STATUTE OF LIMITATIONS QUIZ

Facts & Law:

A. Income taxes must be assessed within 3 years of the later of the  date the return is filed or the due date of the return.

B. However, the assessment period remains open indefinitely “in the case of a false or fraudulent return with the intent to evade tax.”

C. A shareholder in a Subchapter S corporation is taxable on his or her pro rata share of the net income of the corporation.

D. A Subchapter S corporation files a fraudulent return. The taxpayer-shareholder had nothing to do with the preparation or filing of the return, and was not knowledgeable of the fraud.

Question:

Can the IRS assess the taxpayer for a corrected share of the income of the corporation more than 3 years after the filing and due date of the return?

Answer:

No, according to the IRS.

Interestingly, fraud by one spouse in filing a joint tax return keeps the statute open for the other spouse. That was not persuasive here, because spouses are jointly and severally liable for joint return taxes.

In Vincent Allen, 128 TC 37 (2007), the Tax Court held that an income tax return preparer's fraud kept a taxpayer's income tax return open indefinitely. However, that precedent was not applicable here because the intent in that case was to evade the taxpayer’s tax – that was not the case here.

Chief Counsel Advice 201238026