Mitchell v. Commissioner: How a Limitations Defense Defeated a Million-Dollar Fraud Case

In Mitchell v. Commissioner, T.C. Memo. 2026-102 (Sept. 30, 2026), the Tax Court ruled for taxpayers on a nearly $1,000,000 tax and penalty bill.  And the court did not even need to conclude that the tax reporting was correct.

Background

At a high level, in 2015 the taxpayers relied on advice from their tax advisors to enter into several transactions that significantly reduced their tax bill.  The taxpayers filed their tax return in October 2016.  Yet, more than six years later, in March 2023, the IRS issued a notice of deficiency proposing to increase the tax bill by over $500,000 and impose a fraud penalty of nearly $400,000.  Given that the tax year was 2015, the interest—which would have accrued on the tax and penalty—would have been enormous. 

Usually, the IRS has only three years from the time a return is filed to make changes to a taxpayer’s tax return.  There are some circumstances that can extend that timeframe to six years.  As just one example, if a taxpayer omits more than 25% of the gross income that was required to be shown on the tax return, the IRS may be allowed to make changes within an extended six-year timeframe.  Yet, here, the IRS proposed changes more than six years after the return was filed.   

How?  The IRS relied on its allegations of civil tax fraud.  If the IRS can prove civil tax fraud, the IRS has an unlimited period to propose changes to a tax return.  So, whether or not the deductions were proper, if the IRS could not prove civil tax fraud, the IRS could not charge additional tax and penalties. 

To prove civil tax fraud, the IRS has a high burden; the IRS must show with clear and convincing evidence that any portion of the alleged underpayment is attributable to fraud.  Accordingly, much of the tax turned on the taxpayers’ intent. 

The IRS Failed to Prove Civil Fraud

Civil tax fraud, generally, may be established where the IRS demonstrates that a taxpayer intended to evade taxes that they knew to be owing through conduct intended to conceal, mislead, or otherwise obstruct the collection of taxes.  There are several factors—commonly referred to as “badges of fraud”—that courts often analyze to determine if civil tax fraud exists.  The court analyzed some of those factors to determine that the IRS did not meet its burden. 

• No pattern of understatement. The 2016 return was audited with no deficiency, and none was determined for later years.  This factor weighed against fraud.  
• No concealment. Records were kept and given to an outside accounting firm, and the deductions were visible on the returns. This factor weighed against fraud. 
• Consistent, credible testimony. The taxpayer and his CPA both testified credibly, and even the IRS revenue agent testified that the taxpayers never lied to her.  This factor weighed against fraud. 
• Filing false returns. The taxpayer followed the advice of his financial advisors and unwound the structure once they raised concerns. This factor was neutral.
• Education. The IRS pointed to the taxpayer’s accounting degree and an A in a law school tax course.  After law school, however, the taxpayer was a plaintiff’s litigator, and he credibly testified that he relied on professionals.  This factor did not weigh in favor of fraud.

Because the IRS failed to prove civil tax fraud by clear and convincing evidence, the IRS’ proposed tax and penalty bill could not stand. 

Whether or not the taxpayers’ deductions were proper, the taxpayers still were able to prevail.  That happened because their counsel recognized that the statute of limitations, not the deductions, was the real case.  When the IRS needs fraud to reach a closed year, everything turns on intent—and the IRS’ ability to prove it by clear and convincing evidence. 

If you are ever facing an IRS exam or proposed tax bill that seems to be beyond the normal IRS timeframes, or any other civil or criminal tax issue, please feel free to contact me to discuss.  I can be reached at 214-749-2417 and jglassman@meadowscollier.com.