Penalties for Lying on Tax Returns

Lying on your federal or state tax returns is a crime that can lead to financial penalties and even jail time. Leaving out income on your return and even not filing a return at all can also be illegal and subject you to serious penalties.

If you are caught submitting a tax return with false information, the IRS can require you to pay interest and penalties whether you were deliberately lying or simply negligent. This can include filing returns with deductions and credits for which you're not eligible, including business and personal expenses, or failing to declare income you've received.

Even a mistake can lead to a 20 percent penalty assessed on the underpaid tax, but deliberate fraud can lead to penalties of up to 75 percent. The IRS can also refer you to the Department of Justice for federal criminal prosecution. Tax evasion, meaning deliberately failing to pay taxes owed, is a federal felony that can taint your record and lead to fines of up to $250,000 and a prison term of as much as five years.

Even if you don't face consequences that severe, you may still have to go through the stress and expense of an IRS audit if your tax filings appear unusual to the IRS. In addition to needing to put together your own records to work with the IRS, you'll often want to hire a lawyer or certified public accountant to help you with a tax audit. That means that even an audit that doesn't result in you owing money to the government can cost you money. IRS audit triggers can include your return looking different from those filed by similar taxpayers according to the IRS's statistical formulas.

Remember that organizations that pay money to you generally file with the IRS to indicate how much you've been paid, such as the W-2 forms filed by your employer and 1099 forms filed by banks that pay you interest and organizations for which you do freelance work, so the IRS can often detect if your return doesn't include all of your income.

The IRS and federal prosecutors aren't the only ones who can come after you for lying on taxes. State and local tax authorities can also audit and penalize you for filing an incorrect or fraudulent return, and the penalties aren't limited to income taxes. Tax audit penalties and conditions can vary from state to state.

If you run a business and underreport or underpay sales tax that you owe, payroll tax you should be paying on behalf of your employees or any other tax, you can expose yourself to financial penalties and prosecution.