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Tax Fraud Statute Of Limitations

Paying your taxes every year can be quite a headache. Not only is the process pretty complicated, but it can also usually leave your wallet pretty light afterward. That’s why it’s not particularly surprising that 45 percent of Americans think that their taxes are too high

It’s a safe bet that most people would prefer to pay fewer income taxes than they currently do. While this is certainly understandable, it’s no reason to commit a felony like tax fraud. 

A much safer solution would be to consult with the tax experts at Coast One Financial. They can go over your tax returns before you file them and possibly find a few legal ways to save you some money. 

What Is The Statute Of Limitations For Tax Fraud?

The IRS estimates that they are losing upwards of $1 trillion in unpaid taxes every year as a result of tax fraud. With so much money being lost, the IRS has started to take inconsistencies on tax returns more seriously. However, these investigations must be launched and charges must be filed within a certain amount of time. 

If the IRS fails to do so within this established time limit, the statute of limitations kicks in and the case is closed. In general, the IRS has three years to audit your tax returns from the due date of said return. That means that if you file your return early then the statute will last from Tax Day of that year until three years in the future. 

The total amount of time can double if your return includes a “substantial understatement of income.” Normally, this means that more than 25 percent of your income wasn’t properly reported. For these situations, the IRS has six years to audit your return or file charges. 

This is a list of potential tax offenses and their statute of limitations:

  • Tax evasion: Six years
  • Failure to pay tax: Six years
  • Conspiracy to commit tax evasion: Six years
  • Failure to file a return: Six years
  • Interfering with the IRS: Six years
  • Failure to keep records: Three years
  • Disclosing a false document: Six years
  • Failure to supply information: Three years
  • Filing a false tax return: Six years
  • Assisting in preparing a false tax return: Six years
  • False claim for a refund: Five years
  • False statement: Five years

The statute can be delayed under special circumstances. If you don’t live in the United States or become a fugitive then the statute of limitation is frozen until you are discovered or returned to the county. 

Another thing to keep in mind is that the statute of limitation only applies to criminal court proceedings. There is no statute of limitations for civil tax fraud so the IRS can go back as far as they would like. 

However, it’s very rare for the IRS to look further back than the customary six years as it’s fairly difficult to prove tax fraud. 

What Is Tax Fraud?

Tax fraud is the term for whenever a person or business intentionally falsified specific information on their annual tax return. Altering certain information about your finances can lower your overall tax liability. 

There are several different ways to achieve this goal, including:

  • Deliberately failing to file an income tax return or pay taxes.
  • Misrepresenting the size of an estate in order to claim certain deductions and credits. 
  • Purposely filing an income tax return with false information. 

Tax laws are a bit more complex for businesses so there are a few more opportunities for tax fraud. Some of the most common methods of a business engaging in tax fraud include:

  • Intentionally failing to file payroll tax reports or pay them.
  • Neglecting to report some or all cash payments to employees.
  • Hiring an outside payroll service that doesn’t report to the IRS.
  • Failing to withhold income taxes from employee paychecks. 

Can You Accidentally Commit Tax Fraud?

A lot of people are accused of tax fraud by the IRS for making a simple mistake or general negligence. Remember that tax fraud means that you are purposefully deceiving the IRS and intentionally falsifying tax information. 

If you make an innocent mistake on your tax returns and the IRS accuses you of tax fraud, you would need to hire a tax attorney to sort it out. These are a few of the ways that you could find yourself in trouble with the IRS:

Underreporting Your Income

A common mistake made by taxpayers is failing to report income they may have picked up on a side job. Tips, freelance, gambling, and stock market gains are all considered to be income and you have to pay taxes on all of it. 

Failing to include any of these additional funds on your income taxes can lower your tax obligation, but it could also constitute tax fraud if you intentionally underreported your income. 

Overvaluing Charitable Donations

Itemizing non-cash charitable donations can lower your tax obligation in the form of write-offs. A lot of charities will list the estimated value of your donations when they write out the receipt. 

Others will allow you to fill in the information on your own. Giving away old clothes and claiming their value as several hundred dollars would save you some money on your taxes. 

However, it could also be considered fraud and could land you in hot water with the IRS. 

Failing To File A Return

Failing to file a return at all is also considered to be tax fraud. Since 1955, Tax Day has fallen on April 15 or just after it. If you willfully or intentionally fail to file a tax return for the previous year’s income by this date then you have committed tax fraud. 

You’ll still be able to file your returns after Tax Day in order to avoid legal ramifications, but there will be a penalty fee tacked on. 

How Often Are People Convicted Of Tax Crimes?

The fiscal year of 2021 was a busy year for the IRS. They opened up more than 2,500 criminal investigations into tax-related crimes totaling more than $10 billion. The conviction rate of these criminal investigations was just under 90 percent. 

A majority of these tax crimes were committed by businesses as it’s fairly rare for everyday citizens to be audited. Only about one of every 220 taxpayers were audited in 2019, down from one of every 90 from a decade ago. 

The overall odds of getting audited are fairly low, but the potential consequences are steep.  

What Are The Penalties Of Committing Tax Fraud?

Tax fraud is a very serious allegation and comes with severe consequences if proven in a court of law. According to the US tax code 6663: if any part of the underpayment of required tax on a return is shown to be fraud, there shall be an added tax amount equal to 75% of the underpayment portion that is attributable to fraud. 

These are just the penalties levied by the IRS and don’t take into account the criminal consequences. If you are convicted of felony tax fraud in a federal court then you could face up to $100,000 in fines, five years in prison, and pay the cost of prosecution. 

What Should You Do If You Are Charged With Tax Fraud?

You should take immediate action if you are charged with tax fraud. The IRS has most likely completed an investigation into your previous tax returns and prepared a case against you. 

The first thing you should do is contact a tax attorney that specializes in IRS audits and investigations. Tax law is extremely complicated and it would be foolish to try and take on the IRS by yourself. 

The second step is almost as important as the first: Preserve all your financial records. You’ll need to locate anything involving your tax or financial information from the period in question. Intentionally destroying or tampering with any of these records is a federal crime and will only make things worse. 

Next, you will need to turn these records over to your tax attorney so they can advise you properly. Be sure to cooperate with your attorney and the IRS as best as you can. Your explanations for defense will need to stay consistent so be open and honest. 

If the IRS determines that you have a substantial tax liability, there are still options left that don’t involve a trial. The IRS only wants their money and usually doesn’t involve the criminal court system unless they have no choice. It’s possible that your attorney can make a deal with the IRS to lower your tax burden or set up payment plans. 

The Takeaway

The statute of limitations for the IRS to file criminal charges against you on tax fraud can last between three and six years depending on a few circumstances. Due to the nature of audits, the IRS only opens up investigations into less than 0.5 percent of tax returns. While it’s unlikely that you may get audited, tax fraud can come with severe financial penalties and possible jail time. 

If you are unsure about your tax returns or were charged with tax fraud then you should talk with a tax professional. The experts at Coast One Tax Group have over 25 years of experience dealing with tax-related issues. Consulting with them can get you a fresh start with the IRS and help you avoid the consequences of a tax fraud conviction. 

Sources:

Here’s how many Americans think their taxes are ‘about right’ as opposed to ‘too high’ | CNBC

Tax Fraud Definition | Investopedia

5 Ways You Could Accidentally Commit Tax Fraud | HuffPost

Tax cheats cost the US $1 trillion per year | The New York Times

25.1.6 Civil Fraud | Internal Revenue Service

IRS Criminal Investigation releases annual report | Internal Revenue Service.

Attention taxpayers: IRS audits have fallen significantly | CNBC

26 US Code § 6663 | Cornell Law