Smart TaxesSmart Taxes

Tax sinner? It's not too late to repent

The statute of limitations on tax misdeeds varies, depending upon the type of lapse. The rules differ for civil, criminal and fraudulent actions.

By MSN Money Partner Apr 25, 2012 6:22PM

This post is by Laura Saunders of The Wall Street Journal. a tax sin haunting you?


Maybe you paid a baby sitter under the table, or "forgot" to declare income, or deducted personal expenses as business costs. Perhaps you didn't know a large tax or a form was due and found out only later. Maybe you never filed at all.


Whatever the misdeed, it raises an urgent question: When can you breathe easy? When is your offense so old and cold that the Internal Revenue Service won't care -- or can't?


As is often true with taxes, the answer is complex and full of traps. So we asked experts how tax statutes of limitations work, both in theory and practice. Here is what they had to say: (Post continues after video.)

For garden-variety civil tax issues, such as overstating an entertainment-expense deduction, the statute of limitations is typically three years. It runs either from the April due date or the actual date the return is filed, whichever is later. So if you filed on Jan. 30, the three-year statute begins with the April due date; if you got a six-month extension and filed on July 20, the statute runs from then.


Many exceptions to this rule give Uncle Sam wide latitude, however. If the tax issue involved income greater than 25% of the gross income on the return, the statute of limitations rises to six years. This applies only to unreported income, says Mark Matthews, a former top IRS official now with Caplin & Drysdale in Washington.


Civil fraud


A tax-shelter case involving this six-year limit is before the Supreme Court now. United States v. Home Concrete centers in part on "cost basis," or the amount paid for an investment, which is the starting point for calculating the capital gain after selling the investment. The question is whether a large overstatement that then lowers taxes is grounds for extending the three-year limit to six years. The justices heard arguments in January; a decision is expected in June.


In cases of civil fraud, there is no statute of limitations at all. But proving fraud presents a high hurdle for the IRS, says tax attorney Bryan Skarlatos of Kostelanetz & Fink in New York: "With tax fraud, the government bears the burden of coming up with clear and convincing evidence the taxpayer had willful intent."


Other crucial tweaks also favor Uncle Sam. The most important is that the statute of limitations doesn't begin to run until a return is filed. So an unfiled return from, say, 1990 is still fair game.


That rule applies to certain forms as well, even if the rest of the return is filed.


Typically the forms report activities on which Uncle Sam wants to keep close tabs. They include Form 5471 for Controlled Foreign Corporations; Form 3520 for Foreign Trusts and Gifts; Form 8621 for Passive Foreign Investment Companies; and Form 8886 for Reportable Transactions.


The statute of limitations also stops running if a taxpayer declares bankruptcy or leaves the country for more than six months. The latter poses a problem for millions of U.S. taxpayers living abroad who haven't filed foreign financial-account reports, Caplin's Matthews notes. He and others are urging the IRS to devise ways of easing this harsh rule while bringing these people into compliance.


Criminal actions


Compared with civil tax disputes, there are relatively few criminal cases -- but the statute of limitations is typically six years. A conspiracy charge can keep a case open for far longer.


In practice, says Tom Borders, an attorney with McDermott, Will & Emery in Chicago, the IRS rarely goes back more than six to eight years for civil or criminal tax cases: "Usually there aren't enough records and it's too hard to prove."


When an audit is under way, IRS agents often ask taxpayers to sign a waiver extending the statute of limitations until the issues are resolved in full. Taxpayers usually have little choice but to do so, Matthews says. But if the IRS misses a deadline altogether, which happens, the taxpayer gets a bye.


There is a dual take-away here. "The common advice is that if your return isn't picked within two years of filing, it won't be," says longtime tax preparer Jay Starkman, a certified public accountant in Atlanta.


On the other hand, big tax sins have long lives. "If you really want to sleep at night, don't pull an ostrich," Matthews says. "The longer people delay, the worse the outcome often is."


More from The Wall Street Journal and MSN Money:

How to turn in your neighbor to the IRS

Congress eyes 401k's again

IRAs get sexier

How to correct a tax return mistake

What to do if you missed the tax deadline

What if you can't pay your taxes?


Apr 26, 2012 1:40AM
Ore........ Huh? What's a cons titutional? Take your blood pressure medication, and try again.
Apr 25, 2012 11:19PM
Pray for me in my time of need........

Did Geitner---who cares in this administration anyway?  Just one of the 102 Un Cons

titutional Socialist illegal CZARs occupying the White House that we the deficity to guaranteed bankruptcy foot the bill for each day so they can put the final nail on the cofin of USA Sovereignty!

Apr 26, 2012 10:18AM
Twice before the Supreme Court ruled that the federal income tax is unconstitutional. It didn't matter. They would like for you to believe that without our "benelovent" federal government, and the income tax, we would not enjoy a modern society that we have today. That is BS. Roads and turn pikes existed long before the income tax. The railroad system was before it too. I could go on and on. What we didn't have before was CONSTANT WAR READINESS and the WELFARE STATE. Classic "butter & guns". The only way you can have a colosial sized government is to both tax and debase the currency, and they are doing both. Something has to give. I hope it is not what little liberty we have left.
Apr 25, 2012 9:43PM
Man, I should've claimed all that money the mafia gave me for knockin off all those guys. Oye...
Apr 25, 2012 11:25PM
i can rest well at night knowing your main source of income won't be in the stand-up comedian field.
Nov 8, 2012 12:53AM

Tax sinner?  Begin an exercise program that stress limberness.  The limberness will allow you to easier bend over to kiss your a__


Apr 26, 2012 9:09AM

No one would feel guilty if the government would quit giving the money to the banks, start cracking down on the CRAZY & WILD spending by the government agencies, and the abuse of the welfare system that is keeping people from looking for work.

By the last statement I mean if they can get FREE OBAMA money they figure they do NOT have to go get a job.

Nov 29, 2012 8:31PM

The only things I never see duplicated in Spanish are, TAX FORMS at my local Library !

Apr 26, 2012 8:59AM
All about taxes. So many rants. Get real. Take away the military, interstate roads, bridges and the other things that we all provide through taxes we will be back in early 20th century. So good luck my friends it was nice to know you on this enlighten form. LOL
Apr 26, 2012 5:39AM
All these lying, cheating and deceiving thieves have all been proven to be all the Anti-Christian, Anti-Constitutional and Anti-Law abiding Republican, Neo-Con, Teabagger and Libertarian filthy scum. All of them will go to Hell for their crimes!
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.