How Far Back Can the IRS Go for Tax Evasion?

How Far Back Can the IRS Go for Tax Evasion?

Paying taxes is never fun, but evading taxes can lead to big trouble with the IRS. If you’ve underreported income or fudged some numbers on your tax return, you may be wondering – how far back can the IRS go to audit me and assess back taxes and penalties? The answer is, it depends.

The IRS has a few different statutes of limitations that determine how far back they can reach to examine your tax returns and assess additional tax liabilities. Here’s what you need to know about how far back the IRS can go and what factors may extend the time they have to audit you.

The Normal Statute of Limitations

In normal circumstances, the IRS typically has three years from the date you filed your tax return to do an audit and assess additional tax, interest, and penalties. So if you filed your 2018 taxes on April 15, 2019, the IRS would have until April 15, 2022 to audit your 2018 return.

There are a few exceptions and caveats to the three-year statute of limitations:

• If you underreported your gross income by 25% or more, the IRS gets six years to audit you instead of three.
• The three years doesn’t start until you actually file your return. If you filed late or never filed, the statute of limitations never starts running.
• If the IRS already began an audit before the statute runs out, they can take more time to complete the audit even if the statute expires during the process.

So in most normal situations, you don’t have to worry about the IRS coming after you for back taxes from more than three years ago. But if you substantially underreported income or didn’t file at all, you may still be on the hook.

No Statute of Limitations for Tax Fraud

If the IRS believes you intentionally evaded taxes – in other words, committed tax fraud – there is no statute of limitations. They can audit your returns and assess additional liabilities from as far back as they want if they can prove civil tax fraud.

For criminal tax fraud prosecutions, there is a 6 year statute of limitations. So if the IRS uncovers tax fraud, they have at least six years and possibly longer if they can successfully argue civil tax fraud rather than criminal fraud.

Proving Tax Fraud

How does the IRS prove fraud and eliminate the statute of limitations? They have to establish these factors:

• You underpaid your taxes
• You intended to evade taxes through the underpayment

Intent is the key. The IRS has to show you willfully and intentionally tried to cheat on your taxes. Some examples that could show intent include:

• Filing false tax forms or documents
• Using a false Social Security number
• Hiding income in offshore accounts
• Claiming false deductions

Proving civil tax fraud allows the IRS to go back much further, but has a lower burden of proof than criminal tax fraud. Criminal charges have to be proven “beyond a reasonable doubt,” while civil tax fraud uses a “preponderance of evidence” standard.

Tolling Agreements

In some cases, you and the IRS may agree to extend or “toll” the statute of limitations, giving them more time to audit you. This may happen if you have a complex tax return that requires more time to examine fully or you want to give them extra time in exchange for not having to provide as much documentation immediately.

The IRS will usually request a tolling agreement in writing, which you can accept or reject. Make sure to retain a copy of any tolling agreement so you know exactly how much you extended the timeline for the IRS to audit you.

Refunds vs. Tax Assessments

One tricky aspect of statutes of limitations for taxes is that different rules apply to the IRS issuing you refunds versus assessing additional taxes owed. Specifically:

• You typically have only 3 years to file an amended return to claim a refund.
• But the IRS has 3-6 years or longer in fraud cases to audit you and assess additional tax liabilities.

So if you discover an error where you overpaid taxes from several years ago, you may be out of luck trying to get that money back if the normal 3-year window has expired. The IRS doesn’t have to play by the same rules when they are collecting money from you.

When the IRS Can Collect

The IRS may have years to audit you and assess back taxes and penalties, but there are limits on when they can actually collect the money from you. Typically, the IRS has 10 years to collect taxes from the date the assessment was made. They have a few ways to collect:

• Levy your bank account or wages
• File a federal tax lien against your property
• Seize and sell your assets

This 10-year collections statute expires automatically unless the IRS takes action to extend it. Some ways this collections window can be extended include:

• You agree to an installment agreement or offer in compromise
• The IRS files a successful lawsuit against you for the balance
• You make a partial payment (resets the 10-year clock)
• IRS files a tax lien (extends the time period)

So even if the IRS has years to audit you and establish tax deficiencies, they can’t necessarily hound you forever trying to collect if you don’t make any payments or agreements. The collection statute expiring doesn’t erase your liability though.

When Does the Time Period Start?

Given the various time limits the IRS faces, a key question is when do those time periods start running? Some key trigger dates include:

• Statute for audit/assessment starts when you file your return
• Collections statute starts when tax is formally assessed
• Refund statute starts on the filing deadline or when you actually filed

The takeaway is you need to pinpoint the exact date the IRS claims you underpaid your taxes to know when the clock starts ticking on their ability to collect from you.

Strategies to Run Out the Clock

If you’re worried about the IRS assessing taxes or penalties for prior years, you may benefit from running out the clock on the statutes of limitations. Some tips include:

• Don’t extend your return or agree to toll the audit statute
• Don’t sign any waivers allowing more IRS time
• Don’t make any payments or partial payments
• Don’t enter an installment agreement or offer in compromise

Essentially, cut off all contact with the IRS and wait for the statutes to expire before they can take collection action. This is risky though, and may lead to tax liens, levies, or even criminal charges if you overtly dodge them.

Offer in Compromise

One way to resolve things with the IRS before the statutes expire is submitting an offer in compromise. This allows you to settle your tax debt for less than the full amount owed. It extends the collections window for the IRS but caps your maximum liability if they accept your offer.

Voluntary Disclosure

If you engaged in criminal tax evasion like hiding offshore assets, you may be able to avoid criminal prosecution by making a voluntary disclosure to the IRS. This lets you get into compliance and potentially avoid the harshest penalties.

State Tax Agencies

We’ve focused on federal IRS statutes, but state tax agencies like the California Franchise Tax Board or New York Department of Taxation and Finance have their own time limits to audit you and collect tax debts. These vary by state so consult with a local tax expert.

In general though, state agencies tend to have more time than the IRS to collect in certain cases, so don’t assume you’re off the hook once the IRS statute expires.

Get Legal Help

Dealing with the IRS on old tax debts and potential fraud inquiries is stressful. The statutes of limitations determine how long you remain exposed to federal or state tax authorities. An experienced tax attorney can help you:

• Determine exactly when statutes of limitations expire for your situation
• Negotiate with tax agencies before the statutes run out
• Craft an offer in compromise or voluntary disclosure
• Fight any illegal collection actions past the statutes
• Defend against fraudulent tax evasion charges if applicable

Don’t assume you’re in the clear just because many years have passed since you underpaid your taxes. Get professional help to ensure you understand exactly how long the IRS and state tax authorities have to come after you.

Knowing the time limits and your options is key to reducing stress and resolving old tax problems.