Whose Fraud is it Anyway? – Third Circuit Says Anyone’s Will Do!

The Third Circuit recently ruled that the statute of limitations remains indefinitely open on returns in which fraudulent intent by anyone involved is found. In Murrin v. Commissioner, the taxpayer’s tax preparer, without the taxpayer’s knowledge, added fraudulent entries to returns during the 1990s, resulting in underpayment of tax. Decades later, the IRS decided to open audits on the returns based on Internal Revenue Code § 6501(c)(1). The taxpayer argued that the IRS was beyond the statute of limitations since the taxpayer had no intent to evade tax. Both the Tax Court and the Third Circuit held that the tax preparer’s fraudulent intent alone was enough to keep the statute of limitations open indefinitely.

Historically, the Courts, attorneys, and tax preparers believed the IRS had three years to audit taxpayers, unless the taxpayer committed fraud. Most cases focused on whether or not the taxpayer had fraudulent intent. If the taxpayer unwittingly hired an unscrupulous preparer, the understanding was that the taxpayer’s innocence foreclosed the extended statute.

The Third Circuit has now “respectfully part[ed] ways” with such interpretation because of § 6501(c)(1)’s passive voice, i.e., it doesn’t specifically reference the taxpayer. This analysis was at least partially based on the Supreme Court’s 2023 Bartenwerfer decision, which found that Congress means what it says and means what it doesn’t say in a similar context. So, because Congress didn’t specifically mention the taxpayer, the Third Circuit interpreted 6501(c)(1) to say Congress didn’t mean for intent to only apply to the taxpayer, it can be anyone’s intent.

So, even if you have the purest of hearts when filing your taxes, fraudulent entries on your return by your return preparer could result in an unlimited statute of limitations. This means it is more important than ever to review your return and discuss it with your preparer before you file.

While this rule now applies in the Third Circuit, the Circuits are split, and the Supreme Court might have to make a decision. If the Third Circuit’s decision concerns you, please reach out, and we would be happy to discuss it further.

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IRS, statute of limitations, tax

About Michelle Levin

Michelle Abroms Levin is a shareholder in Dentons Sirote’s Huntsville office, where she is a member of the Tax practice group. She represents clients during all phases of federal income tax controversies, including IRS audit, administrative appeals, and court proceedings in the U.S. Tax Court, U.S. Court of Federal Claims, federal district court and the Courts of Appeals. Michelle has secured major victories for her clients in the Eleventh Circuit, Fifth Circuit, and Tax Court, elevating important Administrative Procedure Act issues in the tax controversy context. Her experience includes a wide range of complex tax issues. Michelle also counsels clients in tax and business planning. She works with clients to structure transactions in a manner that maximizes tax benefits, reduces risk, and complies with tax law at local, state, and federal levels. Michelle has also been elected as a Fellow of the American College of Tax Counsel.

About Ronald Levitt

Ronald Levitt is a shareholder in Dentons Sirote’s Birmingham, Alabama office, where he is a member of the Tax practice group and leads the Dentons Sirote Conservation Easement team. His practice focuses on federal and state controversy matters, including planning and defending conservation easements.

About Sarah Green

Sarah Green is a senior managing associate in Dentons Sirote’s Huntsville, Alabama office. She is a member of the Tax practice group. Her practice focuses on Tax Controversy and Litigation.

About Olla Jaraysi

Olla Jaraysi an associate in Dentons Sirote’s Birmingham, Alabama office. She is a member of the Tax practice group. Her practice focuses on Tax Controversy and Litigation.