Return Preparer Fraud Results in Harsh Outcome for Innocent Taxpayer

As discussed in a previous blog post, the IRS generally has three years to assess additional tax, pursuant to IRC Section 6501. The three years can be extended by agreement, the taxpayer filing for bankruptcy, the IRS issuing a Notice of Deficiency, or taxpayer involvement in a third party summons enforcement action. In addition there are exceptions to the three year rule including a 25% omission of income (6 years), unfiled tax return (unlimited statute of limitations), failure to notify the IRS of certain foreign transfers (3 years from date the IRS is furnished with the information), and civil fraud (unlimited statute of limitations). In Murrin v. Commissioner, T.C. Memo 2024-10, the U.S. Tax Court again addressed the issue of whether the indefinite statute of limitations for tax assessment applicable to fraudulent tax returns (IRC Section 6501(c)(1)) extends to a taxpayer whose return preparer was responsible for providing the false information, unbeknownst to the taxpayer.

The U.S. Tax Court summarized the underlying facts as follows:

For tax years 1993 through 1999 (the years at issue), the Murrins relied on a tax return preparer, Duane Howell, to prepare their joint federal income tax returns, as well as returns for two partnerships in which Ms. Murrin was a general partner. Unbeknownst to the Murrins, Mr. Howell placed false or fraudulent entries on those returns with the intent to evade tax. The Murrins themselves did not put any false of fraudulent information on their returns, nor did they intend to evade tax.

The Murrins timely filed their 1993-99 tax returns. The IRS did not discover Mr. Howell's fraudulent entries until well after the expiration of the three-year period of limitations to assess tax set forth in section 6501(a). In 2019 the IRS nonetheless issued a notice of deficiency to the Murrins for the years at issue, premised on the fraud exception to the three-year limitation embodied in section 6501(c). The notice determined deficiencies and accuracy-related penalties under section 6662 against the Murrins for all of the years in issue.

The Tax Court previously held in Allen v. Commissioner, 128 T.C. 37 (2007) that Section 6501(c)(1) is not limited to where a taxpayer filed a false or fraudulent return with the intent to evade tax, but is also applicable where the fraudulent conduct was that of the return preparer. The court reasoned that the language of Section 6501(c)(1) is not limited to fraud by the taxpayer. Ms. Murrin argued that Allen was wrongly decided and asked the court to revisit the issue, relying on a decision of the U.S. Court of Appeals for the Federal Circuit,BASR P’ship v. United States, 795 F. 3d 1338 (Fed. Cir. 2015) which disagreed with Allen. The Tax Court declined Ms. Murrin’s request and then included a detailed discussion of why Allen was correctly decided and why Section 6501(c) is not limited to fraudulent conduct by the taxpayer.

This is a harsh but not unexpected decision by the Tax Court and is a reminder to all taxpayers to hire reputable and trustworthy return preparers.

For questions regarding this blog post or any other civil or criminal tax related matter, please feel free to contact me at jcrouch@meadowscollier.com.