Tax Preparer Fraud Leads to Indefinite Tax Assessment of Filer

Tax Preparer Fraud Leads to Indefinite Tax Assessment of Filer

Tax Preparer Fraud and Assessment of Taxes

In most cases, the Internal Revenue Service has three years to audit or examine the taxpayer’s tax return.  In some situations, such as when there are certain foreign income situations involving unreported income and/or substantial underreporting, the IRS has six years. When it comes to tax fraud, there is no definitive statute of limitations so the IRS can have unlimited time to go after a taxpayer to assess tax liability, fines, and penalties. But what happens in this situation in which the taxpayer’s tax return was fraudulent due to no fault of their own such as when a tax preparer unilaterally prepares a fraudulent return but does not tell the taxpayer?

This often occurs in situations in which the tax preparer is seeking to generate a larger refund wherein the tax preparer receives a percentage of the refund as payment. In the recent case of Murrin, the U.S. Tax Court ruled that even though the Taxpayer was not technically at fault for filing a fraudulent return, the 26 U.S.C. 6501 statute still applies, and there is an indefinite statute of limitations to assess the Taxpayer. Let’s take a look at the basics of this case.

First, What is 26 U.S.C. 6501?

There are three main scenarios in which there is an indefinite statute of limitations. As provided by section 6501 in pertinent part:

• • • “(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.

      • (2) Willful attempt to evade tax

        • In case of a willful attempt in any manner to defeat or evade tax imposed by this title (other than tax imposed by subtitle A or B), the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.

      • (3) No return

        • In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.”

Purpose of the Code Section 6501

• • • “The purpose of the former is to provide unlimited time to the Commissioner to assess the correct tax liability in the case of a false or fraudulent return “because of the special disadvantage to the Commissioner in investigating these types of returns.” Allen, 128 T.C. at 40; see also Badaracco v. Commissioner, 464 U.S. at 398; BASR,  795 F.3d at 1361 (Prost, C.J., dissenting); City Wide Transit, Inc. v. Commissioner, 709 F.3d at 107; Ballard v. Commissioner, 740 F.2d 659, 663 (8th Cir. 1984) (“The lifting of the normal statute of limitations addresses the difficulties which sometimes arise in the discovery of deficiencies by virtue of taxpayer fraud . . . .”), aff’g in part, rev’g in part T.C. Memo. 1982-466.

    • Fraud-by whoever committed-places the tax collector in a “disadvantageous position” vis-à-vis the determination of a taxpayer’s correct tax liability. Badaracco v. Commissioner, 464 U.S. at 398. “[F]raud cases ordinarily are more difficult to investigate than cases marked for routine tax audits. Where fraud has been practiced, there is a distinct possibility that the taxpayer’s underlying records will have been falsified or even destroyed.” Id. “Thus, the lack of a statute of limitations for fraudulent returns with intent to evade tax in § 6501(c)(1) (and § 250(d)) reasonably compensates the government for the unique difficulty involved in discovering fraud and determining the taxpayer’s true tax liability.” BASR, 795 F.3d at 1361 (Prost, C.J. dissenting).”

The Taxpayer Does Not Have to Have Prepared the Return

• • • “Our interpretation nonetheless accommodates the results in each. 

      • Section 6501(c)(1) is triggered by (1) a false or fraudulent return (2) with the intent to evade tax. The combination of a return with the intent requirement circumscribes the pool of actors whose intent might matter to those who had a hand in the preparation or filing of a tax return. I.R.C. § 6501(c)(1); accord BASR, 795 F.3d at 1343 (“A fraud is only committed via submission of a document when a person acting with an intent to defraud makes a false entry on that document.”).

      • The decisions cited by Ms. Murrin each involved fraud perpetrated by third parties distant from the filing and preparation of the return, and thus section 6501(c)(1) did not apply. See BASR, 795 F.3d at 1343; Asphalt Indus. v. Commissioner, 384 F.2d at 230; Botwinik, 39 T.C. at 990-91.”

Tax Court’s Ruling

• • • “We have concluded that no special justification exists warranting our reversal of Allen. Mr. Howell’s preparation of false or fraudulent returns with the intent to evade tax is sufficient to trigger the indefinite period of limitation to assess tax. The Commissioner’s deficiency determinations are timely.”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.