In Stephanie Murrin v. Commissioner, T.C. Memo. 2024-10 (Jan. 26, 2024), Judge Urda decided that the fraudulent acts of a return preparer starting in 1993, made an honest taxpayer liable for some $65,000 in deficiencies resulting from the 30-year old fraud of someone else, plus some $15k in §6662 penalties.  That is, the return preparer’s fraud opened up the unlimited period in §6501(c)(1) for the IRS to assess the deficiency against the taxpayer.  In doing so Judge Urda adhered to the Tax Court’s precedential opinion of Allen v. Commissioner, 128 T.C. 37 (2007).  It is no small irony to me that Allen was written by Judge Kroupa, who was later convicted of tax evasion.

Let me emphasize that there was no hint in the facts of today's case that the taxpayer knew or should have known of the return preparer’s fraud.  That is, the government made no attempt to impute the return preparer’s fraud to the taxpayer.  The government made no attempt to prove the taxpayer had any fraudulent intent to evade her tax obligations.  Yet here we are, over 30 years later with the government seeking to collect tax and penalties when the normal statute of limitations is three years.

Pull up your jaw.  Unless and until the Tax Court’s recent re-interpretation of the §6501(c) fraud exception to the general three year SOL for assessment gets changed, taxpayers and their representatives must deal with the results.

Sad details below the fold.

Background: Regulating Tax Return Preparers
Lots of taxpayers need help preparing their returns.  The latest stats I can find are in the 2018 Taxpayer Advocate Report To Congress, which says that in calendar year 2018 over 80 million of the 150 million returns processed by the IRS were filed on behalf of taxpayers by tax return preparers.

And lots of folks are out there willing to help taxpayer prepare and file returns.  According to the IRS Return Preparer Office, over 739,000 individuals have current and valid Preparer Identification Numbers (PTINs) for 2024.

There is no national regulation of tax return preparers.  A few states have some regulation.  Lack of regulation hurts taxpayers because not all return preparers are competent.  And not all are honest.  In fact, tax return preparer fraud is one of the IRS’s Dirty Dozen Tax Scams.

The IRS tried a front-door approach to regulating tax return preparers.  Historically, Treasury has regulated a group called “tax practitioners” (chiefly lawyers, CPA’s, and enrolled agents) through the regulations contained in Circular 230.  These regulations are issued under the authority of 31 U.S.C. §330 which permits Treasury to regulate “the practice of representatives of taxpayers before the Department.”  For a history of regulations under that statute see my article “’Loving’ Return Preparer Regulation” 140 Tax Notes 457 (July 29, 2013).

The IRS front-door approach was to extend Circular 230 to cover return preparers who were not attorneys, CPAs, or enrolled agents.  See T.D. 9527 “Regulations Governing Practice Before the Internal Revenue Service”, 76 FR 32286 (June 3, 2011). I call these unregulated folks Unenrolled Return Preparers (URPs), surely an appropriate acronym!

The IRS front-door approach got slammed by the D.C. Circuit in 2013.  Loving v. IRS, 742 F.3d 1013 (opinion by then Judge Kavanaugh).  Worse, in 2014, the D.C. District Court took the Loving rationale, fashioned from it a giant cudgel, and whacked the Service over the head, causing a massive loss of hit points on the health of Circular 230. Ridgely v Lew 55 F. Supp. 3d 89 (D.D.C. 2014) (holding invalid Circular 230’s limitation on a CPA charging contingent fees for preparing amended tax returns).

The IRS has since struggled to find a way to regulate return preparers.  Naturally, it gets criticized for not doing what the D.C. Circuit said it had no authority to do.  See, e.g., the 2018 Taxpayer Advocate Report To Congress where the Taxpayer Advocate says “[t]he court decision does not absolve the IRS of the responsibility to protect taxpayers.”  And at least one commentator (me!) did in fact explain why and how the IRS could regulate URPs under the authority of §6011.  See Camp, How the IRS Can Regulate Return Preparers Without New Law, 148 Tax Notes 1355 (Sept. 13, 2015).  Sadly, no one cares what I think.  I even gave a copy of that article personally to then Commissioner John Koskinen who smiled politely, took it … and probably promptly put it in the circular file.

The inability to regulate return preparers through the front door, however, might be ameliorated if there was some side door through which the IRS could undo the damage inflicted, particularly by fraudulent return preparers.

That brings us to §6501.

Background: The Assessment Statute of Limitations and The Exception For Fraud
The language currently codified in §6501(a) provides that “the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed.” The IRS calls the date on which its power to assess expires the “Assessment Statute Expiration Date” (ASED).  Thus, three years is the general rule.

The language currently codified in §6501(c)(1) creates an exception to the general three year rule, providing that “[i]n the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed … at any time.”

The language currently codified in Section 6663(a) also creates a civil penalty for fraud, providing that “[i]f any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.”

Notice I keep saying “the language currently codified.”  That is because language enacted by Congress in a single statute, a single enactment, might end up codified in different parts of the Internal Revenue Code.  Thus it is with these three sections.  They were all initially part of §250 of the Revenue Act of 1918, ch. 18, 40 Stat. 1057  I go into the gory historical detail in Bryan Camp, Tax Return Preparer Fraud and the Assessment Limitation Period, 116 Tax Notes 687 (Aug. 20, 2007).

That history gives us two take-home lessons.  First, what is now §6501 was enacted as a statute of repose, promoting a strong congressional policy of closure.  Before 1918 the statutory scheme required the Commissioner to assess each taxpayer by each June.  Once the assessment was made, the matter was closed; the courts held the Commissioner functus officio to correct errors in the absence of a statute granting a power to re-assess.  Congress eventually supplied such power, but only for a limited time and only in cases of “a false or fraudulent return.”  False returns were simply those that contained error.  Fraudulent returns were those where the taxpayer intended to evade taxes.  When Congress overhauled the assessment process in 1918, it created the current unlimited period of time exception to the general ASED, adding for the first time the “with the intent to evade” language after the phrase “false or fraudulent return” in order to limit the unlimited time period to situations other than simple errors resulting from mere confusion or negligence.

Second, §6501(c)(1) is the legislative twin with §6663. Both sections originated in §250 of the Revenue Act of 1918.  The phrase “with intent to evade tax” came from the fraud penalties part of §250 and that phrase was pressed into service to also define the boundaries of the exception to the five year general ASED.  The Senate Finance Committee copied the phrase “with intent to evade” from the fraud penalty provision into the assessment provision in order to narrow the latter’s scope of operation.  Thus, the same conduct that triggered the fraud penalty would trigger the unlimited assessment period, and that conduct was that of the taxpayer, not third parties.  While Congress changed the language in §6663 in the Omnibus Budget Reconciliation Act of 1989, that does not affect the scope of the phrase.

For these reasons, the traditional interpretation of §6501(c)(1) has been that “[t]here must be additional evidence, independent of the general presumption of correctness, from which fraudulent intent on the part of the taxpayer can be properly inferred.”  Payne v. Commissioner, 224 F.3d 415, 420, 421 (5th Cir. 2000) (emphasis added).  This traditional interpretation is long-standing among the circuits.  See, e.g., Drieborg v. Commissioner, 225 F.2d 216, 218 (6th Cir. 1955) (same).

Respected treatise-writers have similarly long believed that “[t]he issue is one of fact involving the taxpayer’s intent.”  Michael I. Saltzman, IRS PRACTICE AND PROCEDURE (Warren, Gorham & Lamont, 1981), §5.03[1][a] at page 5-10.

From 1918 until 2001, the IRS also agreed with this consensus.  For example, Field Service Advice Memorandum 200104006, 2000 FSA LEXIS 207, 2001 WL 63261, discusses why the fraudulent intent of a tax return preparer cannot be used to trigger the §6501(c)(1) exception.  Its analysis nicely refutes many of the government’s current arguments.  Since 2001, however,  the government has sought to expand the reach of §6501(c)(1), with mixed results.

And, finally, the Tax Court adhered to this traditional interpretation as well.  See Botwinik Brothers v. Commissioner, 39 T.C. 988, 996 (1963) (corporate bookkeeper Vera Green’s submission of fraudulent corporate returns did not toll the limitation period because “it must be kept in mind at the outset that the fraud to be established is the fraud of petitioner corporation, not that of Vera Green.”).

In the early 2000’s, however, the IRS started pushing to expand the reach of §6501(c)(1).  And it succeeded in convincing the Tax Court to adopt a very expansive—one might say unbounded—interpretation of the statute in Allen v. Commissioner, 128 T.C. 37 (2007)(unreviewed opinion).

In Allen the taxpayer provided his preparer with documents supporting claims for mortgage interest and property tax deductions.  The preparer not only claimed those deductions on Schedule A but also claimed fraudulent deductions for charitable contributions, meals and entertainment, and pager and computer expenses, as well as various other expenses.  The parties stipulated that the taxpayer had no intent to evade tax.  As to the preparer, well he appeared to have been a serial fraudster. He apparently performed similar “services” for other clients for which he was convicted under § 7206(2) of willfully aiding and assisting in the preparation of false and fraudulent returns, none of which were Mr. Allen’s.

Judge Kroupa’s opinion in Allen concludes that §6501(c)(1) did not require the government to prove fraud on the part of the taxpayer but could get the unlimited time to reassess by showing fraud on the part of return preparer.  For my critique of her analyses, see Bryan Camp, Presumptions and Tax Return Preparer Fraud, 120 Tax Notes 167 (July 14, 2008).  For example, in her unreviewed opinion, she does not even mention Botwinik Brothers.

In today’s case, therefore, the taxpayer had a big hill to climb to get over the precedential effect of Allen.  The able representation by Lawrence A. Sannicandro, Daniela Calabro, and Michael A. Guariglia, all from McCarter and English, was just not enough to get over that hill.  And to his credit, Judge Urda addresses many of the problems with Judge Kroupa’s opinion.

Let’s take a look at the facts and lesson.

Facts
I cannot do better than just quote Judge Urda on the salient facts of the case:
“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.”

Judge Urda carefully frames the question before the Court as “whether section 6501(c) applies only where a taxpayer herself has filed a false or fraudulent return with the intent to evade tax. The Code contains no such limitation, and we will adhere to our precedent.”

Alert readers will see the smooth move Judge Urda is making.  He is sneaking in a presumption that 6501(c)(1) requires some positive language limiting it to taxpayer fraud.  This is exactly how Judge Kroupa approached it in Allen, writing “Nothing in the plain meaning of the statute suggests the limitations period is extended only in the case of the taxpayer's fraud.”  128 T.C. at 40.

But look again at the statutory text: “[i]n the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed … at any time.”  Obviously a “return” cannot have an “intent.”  Until AI gets better, you need a human to have intent.  The “plain language” of statute is simply silent on whose intent the government must prove.

Judge Urda explains that this silence creates a presumption that anyone’s intent can count because the text “focuses on the return and not the intent of a particular actor.”  Op. at 6.  He does not explain, however, how someone can have an intent to evade someone else’s tax obligation.  Typically, the dictionary definition of “evade” is that it means to avoid or dodge something coming at you, or escape a consequence coming at you, or avoid performing a duty—here the duty to pay “the tax.”

However, in distinguishing Botwinik, Judge Urda suggests that the Tax Court will indeed limit the reach of exception to fraud by return preparers.  Recall that case involved the fraud of a corporate bookkeeper who had cooked the books.  Judge Urda believes that makes the case inapplicable because it did ”not address the applicability of section 6501(c)(1) to a person who filed or prepared false or fraudulent returns with the intent to evade tax, as did Mr. Howell, the Murrins' tax return preparer.”  Op. at 11-12.  I wished Judge Urda had explained the principled basis for limiting the reach of the exception to return preparers.  After all, just as nothing in the text of the statute limits the fraud to taxpayers, neither does anything in the text limit it to third parties who happen to be return preparers.  To me, the fair reading of Botwinik is that the Tax Court was interpreting the unlimited time exception in 6501(c)(1) to only those situations where the taxpayer or the taxpayer's agent had a fraudulent intent.

Aside from the textual argument, Ms. Murrin argued that the 6501(c)(1) exception should be read the same way as the fraud penalty.  Judge Urda rejects that argument, relying on the legislative history of the 1918 Revenue Act as well as the fact that the reasonable cause defense to the fraud penalty is explicitly linked to the taxpayer.  He also explains that each statute has a different purpose.  The purpose of §6501(c)(1) is to compensate the government whereas the purpose of the §6663 fraud penalty is to punish the fraudster.  While the Federal Circuit used that drafting history to read 6501(c)(1) as triggered only by fraud of the taxpayer, Judge Urda adopts the dissenting Judge’s views. See BASR Partnership v. U.S., 795 F.3d 1338 (Fed. Cir. 2015).

Ms. Murrin also pointed out that reading 6501(c)(1) expansively would create conflicts with other sections of the Code and arguably contradicts the legislative history of those statutes.  Judge Urda rejects those arguments as well, falling back on the claim that the language is 6501(c)(1) is “unambiguous.” Op. at 10 (“And we do not believe that resorting to legislative history is called for here given the unambiguous nature of the text of sections 7454(a) and 6501(c)(1).”).

Lesson and Commont:  Choose Your Return Preparer Carefully
The IRS struggles to control return preparers.  It cannot do so through the front door of Circular 230, so in some sense, you could see this push to hold taxpayers accountable for the sins of their preparers as a side-door approach.  And the IRS website cautions taxpayers to be careful.  Yeah, well that is much easier said than done.

The Tax Court’s insistence that anyone’s intent can taint a return—or maybe just the fraudulent intent of a “return preparer” (whatever that means in this context)—can create some harsh results for taxpayer.

First, it means taxpayers are now responsible for the behavior of their return preparers.  Period.  They must be diligent not only in selecting their return preparer but also in monitoring their preparer.  This means more than just ensuring the preparer used the data provided by the taxpayer.  It means more than just ensuring their preparer actually filed the return.  See Lee v. United States, 84 F.4th 1271 (11 Cir. 2023)(Taxpayer who failed to ensure CPA actually e-filed could not establish reasonable cause to avoid failure to file penalty).

Again, this interpretation of 6501(c)(1) means taxpayers are completely responsible for ensuring the preparer is not committing fraud by, for example, submitting a return different from the one presented to the taxpayer for signature.  It means ensuring the preparer does not take a fraudulent position on the return, such as claiming bogus deductions.  See DOJ Press Release “Mansfield Man Charged in Fraudulent Tax Return Scam.”  Thus, taxpayers may need to hire additional help to oversee the return preparer.  After all, the basic reason for hiring a preparer in the first place is that the taxpayer alone is no match for the complexities of tax law and needs help in making a proper return.  Think Employee Retention Credits.

Second, another result of this opinion is that it greatly reduces the burden of the government to get an unlimited assessment period.  It no longer has to prove that the taxpayer had any bad intent, just that someone else had a bad intent.  Someone close enough to the preparation of the return to count as a "return preparer."  This creates a problem for taxpayers because different parts of the federal government go after fraudulent tax return preparers at different times.  For example, a return preparer facing criminal charges may well cop a plea in exchange for a reduced sentence.  If that happens, then boom! Now the government has the admission and can troll the taxpayer 30 years later.  Again, this is just a result of different components of the government doing their jobs.  There is no conspiracy, no evil bureaucracy.  But it is still a harsh result for taxpayers.

Finally, this opinion now opens the door for the IRS to hit honest taxpayers with the 75% fraud penalty in §6663.  That provision contains the same ambiguous language as §6501(c).  While Judge Urda dismissed that argument, he seemed to overlook that the Tax Court has said it involves the “same determination.”  Neely v. Commissioner, 116 TC 79, 85 (2001)(“the determination of fraud for purposes of the period of limitations on assessment under section 6501(c)(1) is the same as the determination of fraud for purposes of the penalty under section 6663.”  I wish Judge Urda has addrssed Neely.

Bottom Line: I would hope that an appeal here to the Third Circuit would help re-establish the long-standing and traditional interpretation of 6501(c)(1), that it requires fraudulent intent on the part of the taxpayer in order for the government to get the unlimited time period to assess. 

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  He invites readers to return on the first Monday of each month (or Tuesday if Monday is a federal holiday) to TaxProf Blog for another Lesson From The Tax Court.

[Editor's Note:  If you would like to receive a daily email with links to each Lesson From The Tax Court and other tax posts on TaxProf Blog, email here.]