The Penalty for Tax Evasion and the Statute of Limitations
The Internal Revenue Service (IRS) has extensive authority to enforce all provisions of the Internal Revenue Code. The agency is charged with eliminating opportunities for taxpayers to engage in fraudulent activity and to evade income taxes. Violators are subject to criminal prosecution punishable by up to five years in prison.
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IRS Time Limitations
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The IRS is authorized to take up to three years from the time a tax return is filed to assess additional tax on a taxpayer. For the taxpayer to be protected by this limitation, a tax return must be filed voluntarily. For example, if you file a tax return on April 15, 2010, the IRS no longer has the authority to conduct an audit on that tax year after April 15, 2013.
Extended Time Limitations
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The statute of limitations is inapplicable to situations where the taxpayer hasn't dealt with the IRS in good faith and attempts to evade taxes. For each and every tax year that a taxpayer attempts to evade taxes, the IRS has an unlimited amount of time to conduct an audit and assess taxes. Common examples of situations in which no limitation period is available is intentionally filing a false return, not filing any tax return or acting in any other manner deemed a willful attempt to evade taxes.
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Fraud Penalty
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The IRS has the authority to impose a 75 percent penalty on any underpayment of tax that's attributed to fraud. This penalty applies to any action by a taxpayer that's committed with the intent to evade taxes. However, the penalty is only imposed on the portion of tax that's still owed to the IRS. If you file a tax return and create a fictitious deduction to evade a higher rate of tax, the penalty is calculated on the additional amount of tax that would have been due had the fictitious deduction not been taken on the return.
Failure to File
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Taxpayers who intentionally fail to file a tax return because an additional amount of tax is due are subject to the fraudulent failure-to-file penalty. The penalty imposed is 15 percent per month on any unpaid tax balances for a maximum of five months or 75 percent. However, failing to file a tax return doesn't automatically warrant a finding of intent to evade taxes. A reduced penalty is imposed on taxpayers with a nonfraudulent reason for not filing a return.
Tax Collection
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The IRS can employ a range of enforcement procedures to ensure the timely collection of tax from tax evaders. A tax lien can be placed on taxpayer property that will prevent its sale or transfer. If the taxpayer transfers the property, in most cases the lien can be enforced against the recipient. Levies can be enforced against a taxpayer's wages and bank accounts. The taxpayer's employer is obligated to remit the employee's wages directly to the IRS, and funds remaining in a levied bank account become property of the IRS.
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References
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