Back in November 2011, Taxing Lessons featured the City Wide Transit tax court decision (T.C. Memo. 2011-279). In that case, the question was whether the usual three year statute of limitations applied in a situation where the taxpayer’s accountant filed fraudulent returns to cover his embezzlement of payroll taxes. The court decided for the taxpayer and barred the IRS from collecting the taxes beyond the three year period.
In March 2013, the US Court of Appeals for the Second Circuit reversed the tax court decision. The Court of Appeals decided that by filing the fraudulent returns, the accountant for City Wide Transit had intentionally evaded taxes. Since fraud extends the statute of limitations, the IRS could collect the prior year taxes beyond the usual three year limit.
In October 2013, in a similar case (BASR Partnership), the US Court of Federal Claims found the extended statute of limitations did not apply based on fraudulent intent by the tax return preparer. Instead, the court said that extending the statute beyond the usual three year period required fraudulent intent by the taxpayer.
Though the situation and facts in BASR differed from those in City Wide Transit, the underlying question of interpreting whose fraudulent intent extends the statute of limitation remains. Is the three year statute extended only when the taxpayer commits fraud? Or does fraud by a preparer or other agent of the taxpayer also extend the statute?
The IRS can appeal BASR once more, to the US Court of Appeals for the Federal Circuit, so the end of this particular story has yet to be written.
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 TaxingLessons.com and HLCarpenter.com.
This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.