Most taxpayers and individuals realize that our legal system encourages parties to bring claims contemporaneously before evidence is lost or destroyed and memories of an event fade from the recollection of witnesses. This principle is true in both civil and many criminal legal proceedings. While there are some crimes with substantial limitations period, serious tax crimes can generally be charged within six years of the act. If the alleged crime occurred more than six years ago, under 26 U.S.C. §6531(2), the taxpayer should not theoretically face prosecution for the alleged crime.
However, while the six-year rule would appear to provide a bright-line rule, the truth is that there is a great amount of nuance regarding how the limitations period is construed. In some circumstances taxpayers who thought that they had avoided tax charges can still come to face criminal tax charges, like tax evasion, due to what is defined as the “last affirmative act” of evasion. A taxpayer in a recent tax action found that due to the timing of his last affirmative act, the charges against him were not dismissed despite initially appearing to fall outside of the limitations period.
The last affirmative act is a legal concept. The last affirmative act is any material action made to further the scheme or conceal the scheme to commit tax fraud or evasion. That is, conduct that has the purpose to mislead or conceal can be considered last affirmative acts. For instance, the last affirmative act could include the taxpayer filing a false tax return, making false statements to an IRS auditor, or moving assets to secret offshore accounts. The last affirmative act is essential to identify because it starts the running of the limitations period. From the last affirmative act of the tax fraud, the government has six years to bring charges against the accused.
In a recent tax matter, U.S. v. Galloway heard in the Eastern District of California and decided on April 8, 2016, the issue as to what constitutes the last affirmative act arose in the context of a tax evasion charges under 26 U.S.C. § 7201. In this tax matter, the taxpayer had been charged with multiple counts of tax evasion. The taxpayer, Galloway, was charged with three counts of tax evasion in May 2014. The alleged acts of tax evasion concerned Galloway’s tax returns filed for 2003 through the 2006 tax years. Thus, it would appear that these charges would be time-barred because they were filed more than six years following a common last affirmative act: filing the tax return.
Therefore, the taxpayer filed a motion to dismiss the charges against him on the basis that the charges were brought outside of the six-year statute of limitations period. He argued that the last affirmative act committed in the furtherance of the alleged fraud was the filing of the 2006 tax return. Since the charges were not filed until 2014 – eight years later – the charges against him were barred by the applicable statute of limitations.
However, the government argued that the last affirmative act in furtherance of the tax evasion scheme actually occurred in February 2010 during an interview with IRS agents. The government argued that this act created a new last affirmative act that restarted the six-year statute of limitations period. Thus, under the government’s view, it would have had until at least February 2016 to bring criminal charges.
Relying on the holding in United States v. Perry where a taxpayer’s misrepresentations during an IRS interview were found to be a “continuing attempt to evade his income tax liabilities,” the court found the government’s position persuasive. Thus, any new or additional act that furthers the tax fraud or conceals the tax fraud from government investigators essentially re-starts the six-year limitations window. Thus, when Galloway made the misrepresentations to the auditor in 2010, the limitations period restarted and the government had six years from that point to bring charges. Had any further concealment by Galloway occurred, it would have again restarted the limitations period.
Thus, taxpayers who are questioned by the IRS and who fail to handle the matter strategically and tactfully often extend their window for potential liability for existing charges while potentially compounding their liability with new charges due to the false statements. Furthermore, taxpayers who may not realize that potential criminal liability exists are unlikely to take the necessary steps to come back into compliance with the U.S. Tax Code or otherwise minimize that risk. Working with a tax attorney can help you address key issues relating to your criminal tax concerns including:
As the recent decision by a court in California shows, courts interpret the concept of the last affirmative act broadly. Nearly any step a taxpayer takes take to conceal or otherwise advance an alleged tax fraud scheme will extend the limitations period and your liability. Understanding these key concepts is a first step in meeting the challenge presented by an IRS audit or investigation.