IRS Civil Tax Fraud Statute of Limitations, When Does Fraud Expire?

IRS Civil Tax Fraud Statute of Limitations, When Does Fraud Expire?

IRS Civil Tax Fraud Statute of Limitations, When Does Fraud Expire?

If the IRS believes that you committed Civil tax fraud, they may have the right go back and investigate you far beyond the typical 3-or 6-year IRS Statute of Limitations.

Common Tax Fraud Questions we receive:

  • Is tax fraud criminal?
  • How long can the IRS come after me?
  • Will I owe fraud penalties?
  • Will I go to jail?

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 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 commences or terminates is often an argument to be made in court, depending on the facts and circumstances of the particular situation (namely, when was the fraud first alleged or detected).

**It is important 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.

Civil Tax Fraud – How Long Can the IRS After You?

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 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 U.S. 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?

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

If the matter is appealed or brought to the U.S. 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

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.

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.

Circumstantial 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

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 preplans 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 actions may have 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 action was deliberately 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.

Look What Happened to Manafort

Especially after the Manafort conviction, our firm was inundated with calls from individuals identifying the same handful of law firms who gave them this horrible advice (to go Streamlined when willful), which has now put these clients into a very serious potential situation involving both civil and criminal penalties – and possibly a criminal investigation.

What Can You Do?

Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists 

The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.

In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.