Tax Evasion, Fraud & the Statute of Limitations on Tax Crimes

Tax evasion and fraud is not just a problem for white-collar crime criminals. Filing your taxes, particularly if you have considerable assets or run your own business, can be terribly complex. This means that the line between an aggressive – but legal – tax planning strategy and fraud is thinner than you might think.

Perfectly innocent mistakes may be interpreted by an IRS investigator as suspect. Therefore, even if you are a law-abiding taxpayer it pays to know the difference between tax evasion and tax fraud, the penalties, and what the IRS’ statute of limitations is when prosecuting tax crimes.

Tax Evasion vs. Tax Fraud

Although often used interchangeably, there are important differences between tax evasion and tax fraud. Tax evasion refers to the use of illegal means to avoid paying your taxes. This includes felonies, such as refusing to pay your taxes once they have been assessed, and misdemeanors; such as failing to file a return. Tax fraud, on the other hand, refers to lying on your tax return and falsifying tax documents- which is always a felony charge. This can extend to tax scammers will pose as a tax preparers and then rip off customers through refund fraud or identity theft. These phony accountants are committing Accountant Fraud and will tell you that they can get you a large tax refund and typically prey on low-income and non-English speaking taxpayers.

Take for example celebrity-convict Wesley Snipes, who was charged with three counts of failing to file a return. Snipes was convicted for three misdemeanor charges and received the maximum one-year sentence for each count. If he had been found guilty of a felony evasion charge or of tax fraud, he could have received up to five years for each count.

Statute of Limitations for Tax Evasion or Tax Fraud

The statute of limitations of a crime is the amount of time a prosecutor or a plaintiff has to file charges. In the case of taxes, it represents how long you should be looking over your shoulder after – willfully or otherwise – lying on your tax return.

The general rule of thumb is that the IRS has three years to audit your tax returns. If an investigation of your tax return reveals you concealed over 25% of your income, the IRS gets twice the time, six years, to file charges. However, this time period can be extended for a variety of reasons.

How can the Statute of Limitations be extended?

There are some stipulations that can make those ten years spread out to an even longer period of time. Here are some reasons you may have an extended tax statute of limitations:

• If you agree to an extension, your statute is placed on hold until that extension time is up.
• If you file bankruptcy, your statute is placed on hold until six months after the bankruptcy and court proceedings have been finished.
• If you leave the country for at least six months, the statute is placed on hold until you decide to return.
• If you are making payment installment arrangements or request innocent spouse relief, the statute is placed on hold until the final decisions are made.

For instance, if you are not in the United States or you become a fugitive, the statute of limitations may be “tolled” – or stop running – until you are found or return home. Another matter to consider is when the 6-year period starts. The IRS could prosecute a series of fraudulent tax returns as a single charge and only start counting the six-year period from your last act of tax evasion or fraud.

It gets worse. Although the IRS is limited to how far back it can look when filing charges in criminal court, there is no statute of limitations for civil tax fraud. This means the IRS can look back as far as it wants when suing for civil fraud. In practice the IRS rarely goes back more than six years because it has a high enough burden of proof to meet in fraud cases without having to deal with the added difficulties of proving older charges.

Tax Crime Statistics

Let’s end with the good news. Although the law grants extensive powers to the IRS, the chances of you being charged — never mind convicted — of tax fraud are minimal. According to IRS statistics, of the approximately 240.2 million tax returns filed, less than 2,000 people were investigated for fraud in 2020. Of those who were investigated, only half were actually charged with a criminal offense. However, once the IRS charges a taxpayer, the conviction rate is high: around 93%. Tax prosecutors have a high burden of proof to meet and their resources are limited; so they tend to focus their efforts on clear-cut cases.

Another positive tidbit is that the IRS rarely brings up an original return in audits or criminal prosecutions, if you came forward and tried to correct mistakes through an amended return. This means that if you avoid blatant abuses and correct filing errors when they come up in an audit, your chances of staying on the right side of a prison cell are excellent.