We are familiar with the statute of limitations. In
general, the SoL means that you have three years to file a return, information
important to know if you are due a refund. Likewise, the IRS has three years to
audit or otherwise adjust your return, important to them if you owe additional
tax.
The reason for the SoL is simple: it has to end
sometime, otherwise the system could not function. Could it be four years instead of three? Of
course, and some states use four years. Still, the concept stands: the ferris
wheel must stop so all parties can dismount.
A huge exception to the SoL is fraud. File a
fraudulent return and the SoL never starts.
Odds are, neither you nor I are too sympathetic to
someone who files a fraudulent return. I will point out, however, that not all
knuckleheaded returns are necessarily fraudulent. For example, I am
representing an IRS audit of a 2020 Schedule C (think self-employed). It has
been one of the most frustrating audits of my career, and much of it is self-inflicted.
I know the examiner had wondered how close the client was to the f-word; I
could hear it in her word selection, pausing and voice. We spoke again Friday,
and I could tell that she had moved away from that thought. There is no need to
look for fraud when being a knucklehead suffices.
Here is a question for you:
You do not commit fraud but your tax preparer does. It could be deductions or credits to which you are not entitled. You do not look at the return too closely; after all, that is why you pay someone. He/she however did manage to get you the refund he/she had promised. Can you be held liable for his/her fraud?
Let’s look at the Allen case.
Allen was a truck driver for UPS. He had timely filed
his tax return for the years 1999 and 2000. He gave all his tax documents to
his tax preparer (Goosby) and then filed the resulting return with the IRS.
Mr. Goosby however had been juicing Allen’s itemized
deductions: contributions, meals, computer, and other expenses. He must have
been doing quite a bit of this, as the Criminal Investigations Division (CID,
pronounced “Sid”) got involved.
COMMENT: CID is the part of the IRS that carries a gun. You want nothing to do with those guys.
Allen was a good guy, and he agreed with the IRS that
there were bogus numbers on his return.
He did not agree that the tax years were open, though.
The IRS notice of deficiency was sent in 2005 – that is, outside the normal
three years. Allen felt that the tax years had closed.
He had a point.
However, look at Section 6501(c):
§ 6501 Limitations on assessment and collection.
In the case of a false or fraudulent return with the
intent to evade tax, the tax may be assessed, or a proceeding in court for
collection of such tax may be begun without assessment, at any time.
The Court pointed out that the law mentions a “false
or fraudulent return.” It does not say that the fraud must be the taxpayer’s.
The year was open, and Allen owed the additional tax.
I get it. There is enough burden on the IRS when fraud
is involved, and the Court was not going to add to the burden by reading into
tax law that fraud be exclusively the taxpayer’s responsibility.
The IRS had helped its case, by the way, and the Court
noticed.
How?
The IRS had not assessed penalties. All it wanted was additional
tax plus interest.
I wish we could see more of that IRS and less of the
automatic penalty dispenser that it has unfortunately become.
Allen reminds us to be careful when selecting a tax
preparer. It is not always about getting the “largest” refund. Let’s be honest:
for many if not most of us, there is a “correct” tax number. It is not as
though we have teams of attorneys and CPAs sifting through vast amounts of
transactions, all housed in different companies and travelling through numerous
foreign countries and treaties before returning home to us. Anything other than
that “correct” number is … well, a wrong number.
Our case this time was Allen v Commissioner,
128 T.C. 4 (U.S.T.C. 2007).
