In Finnegan v. Commissioner, T.C. Memo. 2016-118, the U.S. Tax Court refused to reconsider its previous decision that a tax return preparers fraud keeps the statute of limitations open on the taxpayer’s Federal income tax return.
Facts & Procedural History
On February 7, 2013, the IRS issued a notice of deficiency for tax years 1994-2001.
The notices disallowed the following: (1) Schedule E partnership loss deductions; (2) Schedule C deductions in their entirety; and (3) deductions for Keogh/ self-employment retirement plans.
The IRS contends that these entries are false or fraudulent although they are due to the tax return preparer and not to the taxpayers’ actions.
The notice also assessed accuracy-related penalties.The taxpayers asked the court to court to determine their tax liability.
The issue was whether the IRS could go back and assess taxes and penalties for prior tax periods, even though the taxpayer had filed income tax returns. Generally, filing income tax returns starts the three year period the IRS has to assess additional taxes and penalties. There is an exception to this rule which says that a fraudulent tax return does not start the clock running for the IRS.
The U.S. Tax Court has previously held that fraudulent returns do not start the clock running for the IRS even if there is no wrongdoing or collusion by the taxpayer. In Fennigan, the U.S. Tax Court had this to say about its prior decision:
We see no reason to revisit Allen v. Commissioner, 128 T.C. 37 (2007), on account of BASR P’ship v. United States, 113 Fed. Cl. 181 (2013), aff’d, 795 F.3d 1338 (Fed. Cir. 2015). In the Court of Appeals for the Federal Circuit’s opinion, a persuasive dissent was filed, as well as a concurring opinion that relied on sec. 6229, a provision inapplicable in the instant case. Accordingly, even in cases appealable in the Federal Circuit, it is unclear whether, in the absence of the application of sec. 6229, which interpretation of sec. 6501(c)(1) would prevail. Moreover, there is no jurisdiction for appeal of any decision of the Tax Court to the Court of Appeals for the Federal Circuit. Sec. 7482(a)(1). Additionally, the parties have not cited BASR P’ship and do not contend we should revisit Allen. Thus, Allen is controlling precedent in the instant case, and we do not revisit the analysis and conclusion in that Opinion.
This issue is not a new one. There are other cases that have touched on this issue since Allen was decided.
It seems like this issue is ripe for Congress to resolve.
While life and taxes are not fair, it does not seem right that fraud by a tax preparer can hold open the assessment period for the taxpayer absent some showing that the taxpayer knew of or colluded in the wrongdoing. This is especially true if the only basis for the decision is that a literal reading of the statute requires the courts to reach this conclusion and that taxpayers who face this issue have the ability to shop for a more favorable forum by bringing suit in the Federal Court of Claims rather than the U.S. Tax Court.