Tax Effect of Tax Return Preparer Fraud on the Assessment Limitation Period
21 Pages Posted: 31 Aug 2007
A very confident, unanimous Tax Court decided, in Allen v. Commissioner, 128 T.C. 4 (Mar. 7, 2007), that the fraud of a tax return preparer keeps the assessment limitation period open against the taxpayer, regardless of the taxpayer's knowledge or intent. The Tax Court opinion, however, skips over the intricate and interesting statutory history of the fraud exception to the assessment limitation period. Read properly, the general limitation period imposed on assessments in section 6501(a) represents a strong public policy choice in favor of closure. The section 6501(c) exception to it for fraudulent returns has a different origin and meaning, although now codified in the same section. It links instead to the origin and meaning of the fraud penalty for understatements, now codified in section 6663.
My thesis is that the section 6501(a) assessment limitation period is far stronger than a typical statute of limitation. Accordingly, I believe the fraud exception in section 6501(c) should be limited to the taxpayer's fraud and not the fraud of a third party such as a return preparer. I save for another day a complete review of the Allen opinion, including the very interesting policy issues it raises. Here I focus on why the assessment limitation period is best interpreted as a statute of repose and what that might mean for interpretive issues such as the one presented by Allen.
Part I reviews the statutory language and current judicial interpretation of section 6501(a) to show how it operates as a statute of repose. Part II reviews its legislative history back to 1866. Part III then reviews the history of the fraud penalties to show how and when the section 6501(c) exception to the normal three-year limitation period for fraudulent returns first arose in 1918. Putting those parts together shows, I think, how the fraud exception historically has referred to fraud committed by the taxpayer liable for the tax.
Keywords: tax administration, assessment, statutes of limitation, limitation periods, statutes of repose, tax assessment, statutory history, legislative history, history, statutory interpretation
JEL Classification: H26, K34, K42, K40
Suggested Citation: Suggested Citation