What Is the Statute of Limitations on Tax Fraud?

For practical purposes, the statute of limitations on criminal tax fraud is six years.

The IRS has three years in which to audit tax returns. If it appears that the filer has concealed more than one-quarter of their income, called a “substantial understatement of income,” the amount of time the IRS has to file charges doubles. However, there are opportunities for the IRS to extend the six-year period.

There is no statute of limitations on civil tax fraud. The IRS can pursue such cases indefinitely. Keep in mind this does not relate to criminal tax fraud, which the IRS refers to the Department of Justice or another agency.

At Ayar Law, our tax attorneys know the stress our clients experience when subject to a criminal tax investigation. Here’s what to do if you are contacted by a criminal tax investigator.

What Is a Statute of Limitations?

A statute of limitations in a criminal case is the amount of time a prosecutor has to bring charges against you. For the IRS in a civil case, that is the amount of time it can file charges if it suspects you of tax fraud.

The IRS’ three-year statute of limitations runs from the due date, not the filing date. If the due date is April 15, but you filed your taxes in March, the statute of limitations ends April 15, three years later. If you filed for an extension, that due date is when the statute of limitations ends.

Amending a tax return does not alter the IRS’ three-year statute of limitations.

Fraud vs. Evasion

Tax fraud and tax evasion are not synonymous. Tax fraud refers to false information on your tax return, as well as falsifying tax documents. It requires both taxes due and owed and fraudulent intent.

Tax evasion refers to refusing to pay taxes after assessment or not filing a return at all.

Tax fraud may prove either a criminal or civil case. Tax evasion is always criminal. Only prosecutors can enforce criminal penalties, which may include fines and incarceration.

The burden of proof in these investigations always falls on the government. The criminal burden of proof is higher, in that guilt must be proved beyond a reasonable doubt.

In civil cases, the burden of proof for fraud is “clear and convincing evidence.”

Can the Statutes of Limitations Be Extended?

Yes, the statute of limitations can be extended beyond the three-and-six-year deadlines. The IRS may ask you to agree to extend the statute of limitations. Do not sign any extension agreements without consulting a tax attorney.

The statute of limitations is also extended should you leave the country for at least six months. That triggers tolling, or the suspension of the statute of limitations, until you return to the U.S.

Filing for bankruptcy stops the statute of limitations for six months after bankruptcy court proceedings are completed. Learn more about the statute of limitations for IRS audits.

Main Exceptions to the 3-or-6-Year Statute of Limitations

The main exceptions to the three-or-six-year statute of limitations involve:

  • False return with an intention to evade tax–Such a tax assessment or court proceedings for tax collection without an assessment may start at any time.
  • Willful tax evasion–Those who have willfully attempted to evade paying taxes may find the tax assessed or court proceedings without an assessment starting at any time.
  • Failure to file a return–Failing to file a return also means tax assessment or court proceedings without an assessment may start at any time. Not signing a return invalidates it, so you do not have the three-year audit protection.

State Tax Statute of Limitations

The majority of states adhere to the IRS’ three-and-six-year statute of limitations but there are exceptions. In Michigan, the Collection Services Bureau has a six-year statute of limitations but a court judgment can extend that period.

Tax Crime Statistics

In 2021, 370 tax fraud offenders were sentenced under United States Sentencing Commission (USSC) guidelines. That same year, 57,287 cases were reported to the USSC. That year, there were more than 240 million tax returns filed.

Since 2017, when 598 people were sentenced, the number of offenders sentenced for tax fraud has decreased by 38.1 percent.

The average sentence was 14 months, with 63 percent sentenced to prison. Approximately 82 percent of offenders had little or no prior criminal history.

The bottom line remains that relatively few people are convicted of tax crimes. However, if the IRS does charge a taxpayer, the conviction rate is about 93 percent.

Contact a Tax Attorney at Ayar Law

An IRS tax fraud investigation is a serious matter. Call our experienced tax lawyers for a free consultation today.