Presumptions and Tax Return Preparer Fraud

Abstract

Just because the IRS has the legal authority to act does not mean it should. The Tax Court's decision in Allen v. Comm'r, where the Court agreed to let the IRS use old language for a new purpose, is a good illustration. Allen involved the question of whether the ý 6501(c)(1) fraud exception to the normal three year assessment limitation period in ý 6501(a) was triggered, as a matter of law, by the intent of a tax return preparer to create and submit a fraudulent return, even when the taxpayer had no intent to evade tax. The Tax Court said yes, thereby turning on its head the usual presumption that a taxpayer has not committed fraud unless the IRS proves otherwise.

My thesis for this article is that the Tax Court's opinion in Allen was built more on a foundation of presumptions about policy than legal analysis. To the extent it was a sympathetic response to an IRS tax administration problem, the sympathy was misplaced. Congress has spoken to the problem of tax return preparer fraud and has expressed different policy choices than the Allen Court. Accordingly, the Tax Court should have declined to read ý6501(c) as broadly as it did.

Part I sets up the legal issue presented in Allen. Part II presents the facts. Part III examines the legal rationales offered by the Tax Court for its interpretation, to demonstrate that purely as a matter of statutory interpretation the decision is not solidly grounded. In addition, Part III looks at a legal argument based on the law of agency that, curiously enough, the Court did not discuss. Part IV examines the weaknesses in how the Court applied its policy rationale. Finally, Part V critiques the creation of what is, in effect, a new presumption that allows the IRS to shift to the taxpayer the burden of disproving fraud.

Keywords: tax fraud, fraud, legal presumptions, assessment, statute of limitations, Badaracco, fraud penalty, tax return preparer, returns, tax administration

JEL Classification: K34, K40, K41, K42, K49, K23