PREPARER FRAUD AND THE STATUTE OF LIMITATIONS

Generally, the IRS only has three years to assess additional income tax for a given tax year. The clock starts running at the later of the date the tax return for that year is filed, or the due date of the return.

However, if the taxpayer commits fraud, the statute of limitations for the IRS to assess additional income tax never expires. What happens if the taxpayer doesn't commit fraud, but the tax return preparer does? Is the IRS still bound by the three year statute of limitations?

In the case of Vincent Allen, 128 TC No. 4 (2007), the taxpayer did not commit any fraud, but his preparer did in making false and fraudulent tax deductions. The Tax Court held that the three year statute of limitations did not apply, and that there was no limitations period due to the preparer's fraud.

The Tax Court found that the statute does not require the fraud to be the taxpayer's. Rather, the Internal Revenue Code ties the unlimited extension of the limitations period to the fraudulent nature of the return, not to the identity of the perpetrator of the fraud.