Can I Go to Jail for Unreported Income?

Can I Go to Jail for Unreported Income?

Here’s what nobody tells you when you’re panicking at 2am about unreported income: making a mistake on your taxes is not a crime. It doesn’t matter how much money was involved. It doesn’t matter how many years it went on. If you genuinely didn’t know you were supposed to report something – if it was an honest error – you cannot be convicted of a federal crime. That’s not how it works.

The IRS knows the difference between someone who made a mistake and someone who deliberately cheated. They prosecute the cheaters. They collect money from everyone else.

Welcome to Spodek Law Group. Our goal is to help you understand whether your unreported income situation is a criminal matter or a civil one – and what to do about it either way. Todd Spodek has represented clients who came to us convinced they were going to prison, only to discover their situation was purely civil. He’s also represented clients who didn’t think they were in trouble until they realized the IRS viewed their “mistakes” as a pattern of willful evasion. The difference is everything.

If you have unreported income and you’re worried about criminal exposure, call us at 212-300-5196. We can evaluate your situation and tell you where you actually stand.

The Question Everyone Asks Wrong

People ask “can I go to jail for unreported income?” Thats the wrong question. The right question is: “did I INTENTIONALLY fail to report income I knew I was required to report?”

The answer to that question determines everything.

Under federal law, tax evasion requires what the IRS calls “willfulness.” Willfulness means the voluntary, intentional violation of a known legal duty. Read that carefully. You have to KNOW you have a legal duty to report the income. You have to INTENTIONALLY violate that duty. And you have to do it VOLUNTARILY – not by accident, not by mistake, not becuase you were confused.

Mere understatement of income does not by itself constitute criminal tax evasion.

That sentence from the IRS Internal Revenue Manual might be the most important thing you read today. Just becuase you understated income dosent mean you committed a crime. The crime requires intent. Without intent, theres no criminal case.

Heres the inversion that catches people: you’d think the IRS has to prove you knew you were breaking the law. They do – but they dont need a confession to do it. Willfulness can be inferred from the facts and circumstances. If your actions look like those of someone who knew what they were doing, a jury can conclude you knew. Direct proof of intent is “rarely available.” They build the case from patterns.

What Willfulness Actually Means

The legal definition of willfulness sounds simple, but it has nuances that matter.

If you genuinly believed – even incorrectly – that you werent required to report certain income, that belief is a defense. Courts have held that a “genuine, good faith belief that one is not violating the Federal tax law based on a misunderstanding caused by the complexity of the tax law is a defense to a charge of willfulness.” Notice it says even if that belief is “irrational or unreasonable.” The key is that the belief was genuine.

But theres a massive exception. If your defense is that you beleive the income tax is unconstitutional, or that wages arent income, or that you’re a “sovereign citizen” who dosent have to pay taxes – none of that works. Courts have rejected those arguments so many times that claiming them actually hurts your case. It makes you look like someone who knew they owed taxes and was looking for excuses not to pay.

At Spodek Law Group, we evaluate willfulness carefully. The question isnt just what you did – its why you did it and what you understood at the time. Did you consult with a tax professional who gave you bad advice? Did you have a genuine confusion about complex tax rules? Did you simply not know about a reporting requirement? All of this matters.

Heres how willfulness is proven in practice. Since the government usualy cant get inside your head, they look at your behavior. Did you keep two sets of books? Did you use cash to avoid paper trails? Did you tell people to write checks to a different name? Did the same “error” appear year after year? Did you ignore IRS notices? Each of these actions becomes circumstantial evidence of intent.

One year of unreported income might be a mistake. The same unreported income source appearing every year for five years becomes a pattern. Patterns are hard to explain away.

The IRS also looks at your overall sophistication. If your a small business owner with complicated finances, they might be more willing to accept that you made honest mistakes. If your a licensed professional – an accountant, a lawyer, a financial advisor – they’ll assume you knew exactly what you were doing. The same conduct that might be excused in one person becomes damning evidence in another.

And heres something else people dont think about: the IRS watches how you live. If you report $50,000 in income but your driving a new Mercedes and living in a $2 million house, thats a problem. Your lifestyle becomes evidence against you. They dont need to see your bank statements to know something dosent add up.

The Numbers That Should Calm You (And Terrify You)

Lets talk about how rare criminal tax prosecutions actualy are.

In 2015, the IRS indicted only 1,330 taxpayers out of 150 million for legal-source tax evasion. Thats about 0.0009% of the tax-filing population. The number of Americans convicted of tax crimes each year is less then 2,500 – approximately 0.0022% of all taxpayers.

If your panicking about going to prison, those numbers should provide some perspective. The overwhelming majority of people with unreported income never face criminal charges. They face civil penalties, audits, payment plans – but not prison.

But heres the terrifying part of those numbers. When the IRS DOES decide to prosecute someone, they have a conviction rate above 90%. They dont bring cases they might lose. They spend months or years building the case before they charge anyone. By the time your indicted, theyve already decided they can prove willfulness beyond a reasonable doubt.

Theres also an “unofficial” threshold that tax professionals talk about. The IRS generaly dosent pursue criminal charges unless theres at least $70,000 in unpaid taxes across multiple years of fraud. Small cases arent worth the resources. But if your unreported income resulted in significant tax losses over multiple years – thats exactly the profile they look for.

This creates a strange reality. If you owe $20,000 in unreported taxes, your probably not going to prison – even if you absolutely knew you were cheating. The IRS will come after you civily, add penalties, collect the money, but criminal prosecution isnt worth their limited resources. If you owe $200,000 across five years, thats different. Now your exactly the kind of case they want to make an example of.

How the IRS Decides Who to Prosecute

The IRS Criminal Investigation division has limited resources. They cant prosecute everyone who cheats on their taxes. So they have to choose.

Heres what moves a case from civil to criminal:

Amount matters. That unofficial $70,000 threshold exists for a reason. The IRS needs cases big enough to justify the prosecutorial resources and to send a message. Small-dollar cases get handled civily.

Pattern matters more. One year of unreported income looks like a mistake. Multiple years of the same pattern looks like a system. If you failed to report the same income source for five consecutive years, thats hard to explain as anything other then intentional.

Affirmative acts matter most. Did you take active steps to hide income? Did you create false documents? Did you use cash to avoid reporting? Did you set up offshore accounts? These actions transform a case from “maybe he made a mistake” to “he clearly knew what he was doing.”

Your response to IRS contact matters. When the IRS started asking questions, did you cooperate or obstruct? Did you provide false information during an audit? Did you destroy records? Your behavior after the investigation starts can create new criminal exposure even if the original conduct was borderline.

Todd Spodek has seen the IRS decline prosecution in cases involving hundreds of thousands of dollars becuase they couldnt prove willfulness. Hes also seen them pursue cases involving much smaller amounts becuase the evidence of intent was overwhelming. Its not just about the money. Its about what the evidence says about your state of mind.

Celebrity Cases – What They Teach You

Looking at celebrity tax cases helps illustrate how the IRS thinks about criminal prosecution.

Wesley Snipes went to prison for three years. Not for tax evasion – for willfully failing to file tax returns for six consecutive years. He owed about $7 million. The key wasnt just that he didnt file – it was that he did it year after year after year, despite obviously knowing he had a filing obligation. Six years of non-filing isnt a mistake. Its a decision.

And heres the cascade that people forget: Snipes got out of prison, but he still owed the IRS. In 2018, the IRS ordered him to repay $9.5 million in back taxes. Prison didnt cancel the debt. He served his time AND still owed the money.

Richard Hatch, the first Survivor winner, went to prison for 51 months. He won $1 million on television – the most public income imaginable – and simply didnt report it. The willfulness was obvious. Everyone in America knew he won a million dollars. He thought he could not report it anyway.

But heres the cascade that makes Hatchs case remarkable. He got out of prison. Then he was required to amend his 2000 and 2001 returns. He didnt. So he went back to prison for nine more months. He did extra time becuase he refused to fix the returns that got him convicted in the first place.

Al Capone is the most famous example of all. The federal government couldnt touch him for murder, bootlegging, or organized crime. The IRS got him for tax evasion. He served 11 years. If the IRS could get Al Capone, they can get anyone.

Todd and Julie Chrisley from the reality show “Chrisley Knows Best” recieved 12 and 7 years respectively. They didnt file returns for 2013, 2014, 2015, or 2016. Four consecutive years of non-filing while living lavishly on television. The willfulness was impossible to deny.

What all these cases have in common is pattern. None of them went to prison for a single year of unreported income. They went to prison becuase they did the same thing year after year after year. The repetition made willfulness undeniable.

At Spodek Law Group, we study these cases not just for entertainment value but becuase they reveal how the IRS thinks. The common thread is always the same: obviousness. When the unreported income was so obvious that claiming ignorance seems absurd, thats when prison happens. Snipes was a movie star. Hatch won on national television. The Chrisleys had a reality show about their lifestyle. The gap between what they showed the world and what they reported to the IRS was impossible to explain.

The Civil Penalties You’ll Still Face

Heres the uncomfortable truth that people often miss: even if you avoid criminal prosecution, your still in serious financial trouble.

The IRS will pursue civil penalties regardless of wheather they bring criminal charges. These penalties are substantial:

• Failure to file penalty: 5% of unpaid taxes per month, up to 25%.
• Failure to pay penalty: 0.5% of unpaid taxes per month.
• Accuracy-related penalty: 20% of the underpayment.
• Civil fraud penalty: 75% of the underpayment attributable to fraud.

Read that last one again. If the IRS determines your underreporting was fraudulent – even if they dont prosecute criminaly – they can add a 75% penalty to whatever you owe. Thats on top of the original taxes, on top of interest that compounds daily.

Someone who failed to report $100,000 in income and owes $30,000 in taxes could easily end up owing $60,000 or more once penalties and interest are added. The civil system is designed to punish, even without prison.

And unlike criminal cases, civil fraud has a lower burden of proof. Criminal conviction requires “beyond a reasonable doubt.” Civil fraud only requires “clear and convincing evidence.” Cases that couldnt be proven criminaly can still result in the 75% fraud penalty civily.

Theres also no statute of limitations on civil fraud. For regular tax issues, the IRS has three years from when you filed to audit you – six years if you understated income by more then 25%. But for fraud, theres no time limit. They can pursue civil fraud penalties for returns from a decade ago. The passage of time dosent make you safe.

The IRS also has extraordinary collection powers. They can levy your bank accounts. They can garnish your wages. They can seize property. They can put liens on everything you own. Other creditors have to go to court to collect debts. The IRS dosent. They just take what your owe. This isnt prison – but it can still destroy you financially.

Voluntary Disclosure – Your Only Escape Route

If you have unreported income and your reading this article, theres one potential escape route: voluntary disclosure.

The IRS has a Voluntary Disclosure Practice that allows taxpayers who come forward BEFORE the IRS finds them to avoid criminal prosecution. The key word is BEFORE. Once the IRS has identified you, voluntary disclosure is off the table.

This is the one situation were coming forward first actualy helps.

Heres how it works. You submit a disclosure to the IRS identifying the unreported income. You pay the back taxes, interest, and penalties. In exchange, the IRS generaly agrees not to pursue criminal charges. Youll still owe everything – but you wont go to prison.

The catch is timing. Voluntary disclosure must be “timely” – meaning the IRS hasnt already started an investigation. If Special Agents are already looking at your returns, its too late. If an audit has begun, it might be too late. The window for voluntary disclosure closes the moment the IRS takes any action.

At Spodek Law Group, we help clients evaluate wheather voluntary disclosure makes sense for there situation. Sometimes its the clear best option. Sometimes its not necessary becuase the conduct wasnt willful. Sometimes its too late. You need an attorney to evaluate which category you fall into.

The worst mistake is doing nothing while hoping the problem goes away. Unreported income dosent disappear. The IRS has sophisticated computer systems that match income reported to them against income reported by you. Eventually, discrepancies get flagged.

Every W-2 your employer files, every 1099 a client sends, every K-1 from a partnership – all of that goes to the IRS. There computers compare what was reported about you to what you reported about yourself. When the numbers dont match, your return gets flagged for examination. This happens automaticaly. You dont need to be reported by anyone. The system catches discrepancies on its own.

The question isnt wheather the IRS will find out about unreported income. The question is when. And when they do, you want to be in a position were you came forward first – not one were you got caught.

Spodek Law Group is located in the Woolworth Building at 233 Broadway in Manhattan. We handle federal tax investigations nationwide. If you have unreported income and your worried about your exposure, call us at 212-300-5196. The consultation is free. The mistake of waiting could be permanent.

Todd Spodek has helped clients navigate situations ranging from simple unreported income to complex multi-year schemes. Some of those clients needed voluntary disclosure. Some needed to prepare for criminal defense. Some discovered there situation was entirely civil. The first step is always the same: understand where you actualy stand before making decisions that could make things worse.

Unreported income can lead to jail – but only if you acted willfully. The question is wheather the IRS can prove that. Dont wait for them to decide. Get representation and take control of the situation while you still can.

The difference between civil penalties and prison is intent. Prove you made a mistake, and you pay the money. Let them prove you cheated, and you lose years of your life. Which outcome you get depends on actions you take right now. Call us.