From the Tax Law Offices of David W. Klasing - Can I Go to Jail for Errors on My Federal or State Income Tax Returns?

IRVINE, Calif., Jan. 22, 2025 /PRNewswire/ -- Facing an IRS or state income tax audit is often unnerving, stressful, and downright frightening—particularly if you realize your tax returns may contain a multiyear pattern of serious inaccuracies that could potentially be viewed in their totality as willful tax fraud.

Note:  Most states investigate and prosecute tax crimes in a very similar manner as California does, so we refer to California and the FTB to explain by way of example the state tax exposure caused by tax fraud.

While honest mistakes are typically addressed through civil tax penalties, deliberate acts of noncompliance—such as intentionally underreporting income or overstating deductions—can quickly trigger a life-changing IRS-CID or state criminal tax investigation. By way of example, if the IRS or California Franchise Tax Board (FTB) believes your income tax returns are fraudulent, jail time becomes a very real possibility.

Below, we explain how seemingly simple "errors" can escalate into criminal tax exposure, what red flags prompt referrals to the IRS or State Criminal Investigation departments and how to protect your liberty and net worth during a high-risk audit.

Distinguishing Negligent Mistakes from Willful Tax Fraud

Mere Negligence as Opposed to Willful Fraud
Common oversights—like failing to track certain 1099s or miscalculating small deductions—are typically categorized as negligent mistakes. When the IRS or FTB uncovers these errors, they often assess:

• Civil tax penalties (e.g., a 20% accuracy-related penalty if the underreporting is more than $5,000).
• Interest accruing from the original filing date.

Correspondence Audits

• Minor discrepancies often trigger a correspondence audit conducted by mail. Even though these are considered more straightforward, they can reveal deeper issues if the IRS or FTB agent finds larger "badges of fraud."
  
  

Willful Misconduct and Criminal Exposure

Willful Fraud / Intentional Underreporting of Taxable Income

• If you knowingly omit large amounts of income, fabricate deductions, or maintain cooked books, the IRS may view your actions as willful tax fraud. Omitting a single 1099 might seem minor; however, unreported income of $10,000 or more can prompt an auditor to consult a Fraud Technical Advisor (FTA), potentially leading to a life-changing criminal tax referral.
  
  

Eggshell Audits

• When you face an audit but know you have intentionally cheated on your taxes, you are in a high-risk "eggshell audit." You want to avoid incriminating yourself while also not lying to a federal agent (itself a felony). False statements can become a "last affirmative act of fraud," which can support felony tax evasion charges even on tax years outside the 5 or 6 year criminal tax statute at issue.

How a Routine Audit Can Escalate into a Criminal Tax Investigation

Key Red Flags

1. Significant Underreported Taxable Income
   The IRS automatically cross-checks 1099s, W-2s, and other third-party reporting of taxable income against the returns you file.  For example, when the sum of your 1099s exceeds your reported Schedule C income, or if you fail to report a sizeable amount of cash income, an audit or criminal tax investigation is practically guaranteed. If you are audited or criminally investigated, the IRS and FTB commonly reconcile all deposits into every financial account they can identify against the income you reported looking for unreported taxable income as well.
   
   
2. Exaggerated or Fraudulent Deductions
   Artificially inflating business expenses or writing off personal expenditures disguised as business write-offs are classic "badges of fraud".
   
   
3. Total Tax Loss of $30,000 or greater
   Under federal sentencing guidelines, $30,000 of tax loss equates to about one year in prison—which is precisely the deterrent effect the IRS, at a minimum, seeks.
   
   
4. Multiple Year Pattern of Noncompliance
   Multiple years of suspicious tax returns can lead the auditor to suspect intentional wrongdoing—and can expand the tax audit to prior or subsequent years.

Referral to IRS CID and Its 90%+ Conviction Rate

If a IRS auditor detects firm indications of fraud, they can either consult a Fraud Referral Specialist (FRS) or refer the matter directly to CID. CID then conducts a criminal tax investigation aimed at building a case for criminal tax prosecution. Once CID believes there's enough evidence, the matter can be sent to the IRS District Counsel, forwarded to the Department of Justice Tax Division, and ultimately prosecuted by the U.S. Attorney's Office. CID has a conviction rate exceeding 90%, making it imperative to seek experienced legal representation if your case is under criminal tax investigation. The FTB follows similar procedures but their conviction rate is not quite as high.

Potential Penalties for Criminal Tax Violations

A Federal conviction for criminal tax evasion, filing a false return, or related offenses can result in:

• Prison Sentences
• Up to 5 years per count for felony tax evasion.
• Up to 3 years for filing a false return.
• Hefty Fines
• Up to $250,000 for individuals (or $500,000 for corporations).
  
  
• Civil Fraud Penalties
• Up to a 75% penalty on the tax underpayment, plus accrued interest.
  
  
• Restitution Orders
• Requiring you to pay back taxes, penalties, and interest.

Can You Go to Jail for an Honest Mistake?

Federal or California Criminal tax charges typically require willful conduct. The IRS / FTB rarely seeks prison time for a simple oversight. However:

• Misinterpretations can spiral if the IRS or FTB views your "mistakes" as intentional deceit.
• False Statements to an auditor—even if made out of panic—could support a criminal tax referral.
• Significant Deficiencies (often $30,000 or greater in total tax understatements) create the appearance of deliberate tax evasion.

Even if you believe your situation is purely a "routine" civil tax audit, it would be wise to treat it very seriously. A single mishap, misunderstanding, or slip of the tongue can escalate things dramatically. If you know you cheated and your total multiyear noncompliance is equal to $30,000 or more you would be wise to have a dually licensed Criminal Tax Defense Attorney & CPA at the Tax Law Offices of David W. Klasing represent you in your audit to ensure the best chance of achieving a purely civil resolution of your case and thus protecting your liberty and your net worth and continuing ability to earn a living.

Key Questions About Audits, Criminal Tax Exposure, and the Risk of Jail Time

• Will My California State Returns Also Be Audited?

IRS and California state taxing authorities frequently share data. Any adjustments on your federal tax return will require you to amend your state tax returns, compounding your exposure to additional civil and criminal tax penalties and possibly heightening the risk of criminal tax referral if discrepancies are significant.

• Can They Audit Multiple Entities I Own?

Yes. If an auditor identifies non-compliance or red flags on your personal return, they may extend the audit to all entities you control, further increasing your exposure to severe civil and criminal tax penalties—including the potential for jail time if willful misconduct is uncovered. An entity audit, especially where entity tax adjustments and known to flow though to your personal tax return can cause the fire to burn the other direction as well.

• Will They Visit My Home or Business Unannounced?

In high-risk "eggshell/reverse eggshell" audits, agents may unexpectedly inspect your home or business. Such unannounced visits are often aimed at verifying assets or your standard of living, and they can escalate the investigation if discrepancies suggest an intent to defraud.

• How Long Do Audits Last?

While simple correspondence audits might conclude within a few months, complex office or field audits—especially those involving reconstructive accounting or suspected intentional fraud—can last years. Prolonged investigations not only increase financial liabilities through accumulated penalties and interest but also raise the likelihood of a federal or California criminal tax referral leading to possible jail time.

Contact the Tax Law Offices of David W. Klasing Today if You Are Worried About Your Income Tax Errors Leading to Jail Time

If you are concerned that omissions of income, overstatements of expenses or erroneously claimed credits on your federal or California income tax returns—whether negligent or intentional—could expose you to criminal tax charges or incarceration, prompt and strategic action is essential. At the Tax Law Offices of David W. Klasing, we routinely represent clients in matters ranging from straightforward civil audits to high-risk "eggshell" or "reverse eggshell" audits and suspected criminal tax investigations. In nearly 30 years of practicing civil and criminal tax defense, we have never had an audit client face criminal tax prosecution—a testament to our aggressive advocacy and deep experience in mitigating or altogether preventing criminal tax referrals.

Voluntary Disclosure:

If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

Note:  As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth.   See our Testimonials to see what our clients have to say about us!

Don't Contact Your Original Preparer or Non-Attorney Professionals in a High-Risk Audit or Criminal Tax Investigation Seeking to Avoid Jail Time

• No Attorney-Client Privilege

CPAs, EAs, and CTEC-certified preparers cannot ordinarily provide confidential / privileged communications protection regarding civil or criminal tax issues. Anything you disclose to them can be compelled in court via a subpoena which is enforceable under a federal or California court's contempt power, even if they did not prepare your original tax returns that are ultimately at issue. These non-attorney professionals may very well become government witness number one in a subsequent criminal tax prosecution. The original preparer is also very likely to attempt to shift blame onto you to attempt to protect their own reputations and licenses.

• Inherent Conflicts of Interest

An original preparer who "helped" you file a potentially false or fraudulent return has a strong incentive to cooperate with the government to avoid their own criminal tax liability for aiding and abetting income tax evasion. They retain notes, documents, and interview records that may become incriminating evidence against you.

• Lack of Persuasive Legal Advocacy

Non-attorneys are not trained in legal analysis, the art of persuasion or courtroom procedure. An attorney's skill in negotiation, persuasiveness, skill at building a defense centered on your constitutional protections, and skill at identifying and challenging weaknesses the IRS's case is crucial—especially if your audit is at risk of criminal tax referral or if you "know for a fact you cheated on the returns being audited."

By contrast, hiring a dual-licensed Civil and Criminal Tax Attorney and CPA at The Tax Law Offices of David W. Klasing ensures your communications remain confidential and legally protected through attorney-client privilege. Our attorneys are also trained in the art of legal persuasion, appeals, and courtroom procedure—vital when an audit teeters on the brink of a criminal tax investigation. Even if no criminal issues are immediately apparent, we are uniquely positioned to secure fair civil resolutions, handle tax appeals & litigation if necessary, and identify any potential pitfalls before they escalate into life-altering prosecutions.

Your personal freedom, finances, and future earning capacity may be on the line. Our team thoroughly evaluates every angle of your situation, identifies potential red flags, and keeps the taxing authorities guessing about the true nature of your case. We aim, where possible, to demonstrate that any errors made were non-willful, thereby sidestepping accusations of intentional tax fraud to avoid jail time. When we say we protect our clients, we mean it: we spare no effort in safeguarding your liberty and reputation against unwarranted or draconian criminal tax penalties.

Call the Tax Law Offices of David W. Klasing today at (800) 681-1295 or schedule a reduced-rate initial consultation online to review your options in strict confidence. With appointment-only satellite offices, flexible scheduling, and the ability for David W. Klasing—an instrument-rated pilot—to personally fly to your location at no additional cost (preceded by a one-hour reduced rate initial phone or encrypted go-to-meeting reduced rate initial consultation), we remove the logistical hurdles that often prevent taxpayers from seeking the legal help they desperately need. Let us deliver the unwavering, expert representation you need to halt high-risk tax audits from spiraling out of control—and to safeguard your freedom from the threat of jail time.

Public Contact: Dave Klasing Esq. M.S.-Tax CPA, [email protected]

SOURCE Tax Law Offices of David W. Klasing, PC