Worried about accusations of tax fraud from the Internal Revenue Service (IRS)? The term “statute of limitations” may come to mind. Does the IRS have to play by the same rules as other government agencies? Is there a time limit when it comes to looking back at tax obligations?
Like many things in the legal world, the answer is — maybe. Before we delve into the timeline the IRS has to follow, let’s cover a few basic questions:
What does the IRS consider fraudulent activity?
There are a variety of forms of fraud the IRS could investigate. Some of the more common examples include a deliberate failure to report income, overstatement of deductions, personal expenses claimed as business costs and hiding or transferring assets in an attempt to avoid tax obligations. These behaviors often fall squarely into criminal territory, making it critical to understand the difference between aggressive tax planning and criminal tax fraud.
How often does the IRS investigate alleged fraudulent activity?
The IRS reports that it conducted 1,177 investigations in 2016. Of these investigations, 863 resulted in enough evidence to support moving forward with prosecution. 771 were sentenced, translating to a 76 percent incarceration rate of an average three-year prison sentence.
These statistics underscore how seriously tax crimes are treated. Similar outcomes can be seen in large-scale enforcement actions, including the largest tax evasion cases pursued by the federal government.
How far back can the IRS look?
Back to our original question — how long do you have to worry about becoming another number in those statistics? It depends on the details of the allegations. Generally, the IRS can look back three years.
There are factors that can extend this lookback period. The IRS can look back six years if the agency can establish the taxpayer omitted 25 percent or more of gross income. The IRS can potentially look back an indefinite period of time if it can establish the taxpayer filed fraudulent returns with the intent of evading tax obligations.
These extended timelines often come into play when concealment efforts are involved, such as hiding income or assets offshore. As recent prosecutions demonstrate, attempts to cover up misconduct frequently result in additional charges and harsher penalties, as seen in other high-profile tax fraud cases.
Due to the serious nature of such allegations, anyone under investigation by the IRS is wise to seek legal counsel as early as possible. The attorneys at Goldburd McCone regularly advise individuals facing potential criminal tax exposure and can review the allegations, explain the risks, and help determine the best course of action to protect your legal rights.