A series of related cases illustrate the very bad results that can come from fighting the IRS in a non-direct way. We have heard informal rules of thumb regarding tax evasion. One rule of thumb might be that if you actually evade payment of tax for huge sum of money that you are more likely to be prosecuted for tax evasion. Another rule of thumb might be that if you are a well-known celebrity that evades payment of tax for a modest sum of money that you are also more likely to be prosecuted for tax evasion. Both ends of the well-known celebrity and high wealth parallel but oppositely oriented continua yield a less pronounced middle span largely due to the amount of approvals and signatures that must be obtained before launching a tax evasion case.
The potential criminal charges for tax evasion do not exist in a vacuum. Civil punishments can magnify the potential for criminal liability. The fundamental time period during which a taxpayer owes the government is either 10 years once tax has been assessed, or its an infinite number of years of no tax return is filed and no assessment has been made. Given a relatively slow pace of development for a non-celebrity, small dollar tax evasion prosecution, it doesn’t pay to arrange to be under the IRS microscope for an extended period of time. It helps even less to become more noticeable during such an extended period of time.
The typical taxpayer files a return on time triggering an assessment (debt owed to the government) that “exists” for 10-years. At the 10 year mark, if nothing has occurred to increase the 10 year “statute of limitations” period (known as “tolling”), the IRS is no longer owed the tax debt associated with the tax event. Also, from the time of assessment, the IRS has a 3-year period to challenge the return with an audit. If some understatement problem is found (from an audit or any other source), of a sufficient magnitude to be characterized a presumptive fraud, the 3-year potential audit period turns into a 6-year audit period (from assessment).
Stating this another way, the normal flow of the process is that a taxpayer gets (1) a chance to file a correct return on time, (2a) the government gets 3 years to challenge the return via audit if the taxpayer made a less than presumptively fraudulent attempt to file a correct return, or (2b) the government gets 6 years to challenge the return via audit if the taxpayer made a more than presumptively fraudulent attempt to file a correct return. (3) the government gets a full 10 year period (absent tolling) from the day after assessment to the tax collection statutory expiration date to collect the tax.
The 10 year collection is unfortunately extended, whenever the taxpayer takes an action which requires the government suspend its collection. Some of these actions include bankruptcy, offer-in-compromise, filing a tax court petition. There are many more actions that cause tolling of the collection statute of limitation to move forward into the future. The result is that the 10 year collection period might become a 15 year collection period, or even more.
In addition, when a taxpayer has been particularly problematic for the government, the IRS can file a civil suit and obtain a judgement for collection of the tax which extends the period for collection by an additional 20 years. The judgement is renewable before the end of the additional 20 years and for an additional 20 years. So, even if there was no tolling, the use of the civil suit to obtain judgement means a 50 year collection period during which the taxpayer still owes the money.
There is a general impression that the progression of tax evasion involves cheating, then filing, and then getting caught due to the cheating mechanism. People forget that you can evade taxes by simply not paying. An evader can take action to emit chaff in hopes of escaping IRS attention. This may be foolishly done thinking that the IRS will grow weary and forget about the debt. Mostly blind, reason-deficient, struggles simply create a fervor to collect. There are procedures and rules that govern the negotiation, should be followed for a quick resolution.
Fighting IRS collection in a desperate way that ignores the policies that enable settlement, appears very like an evasive action to delay and prevent payment. Couple a perceived unwillingness to cooperate with temporal expansion (due to tolling) of the collection statutes of limitation, and the taxpayers spend a much longer period of time during which they owe and don’t cooperate with the IRS. Even though the transaction of the tax year is long over, and the audit activities are probably long over, the collection period is extended, leaving the taxpayers under the collection microscope for an extended period.
IRS then has a much longer course of action with which to suspect and establish an evasion based upon non-payment and lack of cooperation. So even in cases in which the transaction and audit did not produce an evasion pattern, a long, drawn-out delay in cooperation can possibly supply the evasive elements needed to build a criminal case.
Any administrative inhibition due to the extended time required for criminal investigation and administrative approval will vanish when the taxpayer provides extension of time via statutory tolling.
Further, when the ire of the IRS has noticed activities of the taxpayer causing a value judgement that the taxpayer is problematic in delaying and misrepresenting efforts to bring the matter to a proper conclusion, it is much more likely that a judgement for collection of tax which extends the period for collection by an additional 20 years will be done. If owing tax debt to the government is painful, then extending that pain for an additional 20 years is tantamount to self-torture for what could be an additional one-third of a lifetime.
Imagine the following theoretical facts, and how they might appear to the IRS:
(1) Yr 0: Taxpayer avoids paying year capital gains
on the sale of a business by using a tax shelter.
(2) Yr 3-10: IRS collection activities occur.
(3) Yr 10: Taxpayer files for bankruptcy in an
attempt to discharge the tax owed, but the bankruptcy court denies discharge and
finds that taxpayers willfully attempted to evade or defeat the collection of
tax under 11 U.S.C. § 523(a)(1)(C). (which recently has been set by legal
decision to carry the same standard of proof applicable to tax evasion).
(4) Yr 12: After tolling delay from the bankruptcy, IRS resumes collection activity.
(5) Yr 15: Taxpayer utilizes administrative due process procedures, including collection due process and offer-in-compromise and are unsuccessful.
(6) Yr 16: IRS refers The Justice Department to file suit to reduce the assessments to judgement and thus extend the period for collection for another 20 years (possibly to Yr 36, and possibly to Yr 56 if extended before Yr 36).
(7) Yr 18: Taxpayer files a
complaint in federal district court against a number of federal workers,
including a revenue officer, collection supervisor, an advisor, a settlement
officer appeals officer, offer in compromise manager, tax examiner, offer
specialist, group manager and the acting director for area collection, and other
yet unknown tax and justice personnel in a “Bivens” action for “a conspiratorial
plot to deny him his constitutional rights, purportedly on account of his
alleged disability, at all relevant stages of the aforementioned tax collection
(8) Yr 19: The Bivens action was dismissed based upon the fact that because the Internal Revenue Code gives taxpayers meaningful protections against government transgressions in tax assessment and collection . . . Bivens relief is unavailable for plaintiffs’ suit. Establishment of evasion using the courses of action from the past can possibly be added to acts occurring in future to perhaps show a continuous course of dealing, an intent, establishment of a plan for tax evasion. Would YOU wish a quick resolution to this tax debt? What actions would YOU take begin such resolution?
(1) Would you start a stream
of payment to IRS on a regular basis?
(2) Would you compute your reasonable collection amount and liquidate everything else and attempt a further offer-in-compromise without delay?
(3) Would you begin your own payment plan subject to a formula that was based upon the IRS cost of living standards?
(4) If your income was steady, would you set up and be willing to risk failure to try a long-term repayment plan?
(5) Given that a tax crime conviction would set up the tax debt owing as an even more onerous restitution payment, what acts and statements could you telegraph to IRS to show that steps are being taken to begin liquidation to an IRS living standards connected subsistence level?
(6) After liquidation to an IRS living standards connected subsistence level and achievement of a $0 further collection potential, would you consider asking to being placed on currently not collectible (CNC) status?
(7) Would you consider living overseas in order to possibly enable yourself to repay the tax debt more rapidly and efficiently through foreign earned income exclusion?
(8) What other actions would you consider to stave off criminal prosecution while paying off your tax debt?