Does filing a false return start the six year clock or does it start at the time of the taxpayer’s last act of tax evasion? A taxpayer’s last act of tax evasion may occur many years after the tax return was (or should have been) filed. Some courts have concluded that the six year statute doesn’t start to run until the last act of tax evasion. That means you may have to worry for many years beyond six years from the date the return was (or should have been filed) filed.
Section 6531 provides the periods of limitation on criminal prosecutions and states, “No person shall be prosecuted tried, or punished for any of the various offenses arising under the internal revenue laws unless the indictment is found or the information instituted” within 6 years “after the commission of the offense” “for the offense of willfully attempting in any manner to evade or defeat any tax or the payment thereof.”[i]
In United States v. Irby,[ii] the 5th Circuit held the six year statute starts on the last act of evasion. Mr. Irby used nominee trusts to conceal his assets, delaying when his six years commenced. Years later, he could be prosecuted and convicted because his indictment, which occurred ten years after his failure to file, occurred within six years from his last act of tax evasion.
The issue of whether the six-year statute of limitations for section 7201 offenses begins to run from the date the tax return was due or following the last affirmative act of tax evasion was a question of first impression for the Court in Irby. The 5th Circuit previously held in United States v. Williams,[iii] that the limitations period for a prosecution under section 7201 in which no tax return was filed begins to accrue on the day the tax return is due. In Williams, the Court specifically declined to address whether the effect of the last affirmative act of evasion on the statute of limitations: “We express no opinion relative to the effect of affirmative acts occurring subsequent to the [tax return] filing date.”[iv]
The jury found Mr. Irby guilty of violating section 7201—willfully attempting to evade or defeat tax. Mr. Irby last failed to file his taxes in 2001, so his violation of section 7201 was time barred by the six year statute of limitations unless the period began to accrue following his last affirmative act of evasion. In holding that the six year statute begins to accrue following the last affirmative act of tax evasion, the Court reasoned that the language of Section 6531(2) provides that taxpayers must be indicted within six years of when the crime of “willfully attempting in any manner to evade or defeat any tax or the payment thereof” was completed.[v] The 5th Circuit also noted that other circuits have considered the issue and concluded that the statute of limitations for section 7201 offenses runs from the later date of either when the tax return was due or the defendant’s last affirmative act of tax evasion.[vi] The Court in Irby focused its reasoning on the decisions in United States v. Dandy[vii] and United States v. Ferris:[viii]
In Dandy, the Sixth Circuit addressed facts similar to those at issue here, where the defendant did not file tax returns for 1982 and 1983, but the last act of evasion did not occur until 1985. Dandy, 998 F.2d at 1355-56. The Dandy court found that the statute of limitation runs from the last evasion act “because it is these evasive acts . . . which form the basis of the cimes alleged in . . . [the] indictment.” Id. at 1356. In Ferris, the First Circuit supported the rule by pointedly stating, “[t]he defendant, however, by deceitful statements continued his tax evasion through [date of last act of evasion].” Ferris, 807 F.2d at 271 (noting that Habig supports this result because, “[t]he [Supreme Court] held that it made no sense to assert that ‘Congress intended the limitations period to begin to run before appellees committed the acts upon which the crimes were based’” (quoting Habig, 390 U.S. at 224-25)).
The 5th Circuit also noted that no circuit has rejected the last affirmative act of tax evasion rule and reasoned that “one element of the section 7201 offense is the commission of an affirmative act seeking to evade tax liability, which can be shown through the individual’s willful failure to file a tax return…or through continued evasive acts intending to avoid the payment of taxes.” The 5th Circuit held that the District Court in Irby did not err in concluding that Mr. Irby’s section 7201 violation was not time barred because Mr. Irby’s last act to evade the payment of his taxes was in 2006 and he was indicted in 2011.
KRISTA HARTWELL – For more information please contact Krista Hartwell at Hartwell@taxlitigator.com or 310.281.3200. Ms. Hartwell is a tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com.
[i] 26 U.S.C. § 6531(2).
[ii] United States v. Irby, 703 F.3d 280 (5th Cir. Miss. 2012).
[iii] United States v. Williams, 928 F.2d 145, 149 (5th Cir. 1991).
[vi] Id. at 283-284 (citing United States v. Anderson, 319 F.3d 1218, 1219-20 (10th Cir. 2003) (“Section 7201criminalizes not just the failure to file a return or the filing of a false return, but the willful attempt to evade taxes in any manner.”); United States v. Carlson, 235 F.3d 466, 470 (9th Cir. 2000); United States v. Wilson, 118 F.3d 228, 236 (4th Cir. 1997); United States v. Dandy, 998 F.2d 1344, 1355-56 (6th Cir. 1993) (“To hold that the statute of limitations for income tax evasion . . . began to run on the date the returns were filed would reward defendant for successfully evading discovery of his tax fraud for a period of six years subsequent to the date the returns were filed.”); United States v. Winfield, 960 F.2d 970, 973-74 (11th Cir. 1992) (per curiam); United States v. DiPetto, 936 F.2d 96, 98 (2d Cir. 1991); United States v. Ferris, 807 F.2d 269, 271 (1st Cir. 1986); United States v. Trownsell, 367 F.2d 815 (7th Cir. 1966) (per curiam)).