One sure way to get in trouble with the IRS is to engage in tax evasion. Of course, getting away with tax evasion (ignoring the illegality of it, for the moment) is the challenge, and for how long. Tax Attorney Rob Wood discusses the question in this report and in his Forbes article “How Far Back Can IRS Claim Tax Evasion?"
Wood points out that tax evasion is not the same as “aggressive tax preparation.” Wood says he doesn’t have a one-line definition, but there is a difference, just as tax avoidance is not the same as tax evasion. The difficulty in drawing the line between what is legal and what is not is a good reason to consult a tax professional. For example, whether a particular expense is deductible will depend on facts that may be unique to one particular taxpayer. All the problems, Wood opines, are reasons why the tax code needs to be rewritten and simplified.
One distinction that stands out is the difference between hiding income and claiming deductions to which one may not be entitled. Not reporting income is almost impossible to justify. The line between what must be reported and what is exempt can be fuzzy. Damage awards from lawsuits illustrate the problem. Damages for physical injuries are clearly exempt from taxation. On the other hand, damages received in an age discrimination action will probably be taxable. On the other hand physical injuries that result from discrimination, as in Parkinson v. Commissioner, may be nontaxable.
Generally, the IRS has a three-year period in which to catch tax evaders. However, the period can be lengthened for several reasons. But if you fail to report twenty-five percent or more of your gross income, the IRS has six years in which to catch you. Omitting information about a foreign account also triggers the six-year limit. And while you may be safe after six years, if your conduct is viewed as a “continuing violation,” the IRS has a longer time yet.
For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network. The Legal Broadcast Network is a featured network of the Sequence Media Group.