V. Statute of Limitations Defense

Perhaps the most important affirmative defense in tax cases is the statute of limitations. Section 6531 controls the statute of limitations periods for most criminal tax offenses. Under section 6531, the general rule is that the statute of limitations for criminal tax offenses is three years. However, the exceptions to the three-year rule essentially swallow up the general rule.

The CTM includes a helpful table that sets forth the limitations periods for common tax offenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The statute of limitations defense is generally raised in a pretrial motion under Fed. R. Crim. P. 12 or at the latest, at trial. A defendant may waive the defense by a knowing voluntary waiver or, since it is an affirmative defense, by failing to assert it timely. United States v. Ramirez, 324 F.3d 1225 (11th Cir. 2003).

a. When the Statute of Limitations Begins to Run

The statute of limitations begins to run when an offense is completed, that is, when all of the elements have occurred to complete the offense. Toussie v. United States, 397 U.S. 112, 115 (1970). However, even if all of the elements have occurred by a certain date, the defendant may later do something that extends the statute.

For example, in a tax evasion case, the statute of limitations usually begins to run when a false return is filed. But if one of the affirmative acts of evasion charged is a subsequent false statement to IRS agents, the crime is completed at the time the false statement is made, not when the false return is filed. United States v. Beacon Brass Co., 344 U.S. 43 (1952). Thus, the statute begins to run from the date of the last affirmative act.

This is the case even when the return – that is the subject of the evasion charge – is filed outside of the statute of limitations period. For example, in United States v. King, 126 F.3d 987 (7th Cir. 1997), the defendant was a tax protester who filed false Forms W-4 claiming excessive exemptions. An employer who receives suspicious W-4s must notify the IRS, and if the IRS has reason to believe that the W-4 forms are incorrect, it can direct the employer not to honor them.

In King, the defendant filed two such Forms W-4, the employer dutifully notified the IRS, and the IRS directed the employer not to honor them. However, for subsequent years, the IRS did not direct the employer to refuse to honor the W-4s, and the employer honored them. The taxpayer did not file a tax return for any year after his first W-4 filing.

The government charged King with tax evasion for the years 1989 through 1991. The indictments were returned more than six years after the year King submitted his false W-4 to his employer, but within six years of the 1989 return being filed.

King argued that his tax evasion charge fell outside the statute of limitations because it was based on a false W-4 that had been filed outside the statute. He relied on the Regulations, which said that a Form W-4 expires on February 15 after the year in which it is filed, even though some employers continue to honor a W-4 until a superseding form is filed.

The court rejected the argument that a false W-4 could not form a basis for indictment if it has technically expired. It reasoned:

If a defendant files a Form W-4 in which he falsely claims to be exempt from withholding, and he keeps the fraudulent form on file indefinitely, all the while believing that his employer will honor it until he files a new one, it is only logical that the fraudulent W-4 may supply the affirmative act for § 7201 charges in later years, regardless of the fact that it technically expired pursuant to Treasury regulations. Maintaining a Form W-4 on file with one’s employer effectively represents that one is still entitled to the number of allowances or exempt status claimed. If the form is false, the form certainly has the capacity to deceive for as long as it is kept on file. In this case, the fact that [the employer] failed to compel King to file a new W-4 each year, as requested by the IRS, in no way mitigates King’s § 7201 liability. To find otherwise would be to allow the negligence of an employer to accrue to the benefit of an employee who has contravened the law in the first place by filing a false and fraudulent Form W-4. It would be inappropriate for us to judicially sanction a tax loophole like that.

[Id. at 991 (emphasis supplied).]

The defendant also argued that the required affirmative act, here the filing of the false W-4, must have occurred within the six-year statute of limitations in order to support a timely criminal prosecution. The court rejected that argument as well, holding:

The indictment properly alleged that King’s offenses occurred on the due dates of his returns for the prosecution years. A § 7201 offense is not complete until a tax deficiency exists, and a deficiency will not arise until the due date of a tax return. …[t]he act of filing and maintaining on file a false Form W-4 carries over to future years if the defendant files with the requisite intent to evade taxes.

[Id. at 992.]

If the act that starts the running of the statute of limitations is the filing of a false return, when is the return considered to have been filed? On the date the taxpayer mails the return, on the date the return is received by the IRS, or on some other date? The answer is, it depends.

The general rule is that the statute of limitations for the filing of a false tax return begins on the date the return is actually filed, that is the date received by the IRS. United States v. Habig, 390 U.S. 222, 223 (1968). However, if the return is filed prior to the due date for filing (i.e., before April 15), the statute of limitations does not begin to run until the due date of the return. Section 6513(c)(1). For example, if the taxpayer filed his return on March 15, the statute of limitations would begin to run on April 15.

On the other hand, if the return is filed after the original due date, the statute of limitations begins to run the day it was actually filed, regardless of whether an extension was granted. For example, if a taxpayer is granted an extension to October 15 to file a return, but actually files it on October 1, the statute of limitations begins to run on October 1.

In addition, a return that is mailed on or before the due date of the return is deemed filed on the date of the postmark, regardless of whether it is received and processed by the IRS after the due date. IRC § 7502. If the crime charged is failure to file a return, the statute of limitations begins to run when the return is due.

b. Statute of Limitations and Conspiracy Under 18 U.S.C. Section 371

The general statute of limitations for Title 18 offenses is five years. 18 U.S.C. § 3282. However, if the offense charged is conspiracy to commit an offense under the Internal Revenue Code or conspiracy to defraud the IRS, section 6531 provides for a six-year statute of limitations.

Defendants charged with tax conspiracy under section 371 have argued that the general five-year statute of limitations under 18 U.S.C. § 3282 should apply. Unfortunately, courts have routinely rejected this argument and affirmed the six-year limitations period for tax conspiracies. United States v. Aracri, 968 F.2d 1512, 1517 (2d Cir. 1992).

Similar to tax evasion, the statute of limitations for conspiracy begins to run from the date of the last overt act. In order for the overt act to be the spark that triggers the running of the statute of limitations, it must be in furtherance of the conspiracy. In Grunewald v. United States, 353 U.S. 391 (1957), the Supreme Court of the United States held that “the crucial question in determining whether the statute of limitations has run is the scope of the conspiratorial agreement, for it is that which determines both the duration of the conspiracy, and whether the act relied on as an overt act may properly be regarded as in furtherance of the conspiracy.” Id. at 397 (emphasis supplied).

Practically speaking, that can be reduced to the following rule: an act that is not in furtherance of a conspiracy but merely seeks to cover up a completed conspiracy does not start the statute of limitations running again. But don’t be fooled. If the object of the conspiracy itself was to conceal the conduct in question, as is the case with many Klein conspiracies, the initial conspiracy carries through the acts in furtherance of that object.

The government need not prove that each member of a conspiracy committed an overt act within the limitations period. Once the government shows that a member joined the conspiracy, his continued participation in the conspiracy is presumed until the object of the conspiracy has been achieved. Hyde & Schneider v. United States, 225 U.S. 347, 369-70 (1912).

Any member of a conspiracy may withdraw. If a defendant withdraws from the conspiracy before the expiration of the limitations period, that being less than six years prior to indictment, withdrawal is a complete defense. But if a member wishes to withdraw, he must do more than just end participation.

As the second circuit court of appeals stated, such a person must take affirmative action, such as going to the authorities or making a noisy abandonment that is likely to reach all co-conspirators. United States v. Borelli, 336 F.2d 376, 388 (2d Cir. 1964).

c. Suspension and Tolling of the Statute of Limitations

While the statute of limitations generally expires within six years of the time the offense is completed, certain events can suspend or toll the running of the statute of limitations for tax crimes. First, the flush language of section 6531 contains its own tolling provision: “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 shall not be taken as any part of the time limited by law for commencement of such proceedings.”

Simply put, the statute of limitations can be tolled if the defendant is outside the United States or is a “fugitive from justice.”

Second, the government may file a complaint within the limitations period and extend the statute period by nine months. This does not mean that the government has carte blanche for more time to bring an indictment. Rather, it is intended to be used in very limited situations, such as when the government has made its case within the limitations period but cannot obtain an indictment within that same period due to the grand jury schedule. Jaben v. United States, 381 U.S. 214, 219-20 (1965).

Third, the statute of limitations is tolled whenever there is untimely compliance with an IRS administrative summons. For example, if the taxpayer files a motion to quash a summons or intervenes in a summons enforcement proceeding, the statute is tolled during the period of the proceeding and any appeals.

Tolling also occurs whenever there is no resolution of the summoned party’s compliance. In that case, the statute is tolled from six months after the date of the summons until the taxpayer’s compliance with the summons is resolved.

Fourth, the statute of limitations is suspended to permit the United States to obtain foreign evidence. Section 3292. As the U.S. economy becomes increasingly more global, so do the tax schemes. Criminal tax prosecutions increasingly involve the use of evidence obtained from foreign sources.

In order for the government to rely on section 3292 for tolling when it requests evidence from a foreign government, it must first get permission from a district court within the normal statute of limitations period. Assuming so, the limitations period will be tolled until the foreign government takes final action on the request, up to a maximum period of three years.

Finally, the statute of limitations is tolled during the course of a Collection Due Process appeal. Under sections 6320 and 6330, taxpayers may appeal the IRS’s issuance of a notice of intent to levy or a notice of federal tax lien to IRS Appeals and ultimately to the United States Tax Court.

Under Section 6330(e), both statutes of limitations — the civil statute for collection as well as the criminal statute – are suspended for the period during which the appeal is being considered and for an additional 90 days after the determination with regard to the appeal is made. This is yet another instance in which civil tax procedure has a direct impact on tax crimes.

In accordance with Circular 230 Disclosure