Taxing Lessons Case Summaries

Case — Statute of Limitations – Embezzlement

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TL Case Summ


Were the actions of the taxpayer’s accountant an attempt to evade tax or hide embezzlement?


Taxpayer Says: The accountant intended to embezzle, and filed false payroll taxes to cover up the embezzlement. The accountant did not have the specific intent to defeat or evade tax, and the normal three year statute of limitations applies.

Internal Revenue Service Says: The accountant’s actions and subsequent conviction show a clear intent to evade tax or willfully defeat or evade tax for the periods at issue. The returns were fraudulent and the normal statute of limitations does not apply.


From Internal Revenue Code Section 6501(a): The Commissioner generally must assess any tax imposed by the Code within a three year period after a taxpayer files his or her return.

From Internal Revenue Code Section 6501(c): One exception to the general three year statute of limitation rule exists, however, for the filing of a false or fraudulent return with the intent to evade tax. [ 6501(c)(1)] Another exception exists for a willful attempt in any manner to defeat or evade tax. [ Sec. 6501(c)(2)] In either of those situations the Commissioner may assess the tax, or commence a proceeding in court for the collection of the tax, at any time.

From Allen v. Commissioner, 128 T.C. 37 (2007): For purposes of section 6501(c)(1), the limitations period remains open indefinitely regardless of whether it was the taxpayer or the taxpayer’s tax return preparer who had the intent to evade tax.


A statute of limitations is a time limit established by law for taking action. Under the Internal Revenue Code, the general statute of limitations is three years. That means the IRS generally must assess, refund, credit, and/or collect taxes within three years from the date a return is due or when it is filed, whichever is later. When the established statute of limitations expires, the IRS can no longer assess additional tax, allow a claim for refund, or take collection action.

There are exceptions that extend the three year statute of limitations. For instance, when gross income is substantially understated, the statute is extended to six years. In addition, the statute does not apply – meaning there is no time limit preventing IRS action – to fraudulent returns or returns that are never filed.

In this case, the dispute arose over the question of whether the tax assessed by the IRS falls under the normal three year statute, or whether the fraud exception to the statute applies. At issue is approximately $372,000 of assessments, which the taxpayer will not have to pay under the three year statute.

The taxpayer, a corporation, hired an accountant to negotiate a settlement with the IRS regarding back payroll taxes. The accountant told the taxpayer the settlement required that the payroll returns be delivered directly to the IRS, along with checks for the amount of the taxes. The taxpayer signed a blank power of attorney, and gave the accountant the returns and the checks, as requested.

The accountant altered the checks, making them payable to himself, and filed false payroll returns with the IRS showing a lower amount of tax. He pocketed the difference.

The taxpayer and the IRS agree the returns filed by the accountant were false and fraudulent, and that the subsequent IRS assessments were made more than three years after those returns were filed.

However, the taxpayer says there’s no evidence the accountant’s specific intent was to evade taxes known to be due by conduct intended to conceal, mislead, or otherwise prevent the collection of those taxes. Instead, the accountant filed the false and fraudulent returns to cover up the embezzlement. Since fraud was not the intent, the applicable statute of limitations is three years, and the additional assessments are not due.

The IRS says the accountant committed fraud. He filed fraudulent payroll returns, pleaded guilty and was convicted of signing, preparing and presenting false returns, and had the knowledge and experience to know his actions would result in the evasion of employment taxes. Therefore, the normal three year statute does not apply, and the taxpayer owes the additional assessments.


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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit and

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Right answer!
Sorry, wrong answer :(
For the taxpayer. The IRS did not show by clear and convincing evidence the accountant filed fraudulent returns with the intent to evade tax or willfully attempted to defeat or evade tax, or that his conduct was not an incidental consequence or secondary effect of his embezzlement scheme, or that the taxpayer’s argument was meritless. The limitations periods for assessment are not extended, and the three-year limitations period of section 6501(a) controls the timeliness of the IRS assessments of additional taxes. Accordingly, the IRS is time barred from assessing the additional tax for all periods at issue.