Frequently, individuals want to know how long they have to worry about past tax mistakes coming back to bite them. For many people, it is relatively effortless to “fudge” the numbers to produce a larger tax refund or a reduced tax liability without considering the full implication of actions of this type. If the fraud is detected by the IRS, the best-case scenario will typically involve an unpaid tax liability which is inflated by penalties and interest. When the mistakes cross the line and seem to involve an ongoing intent to defraud the government, then the taxpayer could end up facing criminal tax evasion or obstruction charges.
Unfortunately, some taxpayers seem to believe that the passage of a certain number of years, regardless of any other acts they may engage in, will protect them from facing an audit or criminal charges. Unfortunately, the statute of limitations applicable to tax controversies is lengthy and, in some instances, is theoretically open-ended. Furthermore, actions by the taxpayer can reset the statute of limitations giving the government a fresh chance at filing tax charges that would otherwise be time-barred.
The 3 and 6-year Statute of Limitations in Your Tax Case Can Vary Based on Facts and Circumstances
26 U.S.C. §6531 – Periods of limitation on criminal prosecutions, sets forth the statute of limitations periods for an array of federal crimes. The statute of limitations is the period during which the federal government can properly file a cause of action alleging a crime or some claim. The statute sets a general default limitations period of three years for which the government has to identify fraud after the commission of an offense. However, a tax charge can be brought within six years if it meets any of the eight categories of offenses set forth in 26 U.S.C. §6531. Crimes where the six-year statute of limitations applies include tax evasion, defrauding the United States government, making certain false statements or proffering fraudulent documents, and other offenses.
The recent Galloway Case Illustrates How Merely Talking to an IRS Agent Can Reset the Statute of Limitations
In U.S. v. Galloway, defendant Michael Galloway was charged with four counts of tax evasion under 26 USC 7201 stemming from false statements on tax returns from the 2003 to 2006 tax years. The returns in question were filed on October 24, 2005, November 7, 2005, November 6, 2006, and August 18, 2008. Under Section 7201 – Tax Evasion, the government typically has six years to bring criminal charges. Thus, the government should have brought charges for the crimes, respectively, by October 2011, November 2011, November 2011, and August 2014. The government did not file charges against Galloway until May 2014.
Under 26 U.S.C. §6531(2), the applicable statute of limitations is six years with respect to the charges of violating 26 U.S.C. § 7201. Since the charges for the first three matters appeared to be filed outside of this statutory period, Galloway filed a motion to dismiss three of the four tax evasion charges. The U.S. government opposed this motion on the basis that Galloway’s “last affirmative act” of tax evasion – were misstatements (lies) made during a 2010 conversation with an IRS agent — justified the timing of the government’s indictment and charges.
When Accusing a Taxpayer of Tax Evasion, Prosecutors will Look for the “Last Affirmative Act”
The difference between felony tax evasion as defined in Section 7201 and the tax misdemeanors listed in Section 7203, the willful failure to file a return is “an affirmative act of evasion.” United States v. Carlson, 235 F.3d 466 (9th Cir. 2000). An affirmative act typically means that the tax payer has to take some action or consciously endeavor to avoid taking a certain action. The U.S. Supreme Court has held that “Willful but passive neglect of the statutory duty may constitute the lesser offense, but to combine with it a willful and positive attempt to evade tax in any manner or to defeat it by any means lifts the offense to the degree of felony.” Spies v. United States, 317 U.S. 492, 63 (1943). Since the “last affirmative act” is a necessary element of the crime of tax evasion the statute of limitations does not run until it occurs, and thus, a crime cannot be charged. Therefore, prosecutors will endeavor to identify the “last affirmative act” not only for purposes of legal sufficiency, but also to determine if the matter is still within its statutory period. Lying to a federal agent investigating a potential tax crime has been established in case law as constituting the last affirmative act of that particular tax crime.
Arguments Advanced Regarding Tax Evasion Charges Beyond 6 Years of the Filing Date
In Galloway, the issue turned on if the defendant’s last affirmative action occurred before August 2008, then the government’s charges for the first three alleged acts of evasion would be untimely. However, if Galloway engaged in any affirmative acts during or after August 2008, then the government’s timing in filing charges would be fully justified.
Here, the factual question is whether a conversation between Galloway and an IRS Revenue Agent could constitute an affirmative act of evasion. Galloway advanced several arguments supporting his belief that three of the four matters should be dismissed. Galloway argued in the alternative that this conversation could not constitute the “last affirmative act” because:
- His statements were not made with the intent to deceive.
- The statements were not knowingly false.
- In isolation, the statements did not constitute tax evasion.
- Mere talking or speech cannot extend a statute of limitations.
Citing United States v. Perry, 714 F.3d 570, 573-74 (8th Cir 2013), the government opposed the defendant’s requested relief and the theories under which he argued for the dismissal. The issue in Perry was substantially similar to the concerns raised by Galloway. In Perry, the defendant made false statements in a 2006 interview with an IRS agent regarding his involvement in a fraudulent scheme allegedly occurring during the 2001 through 2004 tax years. The false statements made in 2006 were found to be the “last affirmative act” of tax evasion thereby justifying the timing of the charges filed against Perry.
The Galloway court found the Perry holding to be in line with the jurisprudence of the First, Sixth, and Eleventh Circuits. Furthermore, the court held that to adopt an approach inconsistent with the foregoing “would only reward a defendant for successfully evading discovery of his tax fraud for a period of six years subsequent to the date the returns were filed.” Thus, the court denied Galloway’s motion to dismiss the first three charges. At trial, the prosecution would still bear the burden of proving that the statements made by Galloway in 2010 were, in fact, an affirmative act of evasion.
When Dealing with IRS Agents, Small Mistakes Can Have Huge Tax Consequences
The Galloway case illustrates how exceptions to the statute of limitations rules can lead to unexpected negative legal outcomes. However, Galloway also stands for the lesson that every interaction a taxpayer has with the IRS and its agents is critical. Speaking to an agent prior to gaining a full understanding of the situation, speaking off the cuff, and making misstatements can have a profound effect on your legal standing and likelihood of success. A mistaken statement that is interpreted as concealing or furthering the fraud can and will grant the government an additional six years to build a case and file charges against you.
Therefore, if you are contacted by the IRS, it is wise to work with a tax attorney. A tax attorney is familiar with IRS audit and tax enforcement procedures. He or she can set ground rules, develop a plan for audit, and ensure that all communications with government agencies are controlled and professional. These steps alone often make a key difference in tax proceedings.
To discuss how a tax attorney can strategically guide your tax audit or other tax enforcement proceeding, call the Tax Law Offices of David W. Klasing today at 800-681-1295. If you’d like more information before you call, please watch our YouTube video about what can happen when you face criminal tax evasion charges.
