If you’re facing unpaid tax debt, you might dream of running off to a tropical island outside the U.S. and laying low for several years to avoid collections actions from the Internal Revenue Service. If so, you may have seen too many movies.
There are legal ways to move out of the country and no longer pay U.S. taxes, especially if you retire to a country with no income tax or if you move your business and yourself to another country. Even then, it’s not easy, according to tax experts.
“You can’t just expatriate and not pay taxes on things you owned in the U.S. and then went overseas,” Jude Boudreaux, a financial advisor and CNBC FA Council member, told CNBC.com.
Likewise, trying to avoid paying taxes you already owe to the IRS by moving offshore rarely works. Generally, you can’t evade or defeat the IRS. In fact, it could make your situation worse if you don’t understand how the statute of limitations for tax evasion works.
What is a Statute of Limitations?
Let’s start with the basics: What is the statute of limitations? A statute of limitations is the length of time any crime is considered prosecutable. Once the statute of limitations runs out, the prosecuting party can no longer take legal action.
For instance, some states have time limits for the collection of consumer debt, such as credit card debt or consumer loans. After that time has passed, the debtor may still try to pursue the debt. But if they take you to court, they are more likely to lose. If your lawyer uses the statute of limitations as your defense, the case might be dismissed.
With tax evasion or tax fraud, the IRS is the prosecuting party. But tax debt is not like regular consumer debt. The tax fraud statute of limitations isn’t as clear-cut.
It’s difficult to “wait out” the IRS in the hopes your tax debt will disappear, especially if you are being charged with tax evasion.
What Is Tax Evasion?
Before we dive into the statute of limitation laws and penalties for tax evasion, let’s define the term. Tax evasion is an illegal way to avoid paying taxes. Tax evasion comes in different forms: evasion of taxes, evasion of tax assessment, and evasion of tax payment.
Tax Evasion: What It Means
You can try to evade taxes by:
- Underreporting income on your tax returns, including cash payments
- Submitting a false tax return
- Knowingly taking tax deductions you don’t qualify for to lower your income tax bracket
- Destroying income records
- Claiming false dependents on your tax returns to claim extra tax credits
- Concealing assets (by holding them in the account of a friend or family member)
- Keeping two sets of books for your business to knowingly obscure income from the IRS
Evasion of Tax Assessment (Failure to File)
Another form of tax evasion is evasion of tax assessment, which is a more serious form of “failure to file” taxes.
The IRS assesses a Failure to File penalty of 5% of the unpaid taxes for each month or part of a month you haven’t submitted tax returns. They can collect fines of up to 25% of your unpaid taxes, according to Internal Revenue code. The agency can also charge interest on those penalties.
The IRS might even waive or reduce those penalties under penalty abatement rules if it is your first offense and you have a good track record of filing your returns in the past three years.
But evading taxes by failing to file carries harsher penalties if it is prosecuted as a federal crime.
Evasion of Tax Payment
If you file your tax returns accurately but try to avoid paying them, you could be prosecuted for evasion of tax payment. But that’s not always the case if you can’t pay your tax debt immediately. Ignoring your tax bill most likely won’t constitute tax evasion, according to the IRS Tax Crimes Handbook.
Even if you have the money and don’t pay your tax debt, you may not be charged with tax evasion. “[O]bstinate refusal to pay taxes due and the possession of the funds needed to pay the taxes is insufficient for an evasion charge,” according to the Tax Crimes Handbook.
On the other hand, if you attempt to conceal or transfer your assets to willfully evade paying your taxes, that could be considered tax evasion and carry harsh penalties.
In short, if you have unpaid tax debt that you’ve ignored for months or years, it pays to face it head-on. Seek professional help from a tax debt resolution company like Alleviate Tax.
As long as you show a willingness to communicate and negotiate with the IRS, there’s a good chance you won’t be prosecuted for tax evasion. You might even be able to negotiate favorable terms to pay off your tax debt over time.
Penalties for Tax Evasion
If you decide to evade taxes, expect some serious consequences, including fines and jail time, if you get caught. Tax evasion carries penalties of up to $100,000 for individuals and $500,000 for corporations, as well as imprisonment for up to five years.
Statute of Limitations: Tax Evasion
The statute of limitations for tax evasion varies.
If the IRS decides to prosecute with criminal charges, the statute of limitations for tax evasion is six years.
If the IRS decides to pursue tax evasion as a civil case, where they believe you overstated deductions, failed to file your tax return due to negligence, or underreported income, there is no statute of limitations.
For criminal cases, the countdown for the statute of limitations begins on the date the tax return was due, typically April 15 of the following year for the prior year’s income. If you file after the due date, the statute of limitations countdown may begin the day you file.
However, there’s a caveat. If you leave the country for six months or more, it suspends the statute of limitations clock. That means you will have a civil tax evasion case and tax debt waiting for you when you return.
IRS Statute of Limitations for Tax Fraud
Tax evasion is a form of tax fraud, although not all tax fraud is considered tax evasion. Tax fraud involves falsifying tax returns to conceal income or claim deductions or credits you don’t deserve.
Tax evasion can involve:
- Falsifying tax returns
- Submitting fake tax returns
- Concealing income and assets from the IRS to get out of paying tax debt.
Tax fraud, like tax evasion, carries a statute of limitations of six years.
What Is the IRS Statute of Limitations on Federal Taxes Owed?
Even though the IRS can’t file tax evasion or tax fraud charges in a criminal case after six years, the IRS can pursue collections of your tax debt for up to 10 years, which is the Collection Statute Expiration Date.
The IRS can extend the CSED, as well as the statute of limitations for criminal tax fraud, if you:
- File for an installment agreement or partial pay installment agreement
- File bankruptcy
- File for an Offer-in-Compromise
- Request a Collection Due Process Hearing
- File for Innocent Spouse Relief
Do You Need a Tax Attorney?
Unless the IRS has pressed charges in a civil or criminal tax evasion case, you may not need a tax attorney to defend your case. You may be able to avoid tax evasion or tax fraud charges by working with Alleviate Tax to negotiate an agreement with the IRS and settle your tax debt.
We have California tax attorneys on staff to assist if you need legal help, though.
The best way to find out if you need a tax attorney or a tax debt specialist is to reach out to Alleviate Tax by phone or email. We are here to help.
FAQs
Can the IRS pursue you after 10 years?
The IRS cannot pursue unpaid tax debt after 10 years because of the Collection Statute Expiration Date. But, before that time, the IRS can garnish your wages and place levies or liens on your property. It’s better to face your tax debt than try to wait out the IRS.
At what point will the IRS come after you?
The IRS will send collections letters as soon as you have accumulated unpaid tax debt or failed to file your taxes. But unless you show a pattern of failing to file or not misreporting your income, the IRS most likely won’t press tax evasion charges.
How far back can tax evasion be investigated?
The IRS can investigate tax evasion in a criminal case for up to six years. There is no statute of limitations on civil cases of tax evasion.
