What is the Statute of Limitations for Tax Fraud: IRS Overview (2024)

Tax Fraud Statute of Limitations

Tax Fraud Statute of Limitations: There are many different statutes that comprise the Internal Revenue Code. The Tax Fraud Statute of Limitations is different from other statutes. The IRS basically has unlimited time to audit you for civil fraud. The criminal statute is different, but we will focus on civil enforcement. In recent years, the Internal Revenue Service has directed its fraud enforcement towards aggressively pursuing foreign accounts compliance — but the government has not forgotten about domestic enforcement either. The fraudulent non-reporting of U.S. Income, offshore accounts, assets, investments, and income may lead to severe penalties, such as FBAR Penalties. These penalties can be reduced and sometimes even avoided with voluntary disclosure. Let’s review the basics of the Tax Fraud Statute of Limitations:

What is Tax Fraud?

Tax fraud occurs when a person seeks to avoid paying taxes. This is generally accomplished by underreporting income, or overembellishing expenses or deductions.

As provided by the IRS:

“Fraud is deception by misrepresentation of material facts, or silence when good faith requires expression, which results in material damage to one who relies on it and has the right to rely on it.”

Simply stated, it is obtaining something of value from someone else through deceit.

What Happens if you Commit Tax Fraud?

It depends. If you get away with it, good for you. If not, you can be subject to various fines and penalties. The penalties can be civil or criminal.

Is Tax Fraud Civil or Criminal?

A person may be subject to civil or criminal tax fraud. But, unlike most other statutes of limitations which expire after 3-or 6-years, there is no time limit for the IRS to enforce civil fraud penalties.

Is Tax Evasion Civil or Criminal?

Tax evasion is criminal. While tax fraud may be civil or criminal, tax evasion is a tax crime.

Is Tax Fraud a Federal Offense?

Yes, tax fraud is a federal offense. While tax fraud can also be a state crime, it is a federal offense.

Can the IRS Put Me in Jail?

No, BUT they can refer you for a criminal investigation, which can lead to a criminal prosecution, which (if convicted) can lead to a jail or prison sentence.

What Happens if You Lie to the IRS?

If you lie to the IRS, you may receive criminal or civil fines and penalties.

How Much Time for IRS to Pursue Tax Fraud (aka Tax Fraud Statute of Limitations)

It is important to note that the “never-ending” fraud statute refers to civil tax fraud, not criminal tax matters.

The IRS does not enforce criminal tax matters, rather they refer the matter to the Department of Justice or other Government agency, which then pursues a complaint or indictment in a court of law.

Unlike civil tax fraud, with criminal tax fraud/evasion, the government must prove the case beyond a reasonable doubt.

Due to the fact that evidence loses value over time and memories fade — when it comes to actual criminal tax fraud/evasion, the enforcement period typically expires after six years.

When Does the 6-Year Criminal Fraud Statute Commence?

When the six-year statute actually commencesor terminates is often an argument to be made in court, depending on the facts and circ*mstances of the particular situation (namely, when was the fraud first alleged or detected).

**It isimportant to remember that even though Fraud and Evasion are used interchangeably, Evasion is criminal, while Fraud can be civil or criminal. The forever statute refers to civil tax fraud and not criminal tax evasion.

How Far Back Does the Tax Fraud Statute of Limitations Go?

In some instances of civil tax fraud, the IRS may go back as many years as they would like to enforce the laws against you.

Unlike other IRS Statutes of Limitations which typically expire after three years (example: failure to file an informational return) or possibly six years (example: willful failure to pay tax), there is no statute of limitations for Civil Tax Fraud. As with all tax matters, there are exceptions, exclusions, and limitations to be aware of.

I Thought the IRS has 10 Years to Audit Me?

The 10-year rule refers to the enforcement/collection of tax debt. And, it should be noted that in actuality, the IRS may be able to reduce the debt to a judgment, which is then renewable every 10 years (in most jurisdictions) — so you may be on the hook for longer than you may have thought.

Why is the IRS So Strict About Tax Fraud?

The answer is relatively simple: Tax Fraud is a very serious violation in the eyes of the IRS. With Tax Fraud, a person is essentially trying to pull the wool over the IRS’ eyes by tricking the US government – typically either by reducing income or falsifying deductions – in order to artificially reduce their tax liability.

While in general, the IRS seems to take every little thing way too seriously, when it comes to Civil Tax Fraud, there is a higher level of scrutiny against any individual the IRS believes committed Tax Fraud.

Therefore, the statute is written to provide the government with as much time as the government may need in order to go back and try to uncover the nucleus of facts leading to the fraud.

Does the IRS Always Have Forever to pursue Tax Fraud?

No. Whether or not the IRS can enforce the forever statute for civil tax fraud dependson various factors.

If the matter is appealed or brought to the US Court of Claims, not all courts agree as to whether the IRS may be able to enforce the civil fraud statute forever and there are some limitations depending on who committed the fraud, when the fraud commenced (and ended), and what happened in the interim.

Three Main IRS “Forever Statute” Situations To Be Aware Of

When it comes to tax, the main exceptions to the 3- or 6-year SOL is codified in 26 U.S. Code § 6501 – Limitations on assessment and collection are:

False Return

In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.

Willful Attempt To Evade Tax

In case of a willful attempt in any manner to defeat or evade tax imposed by this title (other than tax imposed by subtitle A or B), the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.

No Return

In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.

Since the IRS does not define Civil Tax Fraud, you should review the IRM (Internal Revenue Manual) for assistance. The requisite sections of the manual have been reproduced below.

Definition of Fraud

Fraudis deception by misrepresentation of material facts, or silence when good faith requires expression, which results in material damage to one who relies on it and has the right to rely on it. Simply stated, it is obtaining something of value from someone else through deceit.

Tax fraud is often defined as an intentional wrongdoing, on the part of a taxpayer, with the specific purpose of evading a tax known or believed to be owing. Tax fraud requires both:

• • A tax due and owing; and
  • Fraudulent intent.

Definitions—General

The compliance employee must be familiar with the following legal terms to understand the requirements of proof:

Burden of Proof

The obligation to offer evidence that a court (judge or jury) could reasonably believe in support of a contention. In tax fraud cases, the burden of proof is on the Government.

Evidence

data presented to a judge or jury in proof of the facts in issue and, which may include the testimony of witnesses, records, documents, or objects. Evidence is distinguished from proof, in that, proof is the result or effect of evidence.

Direct Evidence

evidence in the form of testimony from a witness who actually saw, heard, or touched the subject of questioning. Direct evidence, which is believed, proves existence of fact in issue without inference or presumption.

Circ*mstantial Evidence

Evidence based on inference and not personal observation.

Presumption (of law)

A rule of law that a judge or jury will draw a particular inference from a particular fact, or from particular evidence, unless and until the truth of such inference is disproved.

Inference

A logical conclusion from given facts.

Preponderance of Evidence

Evidence that will incline an impartial mind to one side rather than the other so as to remove the cause from the realm of speculation. It does not relate merely to the quantity of evidence. Simply stated, evidence, which is more convincing than the evidence offered in opposition.

Reasonable Doubt

A doubt that would cause a prudent person to hesitate before acting in matters of importance to themselves. Such a doubt will leave a juror’s mind uncertain after examination of the evidence.

Willful Intent to Defraud

An intentional wrongdoing with the specific purpose of evading a tax believed by the taxpayer to be owing.

Clear and Convincing Evidence

Evidence showing that the assertion made is highly probable or reasonably certain. This is a greater burden of proof than preponderance of the evidence but less than beyond a reasonable doubt.”

Requirements of Proof

Understanding the requirements of proof is essential in establishing fraud. In all criminal and civil tax fraud cases, the burden of proof is on the government.

The major difference between civil and criminal fraud is the degree of proof required.

• In criminal cases, the government must present sufficient evidence to prove guilt beyond a reasonable doubt.
• In civil fraud cases, the government must prove fraud by clear and convincing evidence.

Civil vs. Criminal Tax Fraud Statute of Limitations

Civil fraud results in a remedial action taken by the government, such as assessing the correct tax and imposing civil penalties as an addition to tax, as well as retrieving transferred assets. Civil penalties are assessed and collected administratively as part of the unpaid balance of assessment.

Criminal fraud results in a punitive action with penalties consisting of fines and/or imprisonment.

Criminal penalties:

• Are enforced only by prosecution;
• Are provided to punish the taxpayer for wrongdoings; and
• Serve as a deterrent to other taxpayers.

A tax fraud offense may result in both civil and criminal penalties. Restitution may be ordered in criminal tax cases pursuant to a plea agreement or a conviction under Title 18 U.S.C. and may be required as a condition of probation.

Avoidance vs. Evasion

Avoidance of tax is not a criminal offense. Taxpayers have the right to reduce, avoid, or minimize their taxes by legitimate means. One who avoids tax does not conceal or misrepresent, but shapes and pre-plans events to reduce or eliminate tax liability within the parameters of the law.

Evasion involves some affirmative act to evade or defeat a tax, or payment of tax. Examples of affirmative acts are deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are.

Common evasion schemes include:

• Intentional understatement or omission of income;
• Claiming fictitious or improper deductions;
• False allocation of income;
• Improper claims, credits, or exemptions; and/or
• Concealment of assets.

Indicators of Fraud vs. Affirmative Acts of Fraud

“Indicators of Fraud

Taxpayers who knowingly understate their tax liability often leave evidence in the form of identifying earmarks (or indicators).

Serve as a sign or symptom, or signify that actionsmayhave been done for the purpose of deceit, concealment or to make things seem other than what they are. Indications, in and of themselves, do not establish that a particular action was done.

Examples include substantial unexplained increases in net worth, substantial excess of personal expenditures over available resources, bank deposits from unexplained sources substantially exceeding reported income, and documents that appear to be altered or false.

Affirmative Acts (Firm Indications) of Fraud

Those actions that establish that a particular actionwasdeliberately done for the purpose of deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events, or make things seem other than what they are.

Fraud Cannot be Established Without Affirmative Acts of Fraud

Examples include omissions of specific items where similar items are included; concealment of bank accounts or other assets; failure to deposit receipts to business accounts; and covering up sources of receipts.”

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