Is the Issue of Fraudulent Conduct by the Return Preparer and the Tax Assessment Statute of Limitations Headed to the U.S. Supreme Court?

In a blog post last year, I discussed the Tax Court’s decision in Murrin v. Commissioner, T.C. Memo 2024-10. In Murrin, the Tax Court again held that 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 or 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 at issue.

In ruling for the IRS, the Tax Court agreed with the decision in Allen v. Commissioner, 128 T.C. 37 (2007) that IRC Section 6501(c)(1) is not limited to fraudulent conduct by the taxpayer. The Murrins appealed their case to the Third Circuit Court of Appeals asking the Third Circuit to consider BASR P’ship v. United States, 795 F. 3d 1338 (Fed. Cir. 2015) in which the Federal Circuit Court of Appeals held that the indefinite statute of limitations for assessment is applicable only where there is fraudulent conduct by the taxpayer. Unfortunately, the Third Circuit, in its detailed opinion, agreed with the Tax Court.

Since we now have a split in the circuit courts, this issue may be headed to the U.S. Supreme Court for consideration.

In the meantime, Murrin 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.