Can an Innocent Taxpayer Be Subject to an Unlimited Statute of Limitations Because of the Return Preparer’s Fraud?

By Bryan C. Skarlatos
Journal of Tax Practice & Procedure
December 2013 - January 2014 Edition

The normal statute of limitations is three years from the date the return is filed. That is how long the IRS has to challenge the accuracy of the return and assess a deficiency.1 However, the three-year statute of limitations does not apply where the tax return is false or fraudulent. Specifically, Code Sec. 6501(c)(1) provides that “[i]n 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.” How does this rule apply in cases where a tax return preparer or tax advisor fraudulently causes an understatement even though the taxpayer is blissfully unaware of any problems on the return? Some courts have held that, if a tax return preparer willfully understates tax liability, the IRS can assess a tax at any time, even if the taxpayer is innocent and blissfully unaware of any problem on the return.

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