Say you hire a tax return preparer and get your tax returns filed, and think that everything is fine. Then years later, say more than a decade later, the IRS shows up and asserts that your tax returns were fraudulent. You did not commit fraud and this is news to you, but the IRS asserts that your tax preparer was the one who committed fraud. The IRS issues you a notice of deficiency asserting that you owe additional taxes for these old years. Is this nightmare scenario possible? What about the statute of limitations? The law in this area is not clear. The court revisited this issue again in the Murrin v. Commissioner, T.C. Memo. 2024-10 (January 24, 2024) case.
Facts and Procedural History
The taxpayers in this case relied on a tax preparer to complete their joint returns for the 1993-1999 tax years. Without the couple’s knowledge, the tax preparer allegedly falsified information on the returns to evade taxes. The court case does not specify how the tax preparer did this, or why. It also does not specify how the IRS was able to prove that the tax preparer did this. This would seem like an insurmountable burden in most cases.
Many years later, in 2019, the IRS issued notices of deficiency to the taxpayers claiming that they owed more taxes for those years. The taxpayers filed a petition with the Tax Court to contest the proposed assessment. The case addresses whether the IRS can assess taxes for these older years even though so much time has passed.
About the Statute of Limitations
Congress has set a number of deadlines for the IRS to take various actions. As eelevant here, Section 6501 provides a three-year period for the IRS to assess additional tax. This statute of limitations generally starts running when the tax return was filed.
An exception exists under section 6501(c), however, stating the period remains open indefinitely for “a false or fraudulent return with the intent to evade tax.” The dispute in this case centered on whose intent counts for this exception.
The Tax Court previously addressed this issue in Allen v. Commissioner, 128 T.C. 37 (2007) and concluded that the intent to evade tax does not necessarily have to be the taxpayer’s intent. In that 2007 ruling, the court determined fraudulent intent by a tax return preparer could also trigger the unlimited statute of limitations against the taxpayer.
The Court of Federal Claims issued a conflicting opinion in BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), questioning the Tax Court’s hopding in Allen. The Federal Claims ruling suggested that Section 6501(c) should apply only when the taxpayer themselves had intent to evade taxes.
Revisiting the Allen Decision
That brings us back to this case. The taxpayers argued that the IRS assessments came too late because the language in section 6501(c) is triggered only when the taxpayer themselves intends to evade taxes. Since the taxpayers did not commit tax fraud or have improper intent to file fraudulent tax returns, they reasoned the normal statute of limitations should apply.
The taxpayers argued that based on context from other code sections, as well as fairness, “intent to evade tax” must be read to refer to the taxpayer’s mental state. They cited the Federal Circuit ruling in BASR that questioned the Tax Court’s ruling in Allen.
The Tax Court, however, reaffirmed its stance that under the plain text of the statute, the fraud committed by the preparer was sufficient to keep the period open. Thus, the Tax Court allowed the tax preparer’s fraudulent intent to trigger endless statute.
The Nondelegable Duty
Taxpayers May well question the fairness of this case. This is particularly true when you compare the outcome with framework for our federal tax system.
Taxpayers have a personal, nondelegable duty to file accurate tax returns. As the Supreme Court stated in United States v. Boyle, 469 U.S. 241 (1985), one cannot avoid responsibility by relying on an agent to meet the filing requirement. This suggests that taxpayers bear responsibility for the filing of their returns.
However, the law has long allowed taxpayers to avoid some tax penalties for inaccurate tax retuns that were filed by showing reasonable cause and good faith. This is set out in Section 6664(c). This defense is even available for the civil tax fraud penalty for tax positions on tax returns that are fraudulent. Reliance on a professional tax advisor can demonstrate reasonable cause, as seen in Neonatology Assocs., P.A. v. Comm’r, 115 T.C. 43, 98 (2000). So one can avoid tax penalties if their tax preparer files an incorrect or even fraudulent tax return.
Why not here? If penalties can potentially be avoided by reasonable cause due to reliance on a tax advisor, why doesn’t that apply regarding the unlimited statute of limitations when a preparer commits fraud? Arguably this disparate treatment clashes with traditional fairness principles behind statutes of limitation as well as taxpayer protections against preparer errors. But the Tax Court has not embraced this view and noted that, according to the court, the statutes have different purposes. Penalties are to encourage taxpayers to file correct tax returns. The statute of limitations is to provide some degree of finality and to allow taxpayers to move on. But are these two purposes all that different?
With that said, the whole issue may be moot. This presumes that the document qualifies as a tax return. Before even addressing the concepts in this article, it should be noted that fraudulent document may not count as a tax return. The law is clear that the statue does not even begin to run until a tax return is filed.
Unfortunately for innocent taxpayers like those in this case, under Murrin, you could remain on the hook if your past tax return preparer falsified information with fraudulent intent—even if you were unaware. There is no time limit for the IRS to charge you more taxes in this scenario.
Some judges have strongly criticized this reading of Section 6501(c) for unfairly punishing taxpayers for the sins of others. But Murrin shows that this remains binding precedent taxpayers must wrestle with. While the Tax Court has spoken clearly, the issue may eventually draw ruling from other appeals courts. Taxpayers remain stuck with a tenuous precedent for now.