According to the Internal Revenue Service, each taxpayer is responsible for a set amount of tax based upon their tax rate as well as any credits or deductions for which they qualify. Any taxpayer who willfully attempts to evade paying his fair share of tax---be it by misrepresentation of their tax situation, dealing in cash or engaging in tax sheltering schemes---is guilty of tax evasion.
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Penalties
Once the IRS discovers that you underpaid your tax, you will be billed the unpaid tax as well as fined additional penalties. The most common penalty assessed on unpaid tax is the Failure to Pay Penalty which is 0.5 percent of the amount owed for each month the tax is late. In cases of tax evasion the IRS may also opt to assess a fraud penalty which tacks on an additional 75 percent of the unpaid tax.
Fines
Allegations of fraud are investigated by the the IRS Criminal Investigations Unit and if sufficient evidence is found, the taxpayer may be forced to repay the tax as well as fines up to $250,000 for individuals and $500,000 for businesses in 2010.
Interest
Interest accrues on all underpayment of tax, regardless of the cause. You will be charged interest on the unpaid tax from the date the tax was due until it is paid in full. The rate of interest is determined quarterly and in 2010 is the federal short-term borrowing rate plus three percent. To determine the rate of interest for the period in which you owe tax, visit irs.gov.
Disallowance
Taxpayers found guilty of fraud are often disallowed from claiming certain credits and are audited at a rate higher than other taxpayers.
Imprisonment
Taxpayers convicted of tax fraud may be sentenced to prison. That determination depends primarily on the severity of the tax fraud as well as the strength of the evidence. When deciding whether or not to prosecute a fraud case, the IRS will consider whether or not the evidence clearly proves that it was the taxpayer's intent to defraud the government. IRS statutes 26 and 18 do not recommend prison sentences in excess of three to five years behind bars.
Common Missed Tax Deductions. While itemizing your tax return, or listing all of your deductions individually, makes filing the return more time-consuming,...
