Statute of Limitations in Criminal Tax
Rarely in criminal law does the statute of limitations provide a viable defense to criminal charges. A caveat to that general rule is found in criminal tax litigation. In criminal tax cases, the statute of limitations can provide a useful tool to defend specific allegations or carve out certain tax years from the CID investigation. In this post, we will go over the general statute of limitations rules for criminal tax cases and dissect some offense specific issues.
The statute of limitations provides a window of time following the commission of the offense that the government must bring formal criminal charges. Every criminal offense in state or federal court will have a delineated limitation restricting delayed prosecution. As a general rule, the more egregious the offense the longer the limitation period. For instance, the state of Texas has 2 years to file formal charges following an arrest for DWI and no limitation period to file formal charges for the offense of murder.
If a limitation period of years does apply, the prosecuting authority may not file charges outside of the prescribed window. If they do, the defendant may raise an affirmative defense alleging a statute of limitations violation. If true, the prosecuting authority cannot move forward with litigation.
The Statute of Limitations and Criminal Tax
The facts needed to explore limitation issues are the applicable limitations period, the date of the offense, and the date of the formal charging instrument. This concept seems simple on its face, but as we will explore below, it can become tricky in criminal tax. Notably, determining the date the limitations period begins to run (or the date the offense is committed) is not clear cut. There has been loads of litigation in this area with specific offenses creating their own distinct considerations.
Below we will discuss the first two elements of the statute of limitations under the IRC – the applicable waiting period and the date the offense was committed. The date of the formal charging instrument is self-explanatory and does not warrant a lengthy discussion.
Applicable Limitations Periods
26 U.S.C. § 6531 provides that no person shall be prosecuted for any of the various laws under the IRC unless the indictment is found or the information instituted within 3 years after the commission of the offense, EXCEPT that the limitation period shall be 6 years:
- For offenses involving defrauding the US, whether by conspiracy or not;
- For the offense of willfully attempting to evade or defeat any tax or payment thereof;
- For the offense of willfully aiding or assisting in the preparation of a false or fraudulent return;
- For the offense of willfully failing to pay any tax or make any return at the times required by law;
- For the offense of filing a false return (tax fraud) (26 U.S.C. § 7206(1) and 7207);
- For the offense described under 26 U.S.C. § 7212 (intimidation of officers and employees of the US);
- For offenses under 26 U.S.C. § 7214(a) committed by officers or employees of the US; and
- For offenses arising under 18 U.S.C. § 371 where the object is to evade or defeat taxes (conspiracy to evade or defeat taxes).
Under the IRC, the statute of limitations starts with a base period of 3 years. It then goes on to delineate the specific offenses which have an elevated six-year limitation period. For criminal tax purposes, 90% of the litigation will fall under the exception list. Failure to file, tax fraud (or filing a false return), and tax evasion make up the vast majority of criminal tax prosecutions. All three areas are carved out of the three-year base period.
When was the Offense Committed
The statute of limitations clock will start when the offense is committed. Each major criminal tax offense has its own rules and considerations for determining when the clock starts. This is the trickiest area of analyzing a limitations issue. We will go through the four most common tax offenses below.
Failure to File a Tax Return
The statute of limitations will not begin to run until the offense is complete. For failure to file cases, the clock will start when the tax return was due. If a tax return was due on April 15, 2020, the statute of limitations for failure to file would begin to run on that day. The government must bring formal charges against the tax filer by April 15, 2026, or they are barred from criminal prosecution.
If a taxpayer gets a valid extension, the limitation period will not begin to run until the extension date has passed. If the tax return due date was extended to October 15, 2020, the statute of limitations would begin to run on the extended due date. Thus, the government would have until October 15, 2026 to file formal charges.
Filing a False Tax Return
The overarching rule is that the statute of limitations will start for filing a false return on the date the return is filed. It is at that moment that the offense has been committed. However, there are three scenarios that must be considered to accurately determine the limitations period – returns filed prior to the statutory due date, returns filed late, and returns filed under an extension.
If the return is filed prior to the statutory due date in April, the statute of limitations will not begin to run until the statutory due date. For instance, let’s assume the statutory due date is April 15, 2020. If the taxpayer files a false return on April 10, 2020, the limitations clock will not begin to run until April 15, 2020.
Returns filed after the statutory due date will follow the general rule. The limitations clock will start when the return is filed.
If the taxpayer receives an extension of time to file their tax return, the clock will begin on the day the return is filed. This is true regardless of whether the return is filed before or after the extension due date.
In simple terms, the statute of limitations for tax fraud begins when the return is filed unless the return is filed prior to the statutory due date. In that one scenario, the statute of limitations begins on the statutory due date.
The statutory due date is determined by the IRC. For individual filers using a fiscal year basis, the due date is April 15 of each year.
Tax evasion requires the defendant to commit an affirmative act of evasion. This act could be the filing of a false return, but it is often a separate act designed to mislead the government. These separate acts include hiding money in offshore accounts and setting up shell corporations to conceal income.
The overarching rule for tax evasion is the clock will start when the last affirmative act of evasion takes place, or the statutory date of the return, whichever is later. If a criminal tax defendant files a false return on April 15, 2020, and then moves money offshore to conceal income on October 1, 2020, the statute of limitations would start on October 1, 2020.
For tax evasion cases, the limitations period is largely dependent on how the offense is charged. If the government alleges affirmative acts of evasion five years after the filing, the defendant could greatly enhance the government’s window to file charges. Criminal tax attorneys will need to analyze the specific facts, and the indictment, to ascertain the starting point for the limitations clock.
Conspiracy to Evade Taxes or Defraud the Government
The statute of limitations will begin to run under a conspiracy count on the date the last overt act can be proved. If one member of the criminal conspiracy commits an overt act within six years of the indictment, the statute of limitations will not bar prosecution of any member of the conspiracy. The only caveat to this rule is if a conspirator affirmatively leaves the conspiracy six years prior to criminal charges.
Relevant Conduct Bridges the Gap for the Government
I will write a separate post on relevant conduct for federal sentencing. However, it is important to note the implications of the statute of limitations on the sentencing guidelines. Most of the Courts of Appeals have held that the statute of limitations does not bar the trial court from considering the conduct in sentencing. Put differently, while the statute of limitations can bar prosecution, it may not bar the district court from using the barred years to calculate the defendant’s sentence.
This area of law is particularly troublesome. The reality is that the statute of limitations does not have the type of impact it should as long as the government has one indictable count in the scheme. This is probably best illustrated with an example.
Let’s assume a taxpayer is under investigation for filing false returns in 2014-2016. We know that the limitation period is six years for tax fraud. In 2021, the government would likely be barred from moving forward on the 2014 and 2015 tax years. However, the 2016 return is ripe for indictment. If the government indicts the taxpayer for his 2016 return, the question remains whether the 2014-2015 false returns can be used in punishment.
Sentencing for a tax fraud case is largely built on the tax loss to the government. Let’s assume the taxpayer had the following tax loss numbers: 2014 – $1,000,000, 2015 – $800,000, and 2016 – $250,000. If the government only uses the tax loss for the indicted year, the recommended sentence is 27-33 months. If the government is allowed to use the other $1,800,000 in the calculation, the recommendation is 41-51 months.
All criminal tax attorneys should be cognizant of the Courts of Appeals’ decisions in this area. If the attorney is going to plead the criminal tax defendant to the 2016 return, they should control the client’s risk by agreeing to tax loss figures in the plea agreement. Do not leave the tax loss open for the District Court to decide at sentencing. As you can see above, the risk is huge for the client.
The tax loss can be addressed in a couple of different ways in the plea agreement. The tax fraud attorney and the government can agree to an exact tax loss for sentencing (preferred). Or the parties can agree to a cap – ex. the parties agree that the tax loss is no more than $250,000. Where it falls under the $250,000 will be up for debate at sentencing, but at least the attorney has capped the risk to the client.
A more thorough review of sentencing in tax evasion, failure to file, and tax fraud cases can be found in a prior post here.
The statute of limitations is an important area in criminal tax. Early in the investigation, the criminal investigations division of the IRS is going to be calculating what years are still in play for criminal purposes. Every criminal tax attorney should start carving out the years not subject to indictment and ensure that all discussions with the government center on the years within the statute of limitations.