on a tax return if the scholarship money was spent on room and board. Legal settlements such as breach of contract, compensation for lost wages and punitive damages are to be declared on tax returns, while court awards for injury or illness are tax-free. Every year, the IRS updates and publishes the list of what does and does not count as taxable income.
Failure to Pay
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When a person simply fails to pay his or her taxes in whole or in part, the IRS must first determine the penalty period. The maximum rate the IRS may penalize a person for a simple failure to pay (FTP) violation is 25 percent of the unpaid tax. FTP penalties are usually leveled against a taxpayer when the unpaid portion of taxes is unintentional.
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Tax Evasion
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The term to "evade or defeat" refers to a person who willfully attempts to pay less taxes (or even no taxes at all) by illegal means. A person may not willfully file an erroneous income report with the IRS, nor may he or she disclose any information to a tax commissioner that misrepresents another person's tax information. In fact, any other attempts at evasion not covered in the tax code are considered felonies and are punishable by law.
Penalties
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Tax evasion penalties vary greatly depending on the specific charge and the nature of the charge. If a person is convicted of undeclared income or attempting to evade taxes, he or she may be punished by fines, jail time or a combination of both. Attempts to evade or willful failure to collect may result in up to five years in prison, $250,000 in fines or any combination. These penalties include prosecution costs. Fraud and false statements carry up to three years of jail time and the same amount in fines. The willful failure to pay tax or supply information can carry a prison sentence up to one year and $100,000 in fines.
Proving Undeclared Income
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Because the IRS must prove that a party was responsible for payment and willfully deceived the organization, simply forgetting to pay or declare a portion of one's taxes rarely results in such stiff punishment. When an audit is ordered, the investigation must demonstrate beyond a reasonable doubt that earnings were undeclared on the tax return intentionally. Otherwise, FTP charges apply.
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