How to Avoid Jail When You Owe Back Taxes – What to Do if You Can’t Pay Your Taxes

When legendary comedian and actor Eddie Murphy accepted a lifetime achievement award at the 2023 Golden Globe ceremony, he offered young entertainers advice on how to succeed and survive in the entertainment industry.

“Pay your taxes,” Murphy warned.

It was good advice for young entertainers because it was good advice for anyone.

Some people don’t realize that you can go to jail for not paying taxes. And if you don’t want to go to jail, you need to come up with whatever money you owe the IRS, plus penalties and interest.

Fortunately, there are other ways to avoid jail or other serious penalties over unpaid taxes. If the best way is to pay your taxes on time, the second-best way is to be upfront and responsive with the IRS when you have failed to pay taxes.

It is easier to address your tax problems before they grow too large. You can work with the IRS to manage your tax problems before the amount owed becomes too large to manage. Indeed, it is expensive for the IRS to investigate and prosecute those who don’t pay their taxes.

So, it is in the government’s interest, as well as yours, to resolve tax issues without anyone going to jail.

What Are Back Taxes?

When you fail to pay taxes, or only partially pay the amount owed, what’s left is called “back taxes.” The IRS makes you pay interest and penalties on back taxes, meaning your situation gets worse.

So, if you miss your tax bill for one year, the debt remains until it is paid. If you continue not paying taxes the following year, that original debt grows, with interest and penalties adding to the total amount owed.

Unpaid back taxes can hurt individuals or businesses in several ways. Left unaddressed, they are a debt that will continue to grow through interest and penalties. That debt can affect your ability to obtain credit or a loan. If you are owed refunds for previous years, the IRS can keep that money by defining it as a contribution to the U.S. Treasury.

The IRS can also place a tax lien on your property, a step that could lead to foreclosure. Your passport can even be revoked – all from failing to pay or file your taxes.

But don’t make the mistake of thinking the IRS is your only concern. There are different types of taxes. Along with federal taxes, we pay state and local taxes every year. That includes income taxes, property taxes, sales taxes, and school or residential taxes. State and local governments can assess penalties, seize property or impose tax liens the same way their big brother on the federal level does.

Can You Go to Jail for a Back Tax?

Can you go to jail? Yes. Will you go to jail for back taxes? That answer isn’t so clear.

For the most part, people who are unable to pay a tax bill, but are willing to work with the government to resolve the issue, are not headed to jail. There are several steps between missing a tax payment and jail, and each of those steps includes an opportunity to resolve your tax problems without facing incarceration.

The key is taking responsibility. If you are contacted by the IRS, respond promptly. If you are in need of an alternative to paying a large tax bill, the IRS may be willing to make a payment plan or settle for less than the total amount you owe.

If you wait, or if you try to avoid the IRS, your problems don’t go away. They grow. The original tax can grow through interest, fines and other costs. These added costs can be avoided or reduced by action on your part. Alerting the IRS about your situation, cooperating with the agency on a solution, goes a long way toward reducing penalties or punishment for avoiding the tax man.

Put another way: Any action you take to avoid an assessment of your tax obligations can result in one to five years in prison. Plus, you can get one year in prison for each year you fail to file a return.

What Can the IRS Send You To Jail For?

It is tough to plead ignorance when it comes to your tax obligations. Founding Father Benjamin Franklin wrote that “Nothing is certain except death and taxes” in 1789, so his words of wisdom are almost exactly as old as the country itself.

Death is not a likely outcome for failing to pay taxes, but imprisonment is. The government can prosecute criminal penalties for:

• Tax evasion
• Tax fraud
• Not filing your taxes

Not filing taxes at all is a common place for trouble to begin. The flip side of that – filing your taxes promptly – is the best way to avoid possible trouble. Honesty and transparency with the IRS establishes a solid relationship and helps with any remedy you seek, such as creating a payment plan or reducing your tax burden.

Tax evasion is deliberately failing to pay all or part of the tax you owe. That can include failing to file your taxes, but it also includes reporting lower income amounts in order to reduce your tax obligation. Reporting false or exaggerated deductions is another form of tax evasion.

Tax fraud includes tax evasion but also other means of avoiding or reducing your tax burden. It can be fraud if you report personal expenses as business expenses, or if you file using a false Social Security number. False documents, such as a W-2, are also examples of tax fraud.

The IRS generally takes action within three years of the offense, or offenses. The IRS can react more quickly depending on the amount of money in question.

What Can’t the IRS Send You To Jail For?

Criminal charges and jail time do not apply to every tax situation. The IRS can’t or won’t prosecute you criminally for several actions:

• Mistakes on taxes: A mistake – by definition, an unintentional error – is not a criminal act. Using mistakes as excuses can be criminal, but honest mistakes are not.
• Being unable to afford tax bill: If you can’t afford your tax bill, your worst reaction is to lie or avoid the IRS. If you file your taxes honestly and are unable to pay, the IRS will work with you to address the problem. In some cases, which could mean reducing your taxes. More often, it means setting up a payoff plan.
• Tax avoidance with write-offs or a business entity: These can fall under the category of mistakes, especially as your tax returns become more complicated with deductions and write-offs, or with the inclusion of a business. Deliberate deception is one thing. Honest mistakes or confusion are seen as inevitable.

The main theme is that it is important to be responsible and meet deadlines for filing returns. Tips to file your taxes correctly can help you avoid honest mistakes.

What to Do If You Have Back Taxes or Can’t Pay Your Taxes

A wise person once said that if you find yourself in a hole, the first thing to do is stop digging. The same logic applies to tax trouble. That hill of back taxes will soon be a mountain if you don’t begin dealing with it.

There are many ways to deal with it, to get your taxes paid and avoid serious trouble with the IRS. They include:

• Being proactive in trying to pay the taxes owed: Do not wait for the IRS to come looking for you. File your taxes and then work with the IRS to cover your tax bill. The agency has rules and regulations meant to help you. Don’t wait to find out about the rules and regulations meant to punish people.
• Providing a reason for a tax error or failure to pay taxes: Life happens. If you had business, financial or health reversals during the year, you may find yourself unable to pay your full tax amount. Or maybe you made an honest mistake while calculating your business or personal taxes. Be upfront about that with the IRS and your outcome is likely to be more favorable.
• Tax forgiveness: One option is to apply for an Offer in Compromise, in which you can settle your tax debt for less than what you owe. Another is an IRS Repayment Plan, which involves breaking the total amount owed into manageable monthly payments. In either case, you can apply for a Penalty Abatement, removing or reducing fines and interest accrued before or during your attempts to settle your debt.

If the first step for dealing with tax problems seems familiar, it is. Filing your taxes, meeting deadlines, and dealing with the IRS in good faith are helpful for personal tax woes or if you can’t pay business taxes.

Be proactive. This may be the first time your business or personal finances ran into trouble, but it isn’t the first time the IRS has dealt with such circumstances. File your taxes, report your status, and then let the IRS guide you to the most realistic solution.

That could mean forgiveness of all or some of your debt or structuring a payment plan that allows you to pay the debt, with reduced fines and penalties, over a fixed period of time.

Government Tax Forgiveness Programs

There are alternatives and programs available to help with settling tax debt.

It may be possible to structure a payment plan with the IRS. That is more likely if your federal and state taxes are current, and if you have the income or assets to cover your monthly payments. Not only are you paying the owed amount in smaller payments, but you can also avoid fines and penalties while you are making those payments.

Offer in Compromise

There is no magic wand option in which the IRS makes your debt vanish. The closest, less than magical, option is an Offer in Compromise.

This option can significantly reduce what you pay to satisfy the IRS. It entails applying to the IRS, revealing your assets, debts and income. If you simply cannot pay your tax bill, the IRS may accept a lower amount to resolve the debt. Lower income applicants have a better chance, but the idea is to reduce the tax owed to a reasonable amount for the individual to pay.

Tax Payment Plan

There are payment plans available to help you pay your taxes without incurring penalties or facing criminal prosecution.

The government offers individuals short-term plans, in which payments are made over a span of 120 days. There is a limit of $100,000 that can be organized into a short-term plan. Long-term plans, available to individuals or businesses, extend the payment schedule out over a longer period. There is a limit of $50,000 on long-term payment plans.

Payment plans include fees, so you may end up paying more than the amount of the debt itself. That can be worth it because the plans prevent trouble with the IRS, including penalties and fines.

Lower or Waived Penalties

The IRS is seldom motivated by kindness, but it is interested in collecting whatever taxes it is able to collect. When a citizen owes more than he or she is able to pay, packing on penalties and fees can make it less likely the IRS will get what it’s after.

In that spirit, it is possible to get penalties reduced or waived altogether if you are in what the IRS considers extreme circumstances. You will still owe the original tax and any interest it may have accrued.

Resources to Manage Back Taxes and Other Debts

An Internet search for tax debt relief will produce an endless list of companies promising to get you out of debt. Some of them are legitimate. Many of them are scam artists. Your friendly search engine doesn’t distinguish between the two extremes.

What is certain is that there are resources available to provide advice and financial relief from back taxes and other debts. They include:

• Credit counseling from a nonprofit credit counselor can be the solution to many financial problems. It is certainly a good place to start, whether your trouble is tax debt, credit card debt, or other financial woes. Counselors are required by law to offer the best financial advice to clients and are trained to find the best possible solutions.
• Debt relief programs can apply to all kinds of difficulties with debts you can’t afford to pay. That includes tax debt. Solutions include negotiating to reduce your debt or setting up a debt management program (DMP) to organize your finances in a way that pays down debts over a defined period.
• Debt consolidation loans involve combining all of your debts into one monthly payment, usually at a lower interest rate. That can mean taking out a loan to pay off debts – from tax obligations to medical debt to credit cards – and then repaying the loan. If possible, you can negotiate a lower payoff total with each creditor, including the IRS.

There are several debt relief options, so finding the right one for you is vital. It is just as vital to avoid the many scams and deceptive practices that are out there.

Get Professional Help with Your Debts

Most of the strategies for dealing with tax debt without facing criminal prosecution are available to the average civilian. There are times, though, when the best strategy is to seek professional help.

The tax code is overwhelmingly complex, and the bureaucracy is massive, and that makes for a forest that can best be navigated with a guide.

A licensed credit counselor can help with all manner of financial difficulties at no cost to you. They are up-to-date on the latest laws and regulations, trained in the various options for resolving debt, and are legally obligated to find the best option for their clients.

Accredited credit counselors are a good place to start or, if you have started but hit a wall, a good place to turn for help.