Paying taxes can be such an onerous burden on the average small business owner that it can be tempting to not pay them at all—or to under-report earnings to reduce the amount due. This is a bad idea for several reasons, and most tax cheats get caught in the end.

Forms of Tax Evasion

First, what is tax evasion? As a federal crime, it comes with penalties and heavy fines and can result in the loss of your business. There are several ways to commit this common offense—not filing a tax return at all is one. So is hiding or under-reporting income. Others involve hiding property, lying about charitable contributions, and filing false returns. The consequences vary based on the nature of the evasion and the leniency of the IRS.

Penalties and Interest

The most common and least onerous consequences involve penalties levied on the guilty party. The taxpayer in question must confess to his or her error, pay back all taxes owed with interest, and pay the penalties. Failure to comply with the IRS ruling can result in criminal prosecution.

Fines

Fines are the next step up on the consequence ladder. The business owner will be charged with tax evasion, which is a felony under federal law, and will be required to pay back the fines and his or her legal and court fees. The amount of the fine varies by the type and severity of the offense, but can be up to $250,000 for an individual and $500,000 for a corporation. It is up to both the prosecutor and the judge whether or not to levy fines or impose a harsher sentence on the person responsible.

Prison Time

The harshest penalty for tax evasion is federal prison. This penalty is uncommon and is usually only levied in the most egregious cases, or in those where the taxpayer has refused to comply with lesser sentences. Again, the punishment—how much time to be served—varies depending on the nature and severity of the taxpayer’s crime. The maximum sentence is five years. Most offenders end up serving between one and three years.

Tax evasion is a serious matter and the IRS takes it seriously, as do all fifty states. It can be tempting to cheat on taxes to save a little money, but it’s not worth it in the end. The best policy is to report everything accurately and pay what’s owed rather than risk the consequences.

Informational Credit to Rod Gregory