Criminal Tax Evasion – Statute of Limitations – When Must the Indictment Be Brought?

TaxConnections Tax Blog Post - Statute of Limitations on Tax EvasionFor any of you out there who are hiding income or assets from the taxman, please take the time to learn about how the statute of limitations rules work. I have had clients mistakenly believing that the passing of several years since the filing of their returns which deliberately omitted income will afford them protection.

The tax laws contain what is known as a statute of limitations. The statute prescribes the length of time permitted to the government to enforce the tax laws. If the length of time runs out for a particular tax year, then the government is forever barred from asserting tax claims or bringing an indictment against you. It is important to understand how the statute of limitations works, because in certain cases, the statute of limitations will be longer than others or it will not start to run at all.

Today’s blog posting focuses on the statute of limitations that applies in the case of the Government bringing a criminal indictment for the crime of tax evasion – for example – when a taxpayer files a return, but it is a false return that under-reports his income; or when the taxpayer willfully does not file a return so as to evade taxes.

Criminal Tax Evasion

The general rule is that the statute of limitations is for a six year period that commences once the tax return is filed; or from the date there was a willful failure to file the return when otherwise due. The six-year statute of limitations is found in Internal Revenue Code Section 6531(2) and can be accessed here: 26 U.S.C. § 6531(2)

Section 6531(2) states, in part:

No person shall be prosecuted, tried, or punished for any of the various offenses arising under the internal revenue laws unless the indictment is found or the information instituted within 3 years next after the commission of the offense, except that the period of limitation shall be 6 years—․

(2) for the offense of willfully attempting in any manner to evade or defeat any tax or the payment thereof; ……….

(4) for the offense of willfully failing to pay any tax, or make any return (other than a return required under authority of part III of subchapter A of chapter 61 –this section deals generally with the filing of information returns as opposed to tax returns) at the time or times required by law or regulations;

When a tax statute uses the word “willfully” the matter has escalated in the degree of severity and can mean prison time and hefty criminal fines, since the crime is often a felony offense. In the case of criminal tax evasion, the matter is not time barred as long as the taxpayer is indicted within six years of when the crime was completed (for example, one needs to examine when the act of “willfully attempting in any manner to evade or defeat any tax or the payment thereof” was completed. See 26 U.S.C. § 7201.).

Furthermore, the statute of limitations can be tolled in certain cases (this means the clock “stops ticking” and IRS has longer and longer to find the offender)! The law provides that the time during which the person committing any of the various offenses arising under the internal revenue laws is outside the United States or is a fugitive from justice within the meaning of section 3290 of Title 18 of the United States Code, shall not be taken as any part of the time limited by law for the commencement of such proceedings.

When was the Crime Committed?

What action triggers the running of the six-year statute of limitations in such a case? Is it when the taxpayer has filed his false income tax return (or, perhaps, not filed a return at all by the date it was otherwise due), or can a later action serve as the trigger, thereby extending the time for the criminal indictment to be brought? Various circuit courts have expressly considered this issue and have concluded that the statute of limitations for section 7201 offenses (e.g., felony tax evasion) starts to run from the later of two possible dates: when the tax return was due / filed or at the time of the taxpayer’s last affirmative act (for example, the last act of tax evasion).

Recently, in United States v. Irby, the Fifth Circuit held that in such cases, the statute of limitations begins to run from the later of the two events. With its holding in Irby, the Fifth Circuit joined every other court of appeal in this position. In the Irby case, the court determined that Irby’s last act to evade the payment of his taxes occurred in 2006, when he used nominee trusts to conceal his assets. This last act was many years after Irby’s failure to file his tax returns due for the years in question. Irby’s later use of the nominee accounts delayed the commencement of the 6-year statute of limitations time period, and made his prosecution timely. As such, the criminal indictment was not time barred.

In accordance with Circular 230 Disclosure

Virginia La Torre Jeker J.D., has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has 30 years of experience specializing in US and international tax planning as well as international commercial transactions. She has been based in Dubai since 2001; prior to that time she worked in Hong Kong for 15 years as a US tax consultant for international law firms, major banks (including HSBC) international accounting firms (Deloitte) and trust companies. Early in her career she worked in New York with the top-tier international law firm, Willkie Farr & Gallagher.

Virginia is regularly asked to speak at numerous conferences and seminars for various institutes and commercial organizations; publishes a vast array of scholarly works in her area of expertise, been interviewed by CNN and is regularly quoted (or has her articles featured) in local and international publications. She was recently appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. She was a guest lecturer at the University of Hong Kong, LL.M Program (Law Department) and served as an adjunct Business Law professor at the American University of Dubai and at the American University of Sharjah where she also taught the legal / ethical aspects of internet law and internet based transactions.


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