What Is the IRS Tax Fraud Statute of Limitations?
Tax fraud is a serious accusation. But how long can the IRS wait before charging you with tax fraud? Here’s what you need to know.
Key Takeaways
- The IRS has unlimited time to pursue civil tax fraud, but criminal tax fraud has a six-year statute of limitations.
- The statute of limitations for criminal tax fraud can be extended under certain circumstances.
- By avoiding certain red flags, you can reduce your chances of being investigated for tax fraud.
Understanding the Statute of Limitations on Tax Fraud
The statute of limitations on tax fraud means how long the IRS can wait before taking legal action against someone for tax fraud.
- For criminal tax fraud, the statute of limitations is six years.
- For civil tax fraud cases, there is no statute of limitations. The IRS can investigate this at any time.
What Is Tax Fraud
Tax fraud means intentionally lying to the IRS to avoid paying taxes. This might mean:
- Underreporting your income
- Inflating the deductions you claim
- Hiding your money in foreign bank accounts so it can’t be taxed
Tax fraud is a serious crime. It can lead to serious fines and even prison time.
Civil Tax Fraud vs. Criminal Tax Fraud
Criminal and civil tax fraud are two forms of tax fraud, each with different levels of seriousness.
Civil Tax Fraud
Civil tax fraud involves actions such as underreporting income, claiming improper deductions, or refusing to file a return when required. If the IRS accuses you of civil tax fraud, they will need to prove it with “clear and convincing evidence.” The penalties for civil tax fraud are only fines. These fines may be hefty, however.
Criminal Tax Fraud
Criminal tax fraud means more deliberate actions to evade taxes, often including falsifying documents, hiding income, and other forms of willful deceit. If the IRS accuses you of criminal tax fraud, they will need to prove it “beyond a reasonable doubt,” which is a higher standard. The penalties for criminal tax fraud include both heavy fines and jail time.
Limitations on the IRS’s Ability to Pursue Tax Fraud
For civil tax fraud, there is no time limit for the IRS to assess taxes and penalties. This means the IRS can demand unpaid taxes at any point as long as there was fraud involved. For criminal tax fraud, the IRS only has six years to press charges.
Exceptions to the Statute of Limitations in Tax Fraud Cases
Even in cases where the six-year statute of limitations would normally apply, there can be exceptions.
1. No Return Filed
If a taxpayer fails to file a return, there is no statute of limitations. The IRS can pursue the collection of taxes indefinitely until a return is filed. Once the return is filed, the standard statute of limitations starts again.
2. False or Fraudulent Return
If a taxpayer files a false or fraudulent return with the intent to evade taxes, the IRS can assess taxes or initiate court proceedings at any time without any limitation. This means the IRS has unlimited time to take action in such cases.
3. Willful Attempt to Evade Tax
In cases where there is a willful attempt to evade taxes, the IRS can pursue legal action indefinitely. This exception ensures that the IRS can hold criminals accountable regardless of how much time has passed.
4. Absence from the US
If a taxpayer is out of the country for a continuous period of at least six months, the statute of limitations is suspended until they return to the US. This prevents taxpayers from avoiding prosecution by staying abroad.
5. Ongoing IRS Actions
The statute of limitations is suspended during ongoing IRS actions, such as audits or court proceedings. This ensures the IRS has sufficient time to complete its investigations without being limited by the six-year time limit.
Evidence Required in Tax Fraud Cases
To prove tax fraud, the IRS must show that the taxpayer intentionally committed fraud with the purpose of evading taxes. Evidence can include:
- Financial records
- Witness testimony
- Any documents or recordings that demonstrate deceitful behavior
Again, the standard of proof is different depending on whether the IRS is pursuing a civil or criminal tax fraud charge. Criminal tax fraud must be proven “beyond a reasonable doubt,” while civil tax fraud only needs to be proven with “clear and convincing evidence.”
Tax Avoidance vs. Tax Evasion: Understanding the Difference
Tax avoidance means minimizing taxes using strategies within the bounds of the law. It is always legal. Tax evasion, on the other hand, means willfully deceiving the IRS to reduce your tax liability. This is always illegal.
Here are some examples of legal tax avoidance:
- Claiming deductions and credits you may be eligible for, such as the Foreign Earned Income Exclusion or the Child Tax Credit
- Contributing to tax-deferred retirement accounts
- Investing in municipal bonds, which are often exempt from federal and sometimes state taxes
Illegal tax evasion, on the other hand, looks like:
- Refusing to file a tax return to keep from paying taxes
- Deliberately not reporting all the income you’ve earned
- Exaggerating expenses or donations to claim tax credits or deductions you aren’t eligible for
- Hiding money in foreign accounts and not reporting it to the IRS
Related: Tax avoidance vs tax evasion
Red Flags for Tax Fraud
When searching for tax fraud, the IRS looks for certain red flags that may hint at illegal activities. Common examples include:
- Reported income that doesn’t match IRS records
- Claiming unusually high tax credits and deductions without proper documentation
- Failing to report foreign bank accounts
- Making glaring mistakes on tax returns that could be interpreted as intentional deceit
- High volumes of cash transactions
- A lifestyle that seems unlikely based on income (e.g., a house or car that you wouldn’t normally be able to afford with your job)
All of these could have perfectly innocent explanations — but they may give the IRS a reason to take a closer look at a taxpayer’s finances. Talk to your Greenback accountant to learn more about how you can avoid common IRS red flags.
Avoid IRS Tax Troubles with Help from Greenback!
Expat taxes are nothing if not complex. When you handle your own taxes, it’s easy to make a mistake. This could catch the attention of the IRS and lead to an audit or investigation.
With Greenback Expat Tax Services in your corner, you can rest easy knowing that your taxes will always be filed accurately and on time.
Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.
This article provides information for educational and informational purposes only and does not constitute legal, tax, or professional advice. While the information is believed to be accurate and current as of the publication date, tax laws and regulations are complex and subject to change. Readers are encouraged to consult their Greenback tax professional or another qualified tax advisor to ensure compliance with current IRS regulations and for personalized advice tailored to their individual circumstances.
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