On Procedurally Taxing, we do not often dip our toes directly in criminal tax matters. Yet the civil and criminal are often closely related; see, for example Keith’s excellent post last week on collateral estoppel in a civil case following a criminal prosecution.
US v Galloway, a district court opinion out of the eastern district in California, caught my attention. It highlights a key difference in civil statute of limitations cases as compared to criminal cases. While there is no SOL on assessment for a fraudulent return there is a SOL for prosecuting tax crimes.
Galloway involves the statute of limitations for criminal tax evasion under Section 7201. Section 6531 provides a general 3 year statute of limitations for many tax crimes, though as Chapter 12.05 in Thomson Reuters SaltzBook IRS Practice and Procedure discusses, that general rule is “swamped” by the 6-year exception for many tax crimes, including evasion. Our colleague at the Federal Tax Crimes blog, Jack Townsend, is the principal author for the rewritten chapter on tax crimes, and in Chapter 12.05 he discusses the start date for statute of limitations as including events beyond the filing of the return:
By the filing, all the elements of tax evasion exist. Does that mean that tax evasion attempted by filing that return cannot be charged after six-years from the date of filing? No. As we shall see, the taxpayer can do some subsequent affirmative act to further the original attempted evasion via the return.
The Galloway case provides a further example of the “as we shall see” variety.
From the opinion:
Defendant Michael Galloway was charged on May 29, 2014, by way of grand jury indictment, with four counts of tax evasion in violation of 26 U.S.C. § 7201. (Doc. No. 1.) The four counts involve the tax years 2003 through 2006 with the defendant having filed the returns in question on October 24, 2005, November 7, 2005, November 6, 2006 and August 18, 2008. (Id.) With respect to each of the counts the Indictment specifically alleges affirmative acts of tax evasion including by “on or about February 23, 2010, making false statements to IRS Special Agents and a Tax Compliance Officer to conceal the defendant’s income during” each of the tax years in question.
Galloway argued that the SOL on prosecution commenced from the return filing date. The government disagreed, noting that Galloway’s alleged false statements to the IRS “were made within six years of the return of the indictment in this case on May 29, 2014.”
More on the government’s view:
According to the government, the statute of limitations for a tax evasion prosecution commences at the time of the defendant’s last affirmative act of evasion and an act of evasion is any conduct which serves the purpose of evasion and the likely effect of which is to mislead or conceal.
The district court agreed with the government, referring extensively to a 2013 8th Circuit case, US v Perry, 714 F3d 570 (8th Cir. 2013) which detailed a taxpayer’s evasive communication with the IRS as pegging the start date for the SOL.
So the government survived the taxpayer’s motion to dismiss. That does not mean that the SOL issue goes away. At trial, government will have the burden to prove beyond a reasonable doubt that Galloway’s statements to the IRS agents constituted an affirmative act of evasion. A statement in and of itself to the IRS is not the trigger for the refresh; as Jack discusses in the Saltz/Book chapter, the inquiry at trial will likely be whether Galloway in his discussions with the IRS was not truthful (including being evasive or providing half truths) with the intent to hide the original return’s evasion. The moral of the story is that taxpayers who may have crossed the wrong side of the law should be very careful when asked to discuss their past actions. If they answer in a way that is false, evasive or incomplete they can find themselves extending the date for prosecution.