Michigan Tax Fraud: Criminal Charges, Civil Penalties, and Lookback

Michigan tax fraud penalties are severe: a conviction under MCL 205.27 is a felony carrying up to five years in prison and a fine of up to $5,000 for each violation, and the Department of Treasury can tack on a civil penalty equal to 100 percent of the unpaid tax, plus interest running back to the day the tax was first due. Because the same conduct almost always violates federal law, a single scheme can produce stacked state and federal charges, two separate fraud penalties, and interest from both governments.

Criminal Penalties Under Michigan Law

Tax fraud is a felony in Michigan. Under MCL 205.27, a person who acts with intent to defraud or evade a tax faces up to five years in prison and a fine of up to $5,000 per violation.¹

The statute creates a separate perjury charge for anyone who knowingly signs or verifies a false return with intent to defraud. Perjury carries its own penalties under Michigan law, so one fraudulent filing can expose a person to both the fraud felony and a perjury prosecution for the same return.¹

Pay attention to the phrase “each violation.” Fraudulent returns across multiple years or across multiple tax types can be charged separately, each carrying its own potential five-year sentence and $5,000 fine. Three years of fraudulent income tax returns can mean three felony counts, not one.

The statute lists several acts that count: filing a false or fraudulent return, aiding someone else in evading tax, filing a false claim for a credit or refund, and making false statements on any return or payment. Fabricating receipts for expenses that never happened, or routing income through a third party to keep it off the return, falls squarely inside those prohibitions.¹

Civil Fraud Penalty and Interest

Criminal exposure is only part of the bill. Michigan imposes a civil fraud penalty equal to 100 percent of the underpaid tax under MCL 205.23(5).² The penalty sits on top of the underlying tax, not in place of it. Owe $20,000 in unpaid tax, and the fraud penalty alone brings the number to $40,000 before any interest is added.

Interest accrues on both the tax and the penalty from the date the liability first arose. Michigan calculates interest at 1 percent above the prime rate.³ Fraud cases typically span multiple tax years, so compounding alone can turn a modest original liability into something several times larger by the time the state catches up.

Separately, MCL 205.24 imposes late-file and late-pay penalties that start at 5 percent of the tax for the first two months and climb to a maximum of 25 percent. These are not fraud penalties, but they can run alongside the fraud penalty when the taxpayer also missed filing deadlines.⁴

Sales tax and payroll withholding cases carry an extra layer. Under federal law, a person responsible for collecting employment taxes who willfully fails to pay them over is personally liable for the full amount under the trust fund recovery penalty. That liability bypasses corporate protections and attaches directly to the individual with authority over the funds.⁵

What Michigan Treats as Fraud Instead of a Mistake

The law draws a hard line between honest errors and deliberate cheating. MCL 205.27 requires intent to defraud or evade. A transposed digit or a misunderstood form is not fraud. Inventing deductions, hiding income, or filing a return you know is false is.

Investigators look for patterns, not isolated oddities. One year with an unusually high charitable deduction might prompt a letter. Consistently underreporting cash receipts while claiming inflated business expenses across several years is the kind of pattern that triggers a fraud referral. Once Treasury classifies conduct as fraud rather than negligence, the penalties jump sharply, which makes the classification itself worth contesting.

How Far Back the State Can Reach

Michigan’s statute of limitations for fraud assessments is tied to discovery, not to when the fraud happened. Under MCL 205.27a, once Treasury discovers that a taxpayer fraudulently concealed a liability, it has two years from the date of discovery to assess the tax, penalties, and interest. The interest and penalties are calculated all the way back to the original due date of the tax.⁶

There is no outer limit. A fraudulent return filed in 2015 and discovered in 2028 can still be assessed in full, with more than a decade of accumulated interest attached. The two-year clock only starts when Treasury actually finds the fraud.

Federal Penalties Stacked on Top

Michigan tax fraud rarely stays a state problem. Underreporting income on a Michigan return almost always means the same income was underreported federally. Federal tax evasion under 26 USC 7201 is a felony carrying up to five years in prison and a fine of up to $100,000 for individuals or $500,000 for corporations.⁷

The IRS also imposes a civil fraud penalty equal to 75 percent of the underpayment attributable to fraud.⁸ That 75 percent federal penalty stacks with Michigan’s 100 percent state fraud penalty. Add the underlying tax, interest from both governments, and potential criminal fines, and the total financial exposure from a single scheme can run to several times the amount of tax originally evaded.

Federal criminal prosecutors generally have six years from the commission of the offense to bring tax fraud charges, and that clock can restart if the taxpayer takes a new affirmative act such as lying to an IRS agent during a later audit.⁹ On the civil side, there is no federal time limit at all when the return was fraudulent. The IRS may assess the tax at any time.¹⁰

Federal interest is set quarterly. For the calendar quarter beginning April 1, 2026, the IRS charges 6 percent on individual underpayments, based on the federal short-term rate plus three percentage points.¹¹ Interest runs from the original due date, so multi-year cases accumulate it fast.

Challenging a Fraud Assessment

A fraud assessment is not the end of the matter. The first step is requesting an informal conference by submitting Form 5713 within 60 days of receiving a “Bill for Taxes Due — Intent to Assess” or a refund denial. The conference can be held in person or by video and gives you a chance to present evidence that any underreporting was not intentional.¹²

If the conference does not resolve the dispute, you can appeal to the Michigan Tax Tribunal within 60 days or to the Court of Claims within 90 days. You must pay the uncontested portion of the assessment before an appeal can go forward.¹³ This trips up many taxpayers. If you owe some tax but dispute the fraud label, you still need to pay the base tax to preserve your right to challenge the penalty.

The fraud-versus-negligence distinction is worth fighting over. The state bears the burden of proving intent. Where the evidence shows sloppy recordkeeping rather than a deliberate scheme, pushing back on the fraud classification can eliminate the 100 percent penalty and the felony exposure that comes with it.

Coming Forward Through Voluntary Disclosure

Taxpayers who know they have unfiled or underreported liabilities can get ahead of an investigation through the Michigan Voluntary Disclosure Program under MCL 205.30c. The trade is full cooperation and full payment of tax and interest in exchange for a waiver of penalties.

Eligibility is strict. You cannot have been previously contacted by Treasury about the specific tax you want to disclose. A general letter of inquiry does not count as prior contact, but anything more specific does. You must also qualify as a “nonfiler,” meaning there is an existing obligation you have not been meeting.¹⁴

The program uses a lookback period that generally covers the most recent 48 months. For business taxes like the corporate income tax, the lookback is the four most recent completed fiscal or calendar years within a 48-month window. In some multistate apportionment situations, the lookback shortens to 36 months.¹⁴

The reward is substantial. The department waives all applicable penalties for the lookback period, both discretionary and nondiscretionary. You still owe the full tax and interest, but eliminating the 100 percent fraud penalty alone can cut the total bill roughly in half. Once Treasury signs the agreement, you must pay the disclosed tax and interest by the deadline it specifies to keep the waiver in effect.¹⁴

1
Michigan Legislature. Michigan Compiled Laws 205.27 – Prohibited Conduct; Violation; Penalties; Enforcement
2
Michigan Department of Treasury. Revenue Administrative Bulletin 1989-53
3
Michigan Department of Treasury. How Are Penalty/Interest Charges Calculated for Failure to File or Underpayment of Estimated Payments
4
Michigan Legislature. Michigan Compiled Laws 205.24 – Failure or Refusal to File Return or Pay Tax
5
Office of the Law Revision Counsel. 26 U.S. Code 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax
6
Michigan Legislature. Michigan Compiled Laws 205.27a – Assessment of Deficiency, Interest, or Penalty; Fraud
7
Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax
8
Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty
9
Office of the Law Revision Counsel. 26 USC 6531 – Periods of Limitation on Criminal Prosecutions
10
Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection
11
Internal Revenue Service. Internal Revenue Bulletin: 2026-8
12
Michigan Department of Treasury. The Appeals Process – Informal Conference
13
Michigan Legislature. Michigan Compiled Laws 205.22 – Appeal of Assessment, Decision, or Order
14
Michigan Legislature. Michigan Compiled Laws 205.30c – Voluntary Disclosure Agreement