CAN THE FRAUD OF THE TAX PREPARER BE IMPUTED TO THE TAXPAYER? by Steve Toscher and Della Bauserman
Prior to 2001, the answer was generally “No.” Today, the answer is unclear.
In 1950, there were a series of cases, that all had similar facts, where the Tax Court addressed the issue of whether the fraud of the preparer could be imputed to the taxpayer for the purposes of the fraud penalty under IRC §6663. In these cases, the taxpayers were all employees of the same airline and all had their tax returns prepared by Mr. Nimro. Mr. Nimro filed false and fraudulent returns for these taxpayers. The IRS asserted the fraud penalty in each of these cases. In each of these cases the Tax Court determined that the deficiency was not due to fraud of the taxpayer. The Tax Court in these cases focused on whether the taxpayer had the intent to file a false and fraudulent return. In one of the main cases, Fulton v. Comm’r, 14 T.C. 1453 (1950), the Tax Court stated that the IRS had “not proven that it was within the actual or apparent scope of Nimro’s authority as petitioner’s agent to prepare and file a false and fraudulent return.”
In 1971, the Tax Court also declined to attribute the fraud of the tax preparer to the taxpayer for the purposes of extending the statute of limitations under IRC §6501(c)(1) in Klemach v. Comm’r, T.C. Memo 1971-169. In that case, the taxpayer was in a partnership with Mr. Bear, who prepared both the partnership’s tax returns and the taxpayer’s tax returns. The taxpayer and Mr. Bear were both indicted by a federal grand jury for alleged fraudulent evasion of federal income taxes based on the understatement of income from the partnership. Mr. Bear pled guilty to all counts, but the indictment was dismissed against the taxpayer. In finding that the statute of limitations was closed, The Tax Court focused on whether the Taxpayer intended to file a false and fraudulent return.
In 2000, the IRS issued FSA 200104006 (Sept. 15, 2000). In this FSA, the taxpayer was a truck driver. The tax preparer took a diesel fuel excise credit on the taxpayer’s tax return that the tax preparer knew that the tax payer was not entitled to. The tax preparer was prosecuted for preparing false returns for the taxpayer and several other drivers. The IRS determined that the fraudulent intent of the tax preparer was insufficient to extent the statute of limitations for the taxpayer under IRC §6501(c)(1).
In 2001, the IRS issued FSA 200126019 (March 30, 2001). This FSA has the same facts and same author as FSA 200104006. However, this FSA comes to the conclusion that the fraudulent intent of the tax preparer may be used to keep the statute of limitations open on the taxpayer’s return under IRC §6501(c)(1).
In 2007, the Tax Court determined that the fraud of the tax preparer may be used to keep the statute of limitations open on the taxpayer’s tax return in Allen v. Comm’r, 128 T.C. 37. The taxpayer was a UPS driver, who had Mr. Goosby prepare his tax returns. Mr. Goosby claimed false and fraudulent itemized deductions on the taxpayer’s tax returns. Mr. Goosby was convicted of 30 violations of Code §7206(2) for willfully aiding and assisting in the preparation of false and fraudulent returns, but was not convicted based on the taxpayer’s returns. The Tax Court determined that the statute of limitations was open based on the tax preparer’s fraudulent intent. The Tax Court did not cite either the Klemach case or any of the cases from 1950.
On March 1, 2013, the Second Circuit decided City Wide Transit, Inc. v. Comm’r, 709 F.3d 102. Ms. Fouche retained Mr. Beg, an accountant, on behalf of the corporation for the sole purpose of negotiating with the IRS a reduction in the corporation’s outstanding employment tax liabilities for periods that are not at issue in this case. Ms. Fouche never requested for Mr. Beg to prepare any of the corporation’s Forms 941. Mr. Beg convinced Ms. Fouche that he had reached an agreement with the IRS. Mr. Beg claimed that, as part of the agreement with the IRS for prior Forms 941, he needed to deliver the corporation’s current Forms 941 along with a certified check for the amount due as the forms became due. Ms. Fouche delivered the correctly prepared forms to Mr. Beg and certified checks for the amount due payable to the IRS. Mr. Beg altered the checks and deposited them in a foreign bank account. Mr. Beg also altered the Forms 941 that he filed by fraudulently claiming that the corporation had made advance EIC payments to employees. Mr. Beg filed these altered forms with the IRS along with checks drawn on the foreign bank account for the lesser amounts due shown on the forms. Unbeknownst to Ms. Fouche, Mr. Beg also filed amended Forms 941, fraudulently claiming that the corporations had made advance EIC payments to employees in prior periods. Mr. Beg pled guilty to charges of knowingly and willfully signing false returns and knowingly and willfully preparing and presenting false tax returns. The Tax Court determined that Mr. Beg’s filing of the Forms 941 and the amended Forms 941 was incidental to his embezzlement scheme and, therefore, the IRS had not proved Mr. Beg’s fraudulent intent under IRC §6501(c)(1). The Second Circuit reversed the Tax Court. The most critical part of the Second Circuit’s opinion is footnote 3, which explains that, on appeal, the taxpayer conceded the issue of whether City Wide was liable for the tax preparer’s fraud. Therefore, the Second Circuit has yet to decide whether the fraudulent intent of the tax preparer can be imputed to the taxpayer.
As of June of 2013, the IRS has been trying to extend the statute of limitations on taxpayers returns based on their tax preparer’s fraud; the Tax Court has been allowing the IRS to extend the statute of limitations on taxpayers returns based on the tax preparer’s fraud; and the Court of Appeals have not yet decided the issue.
For more information on this topic please contact Steve Toscher – firstname.lastname@example.org – or Della Bauserman – email@example.com – and see their article titled “Surprise – The Fraud of Your Tax Preparer May Extend the Statute of Limitations on Tax Assessments” in the April – May 2013 issue of the CCH Journal of tax Practice and Procedure posted under “Publications” at www.taxlitigator.com .