What is the Statute of Limitations on Tax Evasion?

Statute of Limitations on Tax Evasion

Paying taxes is a responsibility all of us have as citizens. But sometimes, people try to avoid paying the taxes they owe by hiding income or falsifying tax returns. This is called tax evasion, and it’s illegal.

When someone commits tax evasion, the government can prosecute them. But there’s a limit on how long they have to do it. This is called the “statute of limitations.” After the statute of limitations passes, the person can no longer be prosecuted for that tax evasion.

So what is the statute of limitations on tax evasion? Unfortunately, there’s no simple answer. It depends on a lot of factors, which we’ll break down here.

No Statute of Limitations for Criminal Tax Evasion

If the IRS believes someone has intentionally evaded taxes, they can bring criminal charges. Examples of criminal tax evasion include:

• Hiding income
• Keeping two sets of books
• Making false statements on a tax return
• Claiming personal expenses as business expenses

There is no statute of limitations on criminal tax evasion charges. The IRS can prosecute at any time, even for tax returns filed many years ago.

6 Year Statute of Limitations on Civil Tax Fraud

If the IRS does not believe the taxpayer had criminal intent, they may pursue civil tax fraud instead. Examples include:

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• Negligently underreporting income
• Overstating deductions
• Failing to file a tax return

The IRS has 6 years to audit a tax return and assess additional tax for civil tax fraud. The 6 years starts from the date the return was filed. If no return was filed, there is no statute of limitations.

3 Year Statute of Limitations on Regular Tax Returns

If there is no evidence of fraud, the IRS generally has 3 years to audit tax returns and assess additional tax owed. This applies to innocent mistakes or oversights, such as:

• Forgetting to report income
• Misreporting earnings or deductions
• Errors in calculating tax

The 3 years runs from the later of:

1. The tax return due date, or
2. The date the return was actually filed

So if you filed your 2018 return in 2019, the statute would expire in 2022.

No Expiration for Fraudulent Returns

Even if the 3-year or 6-year statute of limitations has expired, the IRS can still assess additional tax and penalties if they can prove fraud. So inaccurate returns can potentially be audited many years later if the IRS can demonstrate the taxpayer deliberately evaded tax.

Tolling Agreements Extend the Time Limit

Taxpayers who are under audit often sign agreements with the IRS to extend the statutes of limitation. This “tolls” or pauses the clock, giving the examiner more time to complete the audit. There is no limit on how many times the statute can be extended.

Refunds Have Different Rules

The statutes above apply to the IRS assessing additional tax. Different rules apply for taxpayers claiming refunds. In general, taxpayers must file a refund claim within 3 years of the tax return due date.

State Tax Agencies Set Their Own Limits

While we’ve focused on federal IRS rules, state tax agencies like the California Franchise Tax Board also have their own statutes of limitations for audits and refunds. These vary by state so check your state’s tax agency website.

What Should You Do?

If you failed to report income or pay tax, the clock is ticking. The further back the tax year, the higher the risk the statute has already expired. Consider consulting a tax attorney or CPA to better understand your situation and options.

And going forward, make sure you fully report income, claim legitimate deductions, and calculate your tax carefully. Even innocent mistakes can lead to penalties and interest if not corrected on time.