Can Your Tax Preparer Expose You To Fraud?

We have talked about the statute of limitations many times.

In general, the IRS has three years to challenge your tax return and assess additional taxes. Reverse the direction and you likewise have three years to request refund of a tax overpayment.

The intent is clear: at some point the back and forth must stop.

Mind you, if the IRS assesses additional tax within that period, then the three-year statute for assessment transmutes to a ten-year statute for collection.

There are exceptions to the three years, of course. Here are some exceptions from Section 6501(c):

Let’s do a little tax practice today. Reread (c)(1) above. I have a question for you:

          Must the intent to evade tax be the taxpayer’s?

On first impression, the answer appears to be “yes.” Who - other than the taxpayer - stands to benefit from filing a false or fraudulent return?

Let’s talk about Stephanie Murrin.

For years 1993 to 1999 the Murrins used a tax preparer for their joint individual income tax return, as well as two partnerships in which Ms. Murrin was a general partner. Unbeknownst to the Murrins, the preparer placed false or fraudulent information on those returns with the intent to evade tax.

Why? We are not told.

The Murrins were not aware of the preparer’s actions, nor did they intend to evade tax.

The IRS (somehow) caught up to this and in 2019 (twenty years later) issued a statutory of deficiency for the years at issue. The IRS argued that the years were still open under the statute of limitations pursuant to Section 6501(c).

Mr. Murrin died before the case went to Tax Court.

Mrs. Murrin ran into a formidable obstacle: stare decisis.

The Tax Court had previously decided (in Allen) that Section 6501(c) did not look solely at the taxpayer to find intent.

Mrs. Murrin argued that Allen was wrongly decided. She based her argument on a Federal Circuit Court decision (BASR) disagreeing with the Tax Court decision in Allen.

She had an argument.

The Tax Court noted that each judge in BASR wrote separately, meaning that it was unclear which interpretation of Section 6501(c) prevailed. When everyone has an opinion, there is no standard for precedence.

With that backdrop, the Tax Court stated:

The Federal Circuit’s position on the precise point before us is not clear. We further note that ‘there is no jurisdiction for appeal of any decision of the Tax Court to the [Federal Circuit]’ in any event. Stare decisis principles thus would seem to weigh against our reconsideration of our precedent in light of BASR.”

The Tax Court had two arguments to support its position:

• By its own terms, this provision does not restrict its application to cases where taxpayers personally had intent to evade tax. Instead, Congress showed itself agnostic as to who had to have the intent to evade tax, choosing to ‘key [the extension of the limitation period] to the fraudulent nature of the return’ rather than tie it to taxpayer intent.”

• There are other Code sections (which we will skip for our discussion) where Congress explicitly limited required intent to the taxpayer. The fact that it did not do so here is a tell that Congress did not mean to limit the meaning of “intent” for purposes of this Section.

Mrs. Murrin lost before the Tax Court.

She appealed to the Third Circuit, and I read last week that she lost there also.

Is it fair? My first reaction is no, as taxpayer is the tax return and vice versa. Who else can have a closer connection to that return that the person filing it? It seems to me that the judicial wordsmithing here is drivel and prattle. Still, I acknowledge the necessity and persuasion of stare decisis, although poor drafting of tax law and stare decisis is a bad brew for common sense.

Our case this time was Murrin v Commissioner, No 23-1234 (3^rd Cir, August 18, 2025).

   

Can A Taxpayer Be Responsible For Tax Preparer Fraud?

 

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.

(c)  Exceptions.

(1)  False return.

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).

When The IRS Does Not Believe You Filed An Extension

I have a certain amount of concern whenever we approach a major due date. Let’s use your personal tax return as an example. It is due on April 15; an extension stretches that out to October 15. 

What is the big deal?

Penalties. Fail to extend the return, for example.

How does this happen?

A client moves to another city. A client was unhappy with your fees last year, and you are uncertain if the client is staying with you. A client’s kid starts working, prompting a tax return for the first time. A client gets involved with some business, and the first time you hear about it is when his/her information comes in. A client does business in a new state.

Or – let’s be frank here – you just miss it.

There are two common penalties; think of them as the salt and pepper of penalties:

·      Failure to file

·      Failure to pay

We associate the IRS with taking our money, so one would easily assume that the more onerous penalty is failure to pay. It is not. Owe money past April 15 and the IRS will charge a penalty of ½% per month.

Fail to file, however, and the penalty is 5% per month.

Yep, 10 times as much.

And when does the penalty start?

Miss that extension and it starts April 16.

Huh? Don’t you have until October 15 to file that thing?

Yes, IF you file an extension.

You do not want to miss that extension.

I was reading a case about the Laidlaw brothers. They sold Harley Davidson motorcycles, and they got pulled into Court for a welfare benefit plan that went awry.

There was one issue left: did their accountant file extensions for the two brothers by April 15? If not, those penalties included 5 zeroes. We are talking enough-to-buy-a-house money.

To add to the stress, the trial occurred about a decade after the tax year in question.

The accountant’s name was Morgan, and he presented extensions showing zero tax due for each brother. The IRS said it never received any extensions. Morgan did not send the extensions certified mail, but he recalled sending both extensions in the same envelope. He remembered taking the envelope to the post office and checking for proper postage. He took pride that the Post Office had never returned an extension request for insufficient postage.

He pointed out that there was no question about an extension for the year before, and the year before that, and so forth. The brothers were significant clients to his firm, and he went the extra mile.

The IRS was having none of it. They pointed out that Morgan had many clients, and the likelihood that he could remember something that specific from a decade ago was dubious. Additionally, any memory was suspect as self-serving.

Sounds like Morgan needed to present well in front of the Court.

And there is the rub. The Laidlaw case went Rule 122, meaning that depositions were submitted to the Court, but there was no opportunity for face-to-face questioning.

Here is the Court:

… we had no opportunity to observe Mr. Morgan’s credibility as a witness. The reliability of a witness’ testimony hinges on his credibility. We were not provided a full opportunity – so critical to our being able to find the witness reliable – to evaluate Mr. Morgan’s credibility on the issue of timely filing because petitioners never offered his live testimony in a trial setting. While we can learn much from reading the testimony, it is not the same as a firsthand observation of the witness’ demeanor and sincerity, both essential aspects of credibility and reliability.

The brothers lost, and the IRS collected a sizeable penalty amount.

Back in the day, we used to log all extensions going to the IRS. We would certify each envelope and then attach the receipt to a log detailing each envelope’s contents. Granted, that log could not prove that a given envelope contained a given extension, but it did show our attention to policies and procedures. I recall getting out of at least one sizeable penalty by arguing that point to the IRS.

Those were different times, and many (including me) would say that today’s IRS is less forgiving of basic human error

And, to some extent, we are talking ancient history with extension procedure. Today’s practices, our included, has moved to electronic filing. Our software tracks and records our extensions and returns and their receipt by the IRS. I do not need to keep a mail log as my software does it for me.

Morgan needed something like a log. It would have given the Court confidence in and support for his recollection of acts occurring a decade earlier, even without him being present to testify in person.

National Taxpayer Advocate's June 30, 2015 Report To Congress

Twice a year the National Taxpayer Advocate submits a report to Congress. The Advocate is required to submit these without prior review by the Commissioner of the Internal Revenue Service, the Secretary of the Treasury or the Office of Management and Budget. A report was issued June 30, and it identified the objectives of the Advocate’s office for the upcoming fiscal year.

The National Taxpayer Advocate is Nina E. Olson. We have spoken of her before, and I am a fan.  

The following caught my eye:

The most serious problem facing U.S. taxpayers is the declining quality of service provided to them by the IRS when they seek to comply with their tax filing and payment obligations."

Given that this is a co-equal reason for the IRS to exist (the other being to collect revenue), this is a rather serious charge.

Consider the following:

·         The IRS hung up on approximately 8.8 million taxpayers during this year’s filing season. The IRS dryly refers to these as “courtesy disconnects,” ostensibly as proof that they too have read Orwell’s 1984.

o   This number was up from 544,000 hang-ups during the 2014 filing season.

·         Only 37% of people using toll-free lines were able to speak with a human being.

o   Down from 71% last year.

·          The IRS has announced that it will no longer answer any tax law questions at all.

·         The IRS will eliminate tax preparation altogether.

o   It used to maintain approximately 400 walk-in sites and helped taxpayers prepare around 500,000 tax returns annually.

·         The IRS answered only 17% of the calls from people whose account was blocked on suspicion of identity theft.

·         Don’t expect that hiring a tax professional will resolve the logjam. Professionals were able get through less than 50% of the time.

From the perspective of a practicing tax CPA, I found interacting with the IRS this filing season to be unpleasant, if not futile. I find myself with divided opinions: many of the examiners and officers I have met and worked with over the years are responsible and likeable enough. Gather them together however and you have an organization that has lost the trust and confidence of a sizeable number of taxpaying citizens.

Ms. Olson does point out that the IRS has been charged with additional tasks in recent years, such as pursuing foreign assets (FATCA) and "assisting" the American public with their health insurance (ObamaCare). There has simultaneously been a reduction in agency funding.The GAO has reported that IRS funding declined approximately $900 million since fiscal year 2010, for example, resulting in the elimination of approximately 10,000 full-time equivalent positions.

Let’s be frank: under this Congress there will not be – nor should there be – additional funding for an agency that has been weaponized for political purposes. Paul Caron, a Pepperdine tax law professor, maintains a count and compendium of IRS misbehavior at TaxProfBlog  (http://taxprof.typepad.com/taxprof_blog/irs-scandal). He is perilously close to 800 days and will likely exceed that count by the time you read this. If smoke indicates fire, then someone must have burned down the warehouse district to generate that much smoke.

Is there a solution? Yes, but it will probably have to wait until November, 2016. But you already knew that.

The IRS May Allow Videoconferencing

I am just finished reading Nina Olson’s most recent blog post. Nina Olson is the National Taxpayer Advocate with the IRS. The Advocate’s office is independent from the IRS, although it works with the IRS to resolve tax problems. I have worked with the Advocate’s office before, and in general I have been pleased. Recent contacts have concerned me, though. It sounds to me that they are being overworked, at least here in Cincinnati. I suspect they are feeling IRS budget restrictions.

Ms Olson commented on taxpayer frustrations with “corr exams.” These are correspondence exams and frequently address areas using computer matching. You may get a “corr” notice concerning missing dividends or interest income, for example, or possibly the sale of stock. The corr notices are notorious and can frequently take multiple contacts to resolve. Why? Well, a key reason is that no single examiner is assigned to work on your case. Rather, it floats in a pool, and when you send a letter it gets randomly assigned to an examiner. Say that the letter resolves many, but not all, the issues. The IRS sends out another notice. You respond, but it will not go to the same person who earlier worked on your file. There is no continuity in the corr exam process.

Ms Olson is proposing the use of videoconferencing in conjunction with corr exams. Upon receiving a notice, a taxpayer would have the option of making an appointment for an online meeting. The taxpayer gets a PIN and logs on from his home or office computer. If the taxpayer does not have a computer, he/she could alternatively go to the local IRS office or perhaps to a specially designated room at another government building. With a high-resolution camera, the examiner could even read a document that the taxpayer brought to the videoconference. The examiner would retain the case, and all future correspondence would contain his/her name, phone number and e-mail address.

Here is how Ms Olson phrased it:

As anyone who has looked at both the literacy levels of the United States population and the poor quality of IRS exam notices can attest, there is not a whole lot of communicating going on in IRS correspondence exams.”

A virtual face-to-face meeting would allow for diversity in taxpayers’ ability to read, write and express themselves verbally. The taxpayer would be able to explain himself and the examiner could better explain any necessary documentation without the back-and-forth of a correspondence exam.

What does this tax CPA think? Great idea! I am becoming quite the fan of Nina Olson.