By Matt Mueller
When is it safe? Clients with concerns about possible fraud on their tax returns from a prior year need to be aware of the pertinent statutes of limitations. This article provides a basic discussion of select civil and criminal statutes of limitations for tax fraud. On the civil side, the IRS may have three years, six years, or forever to assess a tax liability, along with corresponding penalties and interest, on a given tax return.
The general rule is that any tax “shall be assessed within 3 years after the return was filed.” I.R.C. § 6501(a). Under Section 6501(e), if the taxpayer omitted certain items from the return, such as more than 25 percent of gross income, the IRS has up to six years to assess the tax. An even more generous extension applies in cases of a “false or fraudulent return with the intent evade tax” or a willful attempt to evade tax. In both cases, the IRS can assess the tax “at any time.” I.R.C. § 6501(c)(1)-(2).
This exception to the three-year statute of limitations for assessment is intuitive where the taxpayer intentionally filed a fraudulent tax return. Having created a deceitful, and often convoluted, scheme to evade taxes, the taxpayer’s complaints about an unlimited period for assessment might ring hollow. A less intuitive and more problematic scenario arises when the tax return filed was fraudulent but the taxpayer did not personally know of the fraud. This could arise if a return preparer includes fraudulent items on a tax return without the explicit knowledge or consent of the taxpayer. It also could arise where a taxpayer, relying on advice from a tax professional, used a tax reduction strategy that was later determined by the IRS to be fraudulent.
Whether the IRS will be entitled to use the unlimited statute where the “fraud on the return” was perpetrated by a third party is currently unsettled. The government has taken the position in different forums that the unlimited statute should apply even where the fraud was committed by a third party. The government has prevailed with variations of this argument in Tax Court, Allen v. Commissioner, 128 T.C. 37 (2007), and in the Second Circuit, City Wide Transit, Inc. v. Commissioner, 709 F.3d 102 (2d Cir. 2013). Conversely, this argument has been rejected by the Court of Federal Claims. BASR Partnership v. United States, 113 Fed. Cl. 181 (Fed. Cl. 2013).*
From a criminal standpoint, the most common federal tax crimes have a six-year statute of limitations. I.R.C. § 6531. However, there are several events that could arguably extend the criminal statute well beyond six years after filing of the return. Those events include post-filing acts of evasion by the taxpayer or a conspirator, summons enforcement proceedings, government requests for foreign evidence, and, in some cases, acts of Congress declaring war or authorizing the use of military force.
* Note: The government appealed the BASR ruling to the Federal Circuit, where the parties presently await
a ruling.
