CommentonLimitationsPeriodsandReturn-PreparerFraud Peter J. Mancini, Esq

PETERJ.MANCINI,ESQ. 580

TABLEOFCONTENTS

PETER J. MANCINI, ESQ. ...................................................................... 95 ISSUE...............................................................................................96 SUMMARYANSWER....................................................................97 TAXCODEANDCASELAWONTHETHREE-YEAR LIMITATIONSPERIODFORTAXASSESSMENT.....................99 HISTORICALCONTEXT: CASELAWANDIRSOPINIONSON LIMITATIONSPERIODSBEINGHELDOPENBYRETURNPREPARERFRAUD......................................................................101

A. CourtsPre-Allen onLimitationsPeriodsandReturn-preparerFraud..... 101

Tinkoff v. United States, 86 F.2d 868 (7th Cir. 1936)— .............................. 101

United States v. Gordon, 242 F.2d 122 (3d Cir. 1957)— ............................102

United States v. Baldwin, 307 F.2d 577 (7th Cir. 1962)— ..........................102

United States v. Whyte, 699 F.2d 375 (7th Cir. 1983)— ............................. 103

United States v. Stadtmauer, 620 F.3d 238 (3d Cir. 2010)— ...................... 103 B. OfficeofChiefCounselonLimitationsPeriods andReturn-PreparerFraud Pre-Allen.................................................................................................... 104 2000 F.S.A. LEXIS 207 (Sept. 15, 2000)—.................................................. 104 C. TaxCourtonLimitations PeriodsandReturn-PreparerFraud .............. 109

Allen v. Comm’r, 128 T.C. 37 (2007)— ....................................................... 109

City Wide Transit, Inc. v. Comm’r, 2011 T.C. Memo 2011-279 (2011)—...113

Eriksen v. Comm’r, 2012 T.C. Memo 2012-194 (2012)— ........................... 113

Finnegan v. Comm’r, T.C. Memo 2016-118 (2016)—................................. 117 D. OfficeofChiefCounselPost-Allen onLimitationsPeriodsandReturnPreparerFraud............................................................................................ 120 2012 IRS C.C.A. LEXIS 137, (June 4, 2012)— ............................................ 120

580 Theauthorisa practicingattorney in Michigan. Hismainfocus is in international disclosurestothe I.R.S.,federal andMichigantax resolution, andcivil appeals before the I.R.S.'sOffice of Appeals. Hehasbeenadmittedtothe U.S. TaxCourt. He has a LL.M. in Taxation and a J.D. from W.M.U. Cooley Law School. He also has an M.B.A.from Eastern MichiganUniversityandBachelordegreesfromtheUniversity ofMichigan.

the taxpayer’s return-preparer willfully took a return position that represented fraud or misrepresented facts and the taxpayer had no knowledge of the fraud or misrepresentation nor intended to evade taxes?

SUMMARYANSWER

II.

For civil actions, the government should not be able to hold open the three-yearlimitationsperiodindefinitelyduetothefraudexceptionin IRC § 6501(c)(1) unless the taxpayer knows of a return-preparer’s intenttoevadetaxesforthetaxpayerandprovidesanyapproval.When this issue was posed to the Office of Chief Counsel in 2000, it agreed andindicatedthatwherea return-preparerhastheintenttoevadetaxes, but the taxpayer does not, the three-year limitations period cannot be held open on the fraud exception. The Office of Chief Counsel concluded that this position was most consistent with the Tax Code and prior caselaw going back more than 80 years. As such, actions morethanthreeyearspasta return’sfilingdateweretime-barreduntil theissuewastakenupinTaxCourtwhenthegovernmentchangedits position.

In 2007 in Allen, the government argued that the fraudmisrepresentation exception applied to an innocent taxpayer when a return-preparer willfully misrepresented the taxpayer’s position or committed fraud. In effect, the government argued that the returnpreparer’sintenttodefraudormisrepresentcouldbeimputedontothe taxpayer.TheTaxCourtheldthatthelimitationsperiodwasheldopen indefinitely under the fraud exception in § 6501(c). This holding controlled for a decade. Then, the Court of Appeals for the Federal Circuit,in BASR P’ship, heldthat Allen anditsprogenywereincorrect. Forthefraudexceptiontoapply,theFederalCircuitCourtofAppeals held that the taxpayer must have the requisite intent to evade taxes or willfulnesstohavethelimitationsperiodheldopenindefinitely.After that decision was made and after considering BASR P’ship, the Eleventh Circuit upheld a Tax Court decision (Finnegan) stating that Allen and itsprogenystillgovernlimitationsperiodsfortaxpayerswho usereturn-preparers.

Asa result,thereisa splitamongthecircuits.FortheFederalCourtof Claims and the Court of Appeals for the Federal Circuit, that circuit’s caselawsupportsthata taxpayermusthavetherequisiteintenttoevade

taxes to hold open the three-year limitations period, and returnpreparer intent does not factor into the matter. Whereas, the Eleventh CircuitandtheTaxCourtsupportthatthethree-yearlimitationsperiod can be held open indefinitely where there is return-preparer fraud regardlessoftaxpayerintent.

I contend that the Office of Chief Counsel, the Federal Court of Claims,andtheCourtofAppealsfortheFederalCircuithaveproperly interpretedtheTaxCodeandcaselawbyrequiringthattaxpayerintent – not preparer intent – determines if the three-year limitations period may be held open indefinitely under the fraud or misrepresentation exceptionsunder§ 6501(c)(1).AlthoughtheOfficeofChiefCounsel’s guidance is persuasive, and not binding, and a decision made in the Court of Appeals for the Federal Circuit does not bind the Tax Court by statute, I argue that the Tax Court and all other federal circuits addressingthismattershouldadoptthisposition.

My reasoning is based on prior Supreme Court holdings, avoiding forumshopping,andavoidingcostsincurredbythegovernmentwhen taxpayers substantially prevail on their claims. The Supreme Court in Cheek held that a taxpayer must be willful to be a tax evader; that is, the taxpayer must intend to evade taxes to be held accountable for evasion.581 Using this reasoning, the Federal Court ofClaims came to the same conclusion: only a willful taxpayer who defrauds the government can have the limitations period held open on a tax return. Thus,afterholdingthataninnocenttaxpayercannotbedeemedwillful whenonlyitsreturn-preparerintendedtodefraudthegovernment,the Federal Court of Claims barred government actions to assess and collect taxes beyond the three-year limitations period then awarded significant cost reimbursements to taxpayers who substantially prevailed(i.e. BASR P’ship).BecausetheFederalCourtofClaimshas jurisdictionoverfederaltaxmatters,itsholdingsnowconflictwiththe Tax Court and other Circuits. Until this matter is resolved, forum shopping will be an issue because taxpayers will leverage these cases by bringing actions in the Federal Court of Claims, after paying their taxes,toseeka refund,insteadofTaxCourtora FederalDistrictCourt. Ifa taxpayersubstantiallyprevails,thegovernmentwillbecompelled to reimburse taxpayers all taxes, interest, penalties, and reasonable costsindefendingtheirpositions.Thisseemslikea losingproposition

581 Cheek v. United States, 498U.S.193 (1991).

for the IRS, which could be avoided by the Tax Court unifying its holdings with the Federal Court of Claims and the Court of Appeals fortheFederalCircuit.

TAXCODEANDCASELAWONTHETHREE-YEAR LIMITATIONS PERIODFORTAXASSESSMENT

III.

In civil matters, the IRS may assess federal taxes, penalties, and interestona taxpayerwithinthreeyearsofthereturnbeingfiled.This is called the limitations period.582 Generally, this period starts from whenthetaxpayer’sreturnisfiled,whenfiledtimely,orwhentheIRS receives the return when filed late.583 A taxpayer has the burden to show that the limitations period does not apply.584 There is, however, anexceptionthatwilltollthethree-yearlimitationsperiodindefinitely: thefalse-returnexception.585

For the false-return exception to apply, the IRS must show that there was a false or fraudulent return that was filed or there was a willful intent to evade taxes.586 Then, the burden shifts to the government to showfraud.587 Theburdenissetatclearandconvincingevidencethat atleastsomeportionoftheunderpaymentisduetofraud.588 Wherethe government is successful at showing fraud at this heightened threshold, the entire underpayment will be attributable to fraud.589 However,whentheburdenshiftsbacktothetaxpayertodefendhisor her position, the taxpayer needs only show that there is no fraud “by the preponderance of the evidence,” then the IRS may not rely on the fraudexceptiontoholdopenthethree-yearlimitationsperiod.590

Although I am addressing civil tax law, if this were put in criminallawcontext,forthegovernmenttoshowcivilfraud,theremustbeboth

582 See IRC §6501(a)(2018). 583 IRC §§6501(a) (2018), 6503(a); Treas. Reg. §301.6501(a)-1—(c)-1; and Payne v.Comm’r,224 F.3d415,420-421(5thCir. 2000). 584 Feldman v. Comm’r, 20 F.3d 1128,1132(11th Cir. 1994). 585 IRC §6501(c) and Payne, 224F.3dat420. 586 IRC §§6501(c)(1),(2), 6503(a) (2018); Treas. Reg. §301.6501(a)-1—(c)-1; and Payne, 224F.3dat420. 587 Payne, 224F.3dat420. 588 Id.,IRC §7454(2018), and Tax Ct.R.142(b). 589 Payne, 224F.3dat420. 590 Id.

intent to evade taxes (mens rea)591 coupled with the action to defraud ormisrepresenta taxpayer’spositiontothegovernment(actus rea).592 Andwherethereistax-evasionintenttobeshown,theburdenshiftsto the government to prove that the accused acted with knowledge that his or her conduct was unlawful.593 Then, the trier of fact (usually a jury) must find that the accused was aware of specific Tax Code provisions.594

However, without both the intent to evade taxes or defraud the government and action to do either fraud or misrepresentation (showing of both mens rea and actus rea), there can be no fraud or misrepresentation.595 ThisisbecausetheUnitedStatesSupremeCourt has carved out an exception to the general rule, that ignorance of the law is no excuse, for tax law.596 Under Cheek, ignorance of tax law is a reasonable cause that overcomes willfulness (intent) that is required under the Tax Code.597 So, under Cheek, the government must show that a taxpayer subjectively had knowledge – was willful – to be convictedoftax-lawviolationsortaxevasion.598 Whenitfailstoshow willfulness, the government cannot assess taxes or penalize the taxpayer.599

Yet, some caselaw supports that where a tax return-preparer willfully takes a return position that is fraudulent or misrepresentative and the taxpayer has no knowledge of the return-preparer’s intent to defraud ormisrepresent,thelimitationsperiodremainsopenindefinitelyunder IRC§ 6501allowingforpenaltiestobeassessedunderIRC§ 6662.600

591 Bryan v. United States, 524U.S.184,191-200(1998). 592 Payne, 224F.3dat415. 593 Bryan, 524 U.S. 184, 191-200 (1998) (citing Ratzlaf v. United States, 510 U.S. 135,137(1993)). 594 Id. (citing Cheek v. United States, 498U.S.192(1991)). 595 Id. and Cheek, 498U.S.192. 596 Cheek, 498U.S.at200. 597 Id. 598 Cheek, 498U.S.at203. 599 Cheek, 498U.S.at192. 600 IRC §6501(c)(1)(2018) and Allen v. Comm’r, 128T.C.37(2007)(statingpreparer fraud will hold open the limitations period even where there is no taxpayer intent); Eriksenv.Comm’r,T.C.Memo2012-194(2012)(stating wherea taxpayerstipulates to fraud or §taxpayer fraud is shown through clear and convincing evidence, the limitationsperiod is heldopenbypreparer fraud);City Wide Transit, Inc.v.Comm’r, 709 F.3d 102 (2nd Cir. 2013)(stating preparer fraud will hold open the limitations period); and Finneganv.Comm’r,T.C.Memo2016-118 (2016)(same) but see 2000

So a “rogue” tax preparer who acts without taxpayer knowledge may notbeanexception tothethree-year limitations periodundercaselaw thatclarifies§ 6501.601

HISTORICAL CONTEXT: CASELAW AND IRS OPINIONS ON LIMITATIONS PERIODS BEING HELD OPENBYRETURN-PREPARER FRAUD

A. Courts Pre-Allen on Limitations Periods and Return-preparer

Fraud

Tinkoff v. United States, 86 F.2d 868 (7th Cir. 1936)—

Ina casefromovereightdecadesago,thecourtconsideredtheactions of a return-preparer and how his actions impacted his taxpayer client. Tinkoffwasa formerrevenueagent,a certifiedpublicaccountant,and a lawyer.602 He had been charged with and convicted of “willful attempt to defeat and evade income taxes” and was to serve time in federal detention.603 In this case, he was appealing his criminal conviction.604

Tinkoffhadbeencontractedtoandwaspaidtopreparetaxreturnsfor another taxpayer (a corporation).605 The corporate returns were completed but contained misrepresentations making them

F.S.A. LEXIS 207, FSA 200104006 (I.R.S. Sept. 15, 2000)(stating that where an experienced return preparer who took a misrepresentative or fraudulent return position that the taxpayer did not know about, the IRS would be time-barred in collectingtaxes) and Eriksen, T.C. Memo2012-194(stating wherefraudisnotshown throughclear andconvincing evidenceorbystipulation,the limitations period is not held open by preparer fraud) and BASR P’ship v. United States, 113 Fed. Cl. 181 (2013) aff’d BASRP’ship v. United States,795 F.3d 1138(Fed. Cir.2015)(holding thatwhere apartnership’soutside counsel actedindependentlytoevade taxesfor the partnership in filing fraudulent or misrepresentative returns, the three-year limitationsperiod barred the IRS fromassessing taxes) and BASRP’shipv.United States, 130 Fed. Cl. 286 (2017)(awarding the partnership, as a prevailing party because the IRS was time-barred for assessing taxes, reasonable litigation costs, which weresubstantial,under IRC§ 7430(b)). 601 Allen, 128T.C.37. 602 Tinkoffv.UnitedStates,86F.2d868,873(7th Cir. 1936). 603 Id. 604 Id. 605 Id. at876.

fraudulent.606 He alone knew of the fraud and was being held accountableforthefraudulentpositionsthathehadtaken.607 Corporate agents signed and filed by the taxpayer who did not know about the misrepresentations.608

Tinkoffarguedthathisprosecutionwastime-barredbythelimitations period, but his argument failed.609 He argued that, as the returnpreparer,hehadnoknowledgeofthetransactionsthatwereclaimedto be fraudulent, but the court found sufficient evidence to the contrary.610 SothecourtheldthatTinkoff– as areturn-preparer– was accountableandcriminallyliableforthefraudulentlypreparedreturns that misrepresented his client’s tax positions.611 However, the client wasnot.612

United States v. Gordon, 242 F.2d 122 (3d Cir. 1957)—

Three decades later, the court revisited the issue and concluded the samein Gordon. Gordonwasanaccountantwhowaschargedwithand convicted of being part of a conspiracy “to attempt willfully to evade and defeat . . . income taxes due . . . . ”613 He and two others, one of whichwasanIRSagent,conspiredtodefraudthegovernment.614 The court held that an accountant—as the return-preparer—could be held liableandcriminallyconvictedfortaxevasioneventhoughtheevaded taxwasnottheirowntax.615

United States v. Baldwin, 307 F.2d 577 (7th Cir. 1962)—

A short time later, in a criminal tax-evasion case, the appeals court held that where a taxpayer acts in good faith after making full disclosuretoa return-preparer,nowillfulnessmaybeshownwhenthe

606 Id. at 878 (stating that records were being attacked for validity and to show tax evasion). 607 Id. at879. 608 Tinkoff, 86 F.2d868. 609 Id. at877. 610 Id. at879. 611 Tinkoff, 86 F.2dat868. 612 Id. 613 United States v. Gordon, 242 F.2d 122, 123 (3d Cir. 1957) (internal quotes omitted). 614 Id. 615 Id. at125.

taxpayerdidnotreportincomeatthereturn-preparer’sadvice.616 Thus, the taxpayer cannot be held accountable for a tax crime because there isnotaxpayerintenttodefraudormisrepresent.617

United States v. Whyte, 699 F.2d 375 (7th Cir. 1983)—

Then, in another criminal tax-evasion case, the appeals court referred to the “reliance defense” as a valid defense to a tax crime when a taxpayer provides full disclosure regarding income and expenses to a qualified accountant (return-preparer), and the taxpayer adopts and filesthepreparedreturnwithoutbelievingitisincorrect.618 Again,the taxpayer cannot be held accountable for a tax crime because there is notaxpayerintenttodefraudormisrepresent.619

United States v. Stadtmauer, 620 F.3d 238 (3d Cir. 2010)—

In a third criminal tax-evasion case, the appeals court stated that a taxpayer’s claim that he relied on his accountant’s advice, in good faith,isa validdefensetoshowthattherewasnowillfulnessuntilthe government negated that claim.620 And again, the taxpayer cannot be heldaccountablefora taxcrimebecausethereisnotaxpayerintentto defraudormisrepresent.621

So time-and-time again, caselaw supports that a taxpayer cannot be heldaccountablefora return-preparerwhohadtherequisiteintentand actedtoevadetaxesonbehalfofa taxpayerwhenthetaxpayerwasnot willfully misrepresenting his or her return position. Thus, the returnpreparer’s intent—not the taxpayer’s intent—determined who should be criminally punished for tax evasion through fraud or misrepresentation.

616 United States v. Baldwin,307F.2d577, 579(7thCir.1962) cert. den’d 371 U.S. 947(1962). 617 Id. 618 United States v. Whyte, 699 F.2d 375, 379 (7th Cir. 1983) (citing United States v.Mitchell,495F.2d285,287-88(4th Cir.1974) and United Statesv. Baldwin,307 F.2d577,579 (7th Cir.1962)). 619 Whyte, 699F.2d at 379-380. 620 United Statesv.Stadtmauer, 620F.3d238,257 n.22 (3dCir.2009). 621 Id.

B. Office of Chief Counsel on Limitations Periods and Return-

PreparerFraudPre-Allen

2000 F.S.A. LEXIS 207 (Sept. 15, 2000)—

In 2000, the IRS issued a non-binding field-service-advice memorandum basedona specific fact setthatcanbeapplied inother, similarsituations.622 Inthismemorandum,theChiefCounselprovided guidancetoIRSstaffthat,undercertaincircumstances, thethree-year limitations period should not be held open for the actions of a tax preparerwhointentionallyprepareda taxreturnthatwas fraudulentor misrepresented taxpayer facts where the taxpayer did not have the requisiteintenttoevadetaxes.623

In this memorandum, the Office of Chief Counsel provided a fact summary: The taxpayer was a truck driver who had conferred with a fellow truck driver about tax issues that related to substantial excisetaxcreditsfordieselfuel.624 Thefellowdriverreferredthetaxpayerto a specific return-preparer at a firm for tax help over several years.625 The tax preparer was an experienced preparer who knew that the taxpayer was not entitled to receive diesel-fuel-excise-tax credits for the tax years the taxpayer was claiming.626 However, the returnpreparertookthatpositionanywayforthistaxpayer.627 Eventually,the return-preparer was prosecuted for preparing false returns for the taxpayerandseveralothertruckdriversbecausethepositionstakenon theexcise-taxcreditsfordieselfuelwerefraudulent.628

Inthetaxpayer’sexamination,theIRSagentwhocontactedtheOffice ofChiefCounselforguidanceproposedthatfraudpenaltiesshouldbe assessed under IRC § 6663.629 As a defense to the penalties, the taxpayer argued that the penalty assessment was time-barred by the statute oflimitations; thus,the penalties could notbeassessed against thetaxpayer.630

622 2000F.S.A.LEXIS207,FSA 2000104006(I.R.S. Sept. 15,2000). 623 Id. at *2-3. 624 Id. at *2-3. 625 Id. at *3. 626 Id. at *3. 627 2000F.S.A.LEXIS207 at *3.

628 Id. 629 Id. 630 Id. at *3-4.

The Office of Chief Counsel began with considering IRC § 6501.631 Under § 6501, taxes must be assessed by the IRS within three years afterthereturnwasfiledunlessanexceptionapplied.632 Anexception to the general rule provides that where there is fraud or misrepresentation coupled with the intent to evade taxation, the IRS maykeepopenthelimitationsperiodindefinitely.633

The Office of Chief Counsel considered other cases that involve limiting governmental powers, such as collecting taxes through limitation periods, and saw that the U.S. Supreme Court has held that “[s]tatutes of limitation[,] sought to be applied to bar rights of the Government, must receive a strict construction in favor of the Government.”634 And limitations periods for tax collections are no exception.635

The Office of Chief Counsel concluded that in order to apply the Tax Code, Treasury Regulations, and related caselaw to the taxpayer’s situation to determine if § 6501(c)(1) applies, fraud must be defined and understood.636 However, neither the Tax Code nor the Treasury Regulationsprovidea definitionof“fraud”fortheIRStouse.637 Thus, the Office of Chief Counsel relied upon caselaw to define “fraud.”638 The definition it followed came from the Fifth Circuit Court of Appeals. In Payne v. Comm’r, fraud implies bad-faith actions, “intentional wrongdoing, and a sinister motive.”639 It is never presumed or imputed.640 A court should never sustain fraud findings that only create suspicion.641 The IRS bears the burden to show that the taxpayer committed fraud through clear and convincing

631 Id. 632 IRC § 6501(2018). 633 Id. at (c)(2). 634 2000 F.S.A. LEXIS 207 at *4(quotingBadaracco v. Comm’r,464U.S. 386, 391 (1984)). 635 Id. (quoting Luciav.United States, 474F.2d565,570(5th Cir.1973). 636 Id. *4-5. 637 Id. at*5. 638 Id. 639 2000 F.S.A. LEXIS 207 at*5(citing Payne, 224F.3d415). 640 Id. (citing Payne, 244F.3dat420,which wasquotingWebbv.Comm’r, 394F.2d 366,377(5thCir.1968)). 641 Id.

evidence.642 As such, “[t]here must be additional evidence, independent of the general presumption of correctness, from which fraudulent intent on the part of the taxpayer can be properly inferred.”643

Additionally,theOfficeofChiefCounselfoundthattheNinthCircuit Court of Appeals had created a checklist in Bradford v. Comm’r that indicated “‘badges of fraud’” for a court to consider:644 understating income,inadequaterecordskept,failuretofiletaxreturns,implausible orinconsistentexplanationsoftaxpayerbehavior,concealingtaxpayer assets,or“failuretocooperatewithtaxingauthorities.”645 Courtshave applied these “‘badges of fraud’” to the taxpayer’s facts and circumstancestodeterminethetaxpayer’smindset.646

The Office of Chief Counsel noted that in Kaissy v. Comm’r, the IRS focused on proving fraudulent intent “on the part of the taxpayer.”647 And the Tax Court concluded that “fraud by its very nature is a question of a taxpayer’s intent.”648 In other caselaw, the Office of Chief Counsel indicated the IRS must provide evidence, which may includecircumstantial evidence,toprovefraud.649

The Office of Chief Counsel went on to show that the IRC has more than one section that addresses fraud.650 So it looked at IRC § 6663, which imposes fraud penalties on a taxpayer for underpayment where fraudcanbeshowninthepositionthetaxpayertookina return.651 And because “fraud” is not defined in the Tax Code, the Office of Chief Counsel looked to caselaw for long-standing definitions used by the courts.652

642 Id. (citing IRC §7454 and Goldberg v. Comm’r, 239 F.2d 316, 320 (5th Cir. 1956)). 643 Id. (citing Drieborg v. Comm’r,225F.2d216,218 (6thCir.1955)). 644 Id. at*5-6(citingBradfordv.Comm’r,796 F.2d303,307 (9thCir.1986)). 645 2000F.S.A.LEXIS207 at *6. 646 Id. (citing, as examples, Bacon v. Comm’r, T.C. Memo 2000-257 (2000) and Kaissy v. Comm’r,T.C. Memo 1995-474 (1995)). 647 Id. (citing Kaissy, T.C. Memo 1995-474)(emphasisadded). 648 Id. (citing Kaissy, T.C. Memo 1995-474)(emphasisadded). 649 Id. (citingRowlee v. Comm’r,80T.C. 1111,1123 (1983) and Stonev.Comm’r, 56T.C.213,223-24(1971), acq. in result, 1972-2 C.B. 3). 650 Id. at*6-7. 651 2000F.S.A.LEXIS207 at *7. 652 Id.

Additional caselaw considered by the Office of Chief Counsel held that “fraud . . . is actual, intentional wrongdoing, and the intent requiredisthespecificpurposetoevadea taxbelievedtobeowing.”653 Further, fraud with the intent to evade taxes is not negligence—no matter how great or little.654 The Office of Chief Counsel concluded thatalthough“fraud”isnotdefinedwithinthecontextoffraudpenalty, there is “ample support to indicate the same definition should apply for. . . § 6501(c)(1).”655 Thus,theOfficeofChiefCounsel,following theTaxCourt,concluded that“fraud” in§ 6501(c)is“identical tothe definition of ‘fraud’ under § 6653(b) [now § 6663].”656 In doing so, the Office of Chief Counsel concluded that “[a]pplying the same definition of fraud for statute of limitations and fraud for penalty purposes is logical in view of the history of these provisions.”657 And itconcludedthatitwasnotawareofanylegislativehistoryorcaselaw showing that fraud was defined differently in regards to IRC §§ 6501(c)(1)and6663.658

The Office of Chief Counsel then went on to determine if an income taxreturn-preparer’sintenttodefraudwouldbesufficientforimposing a fraud penalty under IRC § 6663.659 The Office of Chief Counsel concluded “that the imposition of a fraud penalty requires proof of fraudulentintent on the part of a taxpayer . .. . ”660 Andthat“proofof a return-preparer’sfraudulentintentisinsufficient”toassesspenalties againstthetaxpayer.661 Further,the OfficeofChiefCounselconcluded “that proof of a return-preparer’s fraudulent intent is insufficient to make§ 6501(c)(1)applicable”wherea return-preparerhadfraudulent intentbutthetaxpayerdidnot.662

Supporting its position, the Office of Chief Counsel looked to past policiesthatunderlieIRC§ 6663.663 Itflushedoutthatpenaltieswere put in place to protect governmental revenue and compensate the

653 Id.(quotingMitchellv.Comm’r,118 F.2d 308, 310(5thCir.1941)). 654 Id. (citing Mitchell, 118F.2dat310). 655 Id. 656 Id. at*7-8(citingMurphyv.Comm’r,T.C.Memo1995-76). 657 2000F.S.A.LEXIS207 at *8. 658 Id. 659 Id. 660 Id. at*9(emphasisadded). 661 Id. 662 Id. 663 2000F.S.A.LEXIS207 at *9.

government for its costs to investigate taxpayer fraud and losses related to taxpayer fraud.664 It also determined that penalties were meantto“‘punishanddeterwrongfulconduct’”madebytaxpayers.665 Andfromthis,theOfficeofChiefCounselconcludedthat“[g]iventhe policy of punishing and deterring wrongful conduct, it would be improper to impose the fraud penalty based solely on the preparer’s misconduct; [thus,] the wrongful conduct of the preparer should not have an adverse affect on an innocent taxpayer.”666

TheOffice ofChief Counsel alsocame tothisconclusion because the IRC has specific provisions that are in place to deter return-preparer fraudandothermisconduct.667 Specifically,itcitedfourIRCsections: 6694, 6695, 7206, and 7216.668 “Thus, . . . proof of the returnpreparer’sfraudulentintentinpreparingthetaxreturnis insufficient to make[IRC]§ 6501(c)(1)applicableto Taxpayer.”669

Finally, the Office of Chief Counsel considers caselaw that held that thestatuteoflimitationsperiodshouldbeheldopenincasesofreturnpreparer fraud.670 First, it looked to caselaw that showed how one spouse’s actions would impute fraud on both making them subject to § 6501(c)(1) penalties, and how this could be applied to a tax returnpreparer. 671 The Office of Chief Counsel was not persuaded by this argument.672 Itreasonedthatthetaxreturn-preparer“isnota partyto the return[,] and the return-preparer is not jointly liable with [the] [t]axpayer.”673 Next, it looked at caselaw that tried to show that corporate agents (officers and employees) may impute fraud on the corporation.674 Itwasnotpersuadedbecausea corporationisnota real person; instead, it acts through its agents (employees, officers, and

664 Id. (citingHelvering v. Mitchell,303U.S.391(1938) and McGeev.Comm’r,61 T.C.249(1973) aff’d, 519F.2d1121(5thCir.1975)). 665 Id. (quotingAsphalt Indus.,Inc.v.Comm’r,384 F.2d229,234-35(3dCir.1967)). 666 Id. at*9(emphasisadded). 667 Id. at*10. 668 Id. 669 2000F.S.A.LEXIS207 at *10(emphasisadded). 670 Id. 671 Id. (citing examples Vannaman v. Comm’r, 54 T.C. 1011(1970); Estate of Upshawv.Comm’r,416 F.2d737 (7thCir.1969); and Howellv.Comm’r,175 F.2d 240(6thCir.1949)). 672 Id. at*10-11. 673 Id. at*11. 674 Id. (citingRuidoso RacingAss’n,Inc. v. Comm’r,476 F.2d502 (10thCir.1973), aff’g T.C.Memo.1971-194).

In this case, the petitioner (taxpayer) was a truck driver for United ParcelService.685 Hetimely filedhisreturnsthatwereatissue,which were completed by a return-preparer.686 The taxpayer gave his financialinformationtoa taxpreparerwhopreparedhisreturnsforthe years in question and filed them with the IRS687 The return-preparer prepared the taxpayer’s returns fraudulently and claimed false deductions in Schedule A.688 The taxpayer received complete return copies after they were filed and did not file any amended returns.689 The taxpayer’s return-preparer was later investigated for these and other actions.690 IRS agents successfully showed that the tax returnpreparer had violated IRC § 7206(2) (willfully aiding and assisting a false-and-fraudulent return preparation) in 2006.691 He was later convictedof30violationsunderthatCodesection.692

TheIRSissueda deficiencynoticetothetaxpayerwhichstatedthatit haddisallowednumerousScheduleA deductionsthatwereclaimed.693 The deficiency notice did not assess any fraud penalties under IRC § 6663againstthetaxpayer.694 Becausethethree-yearlimitationsperiod hadexpiredyearspreviously,thetaxpayerclaimedtheassessmentwas time-barredandtimelyfileda petitionforreliefintheTaxCourt.695

Both the taxpayer and the IRS stipulated to the fact that the taxpayer did not have the intent to evade taxes. 696 Bothstipulatedthatthereturnpreparermadefalseclaimsfordeductions.697 Andbothstipulatedthat only the return-preparer intended to evade taxes inmakingthesefalse claimsfordeductions.698

In its analysis, the Tax Court addressed the issue that was in contention: whether the return-preparer’s fraudulent intent kept open

685 Id. at37. 686 Id. at37-38. 687 Id. 688 Allen, 128T.C.at38. 689 Id. 690 Id. 691 Id. 692 Id. 693 Id. 694 Allen, 128T.C.at38. 695 Id. 696 Id. 697 Id. 698 Id.

the limitations period indefinitely?699 The court then looked to the Codeandsawthat“intenttoevadetax”isa requirement.700 The Code noted that there was no express provision requiring “that the fraud be thetaxpayer’s.”701 Thenthecourtdeterminedthattherewas“[n]othing intheplainmeaningofthestatute[that]suggeststhelimitationsperiod is extended only in the case of the taxpayer’s fraud.”702 The court concluded that the statute’s focus is on the return’s fraudulent nature and not the fraud perpetrator’s identity.703 Oddly though, this court concluded that taxpayer intent to defraud or evade taxes was not present in this Code section when prior caselaw supported that other courtshaveheldthatintentwasrequired.704

The Tax Court then considered and agreed with the government’s position that where a limitations period is being considered, it should bestrictlyconstruedinfavorofthegovernment.705 Thecourtreasoned that“anextendedlimitationsperiodiswarrantedinthecaseoffalseor fraudulent return[s] because of the special disadvantage to the Commissioner in investigating these types of returns.”706 This court concluded that three years may not be sufficient for the IRS to investigate or prove fraudulent intent. 707 In sum, this court’s concern was with the possibility that there is not enough time for the IRS to investigate intent and determine if tax evasion by way of fraud was meant.708

The taxpayer, relying on caselaw, argued that a limitations period should only be extended if there was taxpayer intent to defraud and

699Allen, 128T.C.at39. 700 Id. (citing IRC§ 6501(c)(1) (2018)). 701 Id. (analyzing Congressionalintentpresentinthehistoricalrecordinn.3). 702 Id. 703 Id. 704 Id. But see n.4(citing United States v. Gordon, 242F.2d122,125(3dCir.1957) and Tinkoff v. United States, 86 F.2d 868, 875-875 (7th Cir. 1936) as prior cases where accountants were held accountable for tax evasion after preparing their innocentclient’sreturns). 705 Allen, 128T.C.at40(citingBadaraccov.Comm’r,464 U.S.386,391 (1984) and Lucia v. United States,474F.2d565,570(5thCir.1973)). 706 Id. (quoting Badaracco, 464U.S.at398). 707 Id. (emphasisadded). 708 Id.

evadetaxes.709 710 Thiscourtwasnotpersuaded because thecases the taxpayer cited were defining fraud regarding taxpayer’s actions when the taxpayer committed the fraud.711 These cases failed to show that IRC § 6501(c)(1) exceptions were limited to only taxpayer fraud and thatthefraud’scausemustbethetaxpayer’s.712

Thetaxpayerfurtherarguedthatextendingthelimitationsperiodbased on a preparer’s fraudulent intent was burdensome.713 However, the court disagreed citing caselaw as its basis.714 The court’s reasoning wasbasedonthefactthata taxpayerhastheultimateburdenandduty to file and pay his or her income taxes,715 and this duty cannot be delegatedtoanagent.716 Further,thiscourtreasonedthata taxpayeris notundulyburdenedtoreviewa returnfor“obvious false or incorrect” items.717 Thecourtheldthata taxpayer“cannothidebehindanagent’s fraudulent preparation of his returns and escape paying tax if the Government is unable to investigate fully the fraud within the limitations period.”718 The court justified this position by stating that “[t]ofindotherwisewouldallowa taxpayertoreceivethebenefitofa fraudulentreturnbyhidingbehindthepreparer.”719

Therefore, the court concluded “that the limitations period for assessment is extended under § 6501(c)(1) if the return is fraudulent, eventhoughitwasthepreparerratherthan[thetaxpayer]whohadthe intent to evade tax[es].”720 Thus, the limitations period was extended indefinitelyinthiscase.721

709 Id. at40-41. 710 Id. (citing Phone-Poulenc Surfactants & Specialties, L.P. v. Comm’r, 114 T.C. 533, 548 (2000), which cited Chin v. Comm’r, T.C. Memo 1994-54; Williamson v. Comm’r, T.C. Memo 1993-246; Richman v. Comm’r, T.C. Memo 1993-32; Callahanv.Comm’r, T.C. Memo 1992-132). 711 Allen, 128T.C.at40-41. 712 Id. at41. 713 Id. 714 Id. (citing Magill v. Comm’r, 70 T.C. 465, 479-80 (1978) aff’d 651 F.2d 1233 (6thCir.1981) and Teschner v. Comm’r,T.C.Memo1997-498). 715 Id. (citing Kooyersv.Comm’r, T.C.Memo2004-281). 716 Id. at 41.(citing Estate of Clause v. Comm’r, 122 T.C. 115, 123-24 (2004) and Am.Prop’s, Inc. v. Comm’r,28T.C. 1100,1116-17(1957) aff’d 262F.2d150(9th Cir.1958)). 717 Allen, 128T.C.at41(emphasis added). 718 Id. 719 Id. at42. 720 Id. 721 Id.

City Wide Transit, Inc. v. Comm’r, 2011 T.C. Memo 2011-279 (2011)—

In 2011, the Tax Court considered whether actions by a taxpayer’s accountant, who filed false claims for the taxpayer as part of an embezzlementscheme,constitutedfraudwhentheaccountant’sintent was to embezzle and not evade taxes.722 The taxpayer challenged the IRS’s assessment claiming that it was time-barred.723 The taxpayer argued that Allen did not apply, so the limitations period could not be heldopenpastthreeyears.724

The Tax Court held that the IRS failed to show that the taxpayer’s accountant had the requisite intent to willfully evade taxes when the false returns were prepared and filed.725 The court also held that the taxpayerwasnotaccountablefortheaccountant’sactions.726 Thecourt reasonedthattheaccountant’sconductdidnotestablishtaxevasionas the intent; rather, the accountant’s intent was to embezzle the funds meanttopaytaxesandcoveruptheembezzlement.727 Thecourtbased some of its reasoning on the accountant’s criminal trial where the criminalcourtacceptedpleasforknowinglyandwillfullysigningfalse returnsandknowinglyandwillinglypreparingandfilingfalsereturns withtheIRS.728 So,goingagainst Allen, thecourtheldforthetaxpayer believingtheIRSactionsweretime-barred.729 However,thisdecision wasreversedonappeal.730

Eriksen v. Comm’r, 2012 T.C. Memo 2012-194 (2012)—

The Tax Court revisited this issue once again in Eriksen. In this case, theIRSassessedpenaltiesandinterestonEriksen,anOaklandCounty (Michigan) Sheriff’s deputy, along with other Oakland County deputies, when their tax returns included misrepresented and fraudulent return positions on business expenses that they had

722 CityWideTransit, Inc.v.Comm’r,2011T.C.Memo2011-279 (2011). 723 Id. at13. 724 Id. at16-19. 725 Id. at22-23. 726 Id. 727 Id. 728 City Wide Transit, Inc., 2011T.C.Memo2011-279at11. 729 Id. at23. 730 CityWideTransit, Inc.v.Comm’r,709F.3d102(2dCir.2013).

deducted related to ammunition expenses.731 Some taxpayers argued that the three-year limitations period barred assessment and collections.732 TheIRSarguedthat Allen controlledhere,andthethreeyear limitations period was held open because there was fraud and misrepresentationmadebytheirreturn-preparer.733

At issue was whether the IRS had shown if there was clear and convincingevidencethattherewasfraudormisrepresentation.734 The IRS was successful at showing that at least one taxpayer had committed fraud based on stipulated facts, so her limitations period remained open.735 However, the other taxpayers were successful at showing that the IRS was time-barred because they lacked intent and the government failed to show otherwise.736 Thus, the court rendered two differing decisions based on whether the taxpayer’s intent was to defraudormisrepresenttoevadetaxes.

Based on stipulated facts, there were two return-preparers involved: Mr.KernandMr.Redinger.737 Mr.Kernwasanenrolledagentwitha bachelor of science in accounting and taxation who specialized in preparing returns for law-enforcement employees.738 Kern also often claimedforhisclients—includingdeputies—deductionsthatwerenot supported by receipts or other proper documentation.739 He knew that this was not proper because he boasted about this to his partners and their staff that it was “not wrong until you get caught.”740 Kern did prepare returns for some of the taxpayers, though at trial he could not recall.741

Mr. Redinger was a certified public accountant (in good standing at thetimeofthetrial).742 HepurchasedKern’spracticewhenhewanted to go into business for himself preparing tax returns.743 During the

731 Eriksenv.Comm’r,T.C.Memo2012-194,1-2 (2012). 732 Id. 733 Id. 734 Id. 735 Id. at33-40. 736 Id. at33. 737 Eriksen, T.C. Memo2012-194at3-4. 738 Id. 739 Id. at6. 740 Id. (withinternalquotesomitted). 741 Id. at6-7. 742 Id. at7. 743 Eriksen, T.C. Memo2012-194at7.

transition, Kern was retained as a contracted employee for two years and prepared returns for clients after Redinger took over.744 Kern prepared most, but not all, individual returns in the first year.745 For the most part, Redinger adopted Kern’s practices by merely confirming that expenses were “about the same” as the prior year.746 To help in the return-preparation process, Kern provided Redinger with a list of deductible expenses that he believed taxpayers were entitled to based on a taxpayer’s occupation.747 However, Redinger failed to investigate if reimbursements were being made for expenses incurredbythedeputies.748

Redinger’s staff was directed to use prior-year itemizations and providea flat1.5%charitabledeductionforpolice.749 And at onepoint, Kern encouraged a deputy to claim costs for a firearm that the deputy didnotpurchase.750 Then,basedontheseactions,theIRSwasableto show that Kern and Redinger had prepared false returns and got them to plead guilty.751 As part of his agreement, Redinger turned over hundreds of returns to the criminal investigators.752 From this return pool, the IRS examined about 140 (give or take 10) returns, which includedthepetitioningdeputies.753

Thecourtturnedto Allen todetermine if thelimitations periodshould remain open.754 First, the court looked at similarities between Allen and the facts at hand.755 The similarities include: 1) the returnpreparerswereconvictedofviolatingIRC§ 7206(2);2)thereturnsin question in this case were not identified in the criminal cases; 3) notices of deficiency were sent out after the three-year limitations period;and4)theissuesrelatetoitemizeddeductions.756 However,the courtconcludedthatthesimilaritiesendedthere.757

744 Id. 745 Id. 746 Id. at 8.

747 Id. 748 Id. at8-9. 749 Eriksen, T.C. Memo2012-194at9. 750 Id. at10. 751 Id. at11. 752 Id. at13. 753 Id. 754 Id. at19. 755 Eriksen, T.C. Memo2012-194at19. 756 Id. at 20. 757 Id. at 21-22.

The Eriksen court concluded that unlike Allen, these cases were determined through a trial and not through stipulated facts noting that in the stipulated fact in Allen, the parties agreed that the returns filed by Allen were false and fraudulent.758 Further, the parties stipulated that the return-preparer had the intent to evade tax when he prepared falsified returns.759 This court distinguished this case from Allen, in whichthepartiesstipulatedthatthereturnswerepreparedbya returnpreparer who intended defraud.760 This was key to this court because withthatstipulation,theissueshiftedfroma factualone—whetherthe returnswerefraudulent—toa legalone—whetherIRC§ 6501(c)held open the limitations period.761 Thus, the stipulated evidence in Allen became the clear and convincing evidence required to show fraud.762 However,thepartiesin Eriksen madenosuchconcessions.763 Instead, thepartiesmadea deepchallengetotheallegationthattherewasclear andconvincingevidencetoshowfraud.764

The court’s opinion reflects two differing results based on taxpayer intent. First, for the three taxpayers who did not stipulate their intent was to evade taxes, the government failed to show clear and convincing evidence that they were willful.765 As a result, the court held that the assessments against these taxpayers were time-barred.766 However, for the taxpayer who stipulated to the facts and who providedtestimonythatshehadnotmadethepurchasesthatsheclaims aslegitimatebusinessexpenses,thecourtheldthatthegovernmenthad provided clear and convincing evidence that she made fraudulent claims for business deductions.767 Consequently, for the stipulating taxpayer, her limitations period was held open indefinitely allowing theIRStoassesspenaltieslate.768

758 Id. at22. 759 Id. at21. 760 Id. 761 Eriksen, T.C. Memo2012-194at21. 762 Id. 763 Id. 764 Id. 765 Id. at33. 766 Id. 767 Eriksen, T.C. Memo2012-194at35. 768 Id.

In the end, the Tax Court held differently as determined by taxpayer facts and circumstances. For taxpayers where the government could notshowfraudthroughclearandconvincingevidenceorstipulations, the court time-barred the IRS’s actions.769 The same court also held thatIRC§ 6501(c)tollsthelimitationsperiodforfalsereturnsprepared by another where there is clear and convincing evidence that fraud exists and the taxpayer stipulates to those facts.770 It reasoned that “[f]raudistheintentionalcommissionofanactoractsforthespecific purposeofevadingtaxbelievedtobedueandowing.”771 Further,fraud cannot be imputed or presumed and “must always be established by independentevidenceoffraudulentintenttoevadetax.”772 Andfraud’s existenceisdeterminedbyfacts“gleanedfromtheentirerecord.”773

In sum, Eriksen both supports Allen and refutes Allen: A returnpreparer’s intent can hold open a return based when the taxpayer stipulates to misrepresentation or fraud made by a return-preparer; however, where clear and convincing evidence is not present that the taxpayer was willfully fraudulent or misrepresentative, the government cannot hold open the limitations period when only the return-preparerintendedtofilea falsereturn.

Finnegan v. Comm’r, T.C. Memo 2016-118 (2016)—

Many years later, the Tax Court revisited this same issue again in Finnegan. The Finnegans owned a rental condominium (“condo”) in Daytona Beach, Florida.774 By all accounts, they did not use the condominium as their primary or secondary residence because in the first10yearstheyownedit,theyhadnotvisitedthecondo.775 Instead, it was an income property that they rented out through an agency, to which they paid fees for this service.776 After their accountant moved away,theysoughtouta newoneandretaineda newreturn-preparer.777 Theirnewreturn-preparerincorrectlyadvisedtheFinneganstoforma

769 Id. at34. 770 Id. at21. 771 Id. at23(citing Petzoldtv.Comm’r,92T.C. 661, 698(1989)). 772 Id. (citing Petzoldt, 92 T.C. at 699). 773 Eriksen, T..C. Memo 2012-194 at 24 (citing Gajewski v. Comm’r, 67 T.C. 181, 199(1976)). 774 Finnegan v. Comm’r,T.C.Memo2016-118,7 (2016). 775 Id. 776 Id. 777 Id. at8.

partnership, to report their rental income, then use their contributed money to fund a self-employment retirement fund.778 They did and calledthepartnership“Jomarjen.”779

The Finnegans did not draft a partnership agreement, and the filing address on the partnership’s returns changed yearly.780 Jomarjen did notcommunicatewithtenantsdirectly;theFinnegansdid.781 Theydid not change the title for the condominium from the individuals to Jomarjen.782 And their other actions clearly showed that the condominiumwasnotreallya partnershipasset,nordidtheytreatthe partnershipasa distinct,separatebusinessentity.783

Following their return-preparer’s advice, they contributed money to a retirement account.784 Each year, for five years, their new returnpreparer prepared their tax returns under a different name.785 During the trial, the reasons for the name changes became clear.786 Their return-preparer was committing fraud, and he did not want his clients northeIRStofigurethisout.787

The Finnegans’ return-preparer had been a C.P.A. but had been convicted of preparing false returns previously.788 During a different criminal trial,789 the return-preparer had admitted that every return he prepared included fraudulent entries.790 And the IRS found evidence thathewasdoingthesamethingshere.791

Attrial,theFinnegansarguedthatthethree-yearlimitationsperiodwas not held open because their return-preparer had committed the fraud and because they did not have the requisite intent to commit tax

778 Id. 779 Finnegan, T.C. Memo2016-118at8. 780 Id. at9. 781 Id. 782 Id. 783 Id. at8-9. 784 Id. 785 Finnegan, T.C. Memo2016-118at9. 786 Id. at10. 787 Id. at12-16. 788 Id. at14-15. 789 Id. at 12 (citingUnited States v. Mitts, 2012U.S.App.LEXIS 26911(2012) aff’d United Statesv.Mitts,396 Fed.Appx.296 (6thCir.2010)). 790 Id. (citing Mitts, 2012U.S.App.LEXIS26911at2). 791 Finnegan, T.C. Memo2016-118at16.

D. Office of Chief Counsel Post-Allen on Limitations Periods and

Return-PreparerFraud

2012 IRS C.C.A. LEXIS 137, (June 4, 2012)—

In 2012, prior to Finnegan, the Office of Chief Counsel issued an advice memorandum that touched on this issue again.802 In this instance, a business owner who held a 50.0% stake in a closely-held S-Corporation prepared the corporation’s tax returns and misrepresented expenses that were claimed by the business.803 Ultimately, the return-preparer, who was an owner of this business, was convicted of several federal crimes, which included tax evasion, filing false personal returns, and filing false corporate returns.804 The othershareholderwasnotinvolvedinthereturnpreparationnorsigned the return.805 Nor was the other shareholder aware that the returnpreparer had filed these returns or that the other shareholder participatedinanyway.806

The IRS sought to assess penalties on both owners’ personal returns. However,tenyearshadpassedsincetheForms1040hadbeenfiled.807 So the Office of Chief Counsel was providing guidance on whether penalties could be assessed past the three-year limitations period due tothefraudexception.808

TheOfficeofChiefCounselreviewedtherelevantCodesection(IRC § 6501).809 Then it considered the IRS’s position that “the limitations periodmaybeheldopenindefinitely”forthetaxpayer’sreturn“based on the fraudulent Form 1120S filed” by the return-preparer who was the only one who knew of the fraud.810 Thus, the Office of Chief Counsel addressed the question: What part does the taxpayer’s intent to evade taxes play in determining if the limitations period should remainopenindefinitely?811

802 2012IRS C.C.A.LEXIS 137(2012). 803 Id. at*1-4. 804 Id. at*3-4. 805 Id. at*3. 806 Id. 807 Id. ( emphasis added). 808 2012I.R.S. C.C.A. LEXIS137 at *3. 809 Id. at*3-4. 810 Id. at*4. 811 Id.

The Office of Chief Counsel concluded that there must be evidence present showing the taxpayer intent to evade taxes.812 And, in doing so, it directly addressed Allen and its impact on this decision.813 The Office of Chief Counsel concluded that it was doubtful that Allen’s holding could be applied here to allow the limitations period to be extended indefinitely.814 To do so, a court would need to “to focus on the fraud of a third party” who prepared a return, which was not the casehere.815

The Office of Chief Counsel distinguished this case with Allen: 816 First, the return-preparer who perpetrated the fraud in this situation wasoneoftheshareholders,andthatpersonwassolelyresponsiblefor the Form 1120S preparation and the fraud that was presented in it.817 Andsecond,whentheinnocentshareholderpreparedhisreturns(Form 1040), using information from the fraudulently prepared corporate returns (Form 1120S) and the related schedules (K-1s), he was not relying on a return-preparer who sought to evade taxes or defraud the governmentonhispersonalreturnsaswaspresentin Allen.

818

E. Federal Appeals Courts Post-Allen on Limitations Periods and

Return-PreparerFraud

City Wide Transit, Inc. v. Comm’r, 709 F.3d 102 (2d Cir. 2013).—

The appeals court was asked by the IRS to determine “whether an accountant that filed fraudulent tax returns on behalf of a company . . . intentionally evaded that company’s taxes within the meaning of [IRC]§ 6501(c)(1)?”819

InreviewingtheTaxCourt’searlierholding,theappealscourttreated the taxpayer’s intent “as a question of fact subject to clear error review.”820 Based on the entire record, the appeals court will reverse

812 Id. at*11-12 (emphasisadded). 813 Id. 814 2012I.R.S. C.C.A. LEXIS137 at *11-12. 815 Id. 816 Id. 817 Id. 818 Id. 819 CityWideTransit, Inc.v.Comm’r,709 F.3d 102,103(2d Cir.2013). 820 Id. at106.

the Tax Court only if it finds that a “definite and firm conviction that a mistakehasbeencommitted.”821

The IRS conceded that it assessed penalties and interest outside the three-year limitations period.822 And the taxpayer concedes that its return-preparer filed false or fraudulent tax returns and amendments for it.823 Further, the taxpayer agreed that if there was return-preparer intent to defraud or evade taxes, that the limitations period would not apply allowing the IRS to assess penalties and interest on it.824 So the appealscourtlookedcloselyatthepreparer’sintenttodetermineifthe three-yearlimitationsperiodbarredtheIRS’sactions.825

The appeals court relied on prior caselaw that held that where tax evasionplayedanypartina return-preparer’sconduct,an“affirmative willful attempt to evade taxes may be inferred.”826 Thus, the IRS had onlytoprovethatthereturn-preparerintendedtounderpaytheIRSfor thetaxpayerwhenhefileda fraudulentreturn.827

Further,theappealscourtconcludedthatthereturn-preparerprimarily intended to defraud the government and evade taxes.828 It determined thatthetaxpayerintendedtoavoidpayingtaxestothegovernmentthat were otherwise due and that the embezzlement scheme proves the returns were fraudulent.829 The appeals court conceded that had the return-preparer falsely recorded personal expenses in the taxpayer’s ledger that caused the taxpayer’s returns to be fraudulent As a result, the taxpayer’s actions would have caused the taxpayer to file false returns;thus,thetaxpayerdidnotintendtodefraudthegovernment.830

From this, the appeals court overturned the Tax Court’s decision, and heldthattherewasclearandconvincingevidenceprovidedbytheIRS

821 Id. 822 Id. at107. 823 Id. 824 Id. 825 City Wide Transit, Inc.,709F3dat107-108. 826 Id. at107-108(quotingUnited States v. Klausner,80F.3d 55,63(2dCir.1996)). 827 Id. at108. 828 Id. 829 Id. 830 Id.

that the return-preparer intended to evade taxes by filing the false returnsforthetaxpayer.831

Finnegan v. Comm’r, 926 F.3d 126 (11th Cir. 2019)—

After the Tax Court rejected the claim that the limitations period should not remain open indefinitely when their return-preparer committed the fraud, the Finnegans appealed for reconsideration. 832 After considering the taxpayers’ claims, the appellate court disagreed with their position.833 The court rejected their arguments and in its holding, affirmed the Tax Court’s decision directly and Allen indirectlyfortheEleventhCircuit.834

Theappellatecourtlookedat Allen afterconsideringthefactsbecause it was at the core of the government’s arguments.835 It saw that the government had used Allen to trigger the fraud exception and extend the limitations period beyond three years.836 The court also indicated that Allen was the crux of the government’s argument by pointing to how many times it was cited throughout this case.837 However, the taxpayers’ argument failed to address Allen. 838 Instead, the taxpayers focused on Eriksen, which the appellate court concluded fell short because Eriksen was notthe“appropriatehookfortriggeringthefraud exception.”839

Further, the appellate court reasoned that the taxpayers “never challenged Allen orits logic at all.”840 Instead, the taxpayer stipulated to Allen controlling this case, and later—when asked directly by the Court—admitted that Allen was the controlling case.841 So, in short, the appellate court held the taxpayers to their stipulations and admissions,whichbecametheirdeathknell.842

831 City Wide Transit, Inc., 709F3dat108-109. 832 Finnegan v. Comm’r,926 F.3d 1261,1265(11thCir.2019). 833 Id. 834 Id. 835 Id. 836 Id. 837 Id. 838 Finnegan, 926F.3dat1265. 839 Id. at1266. 840 Id. 841 Id. 842 Id.

The appellate court even pointed out and considered that the IRS sent the Tax Court a letter and copied the taxpayers on the BASR P’ship decision.843 And even after its decision was rendered, the taxpayers failedtoasktheTaxCourttoreconsider Allen andfailedtomakeany Allen-relatedarguments.844 Indoingso,theappellatecourtpointedout that the taxpayers failed to argue Allen’s impact on their case, as it couldhave.845

Taking up the Allen issue, the appellate court saw that the Tax Court, in a single, brief paragraph, held that the fraud exception applied “because Allen held that the return-preparer’s fraud was enough to triggertheexception.”846 ItalsosawthattheTaxCourtacknowledged the Court of Federal Claims decision failed to follow Allen in BASR P’ship, so it hadtoconsideritsimpact.847 Andintherelatedappeal,it also saw that the Tax Court acknowledged the Court of Appeals for theFederal Circuit’s decisiontoupholdthe BASR P’ship decisionbut chosenottorevisittheissue.848

After considering the new arguments, the appellate court concluded thatthetaxpayerswaivedtheirrightstoarguethat Allen did notcontrol becauseofthe BASR P’ship appellate courtdecision.849 Itreasoned that the taxpayers knew the IRS was relying upon Allen but failed to challenge it when it had the chance.850 Instead, the appellate court pointedtothetaxpayers’expressadmissionthat Allen controlledtheir case.851 Assuch,theappellatecourtfoundthistobeanobviouswaiver to this defense.852 Thus, the taxpayers cannot raise the decision in BASR P’ship as an argument that Allen did not control their case.853 The appellate court further reasoned that in the taxpayer argument, they contended that the fraud exception was never triggered; thus, the

843 Id. at 1267-68. 844 Finnegan, 926F.3dat1267-68. 845 Id. 846 Id. at1268(citing Finnegan, T. C. Memo2016-118at2). 847 Id. (citing BASR P’shipv.UnitedStates,113 Fed.Cl.181(2013)). 848 Id. (citing Finnegan, T.C. Memo 2016-118at6 n.6.). 849 Id. at1270. 850 Finnegan, 926F.3dat270. 851 Id. 852 Id. 853 Id.

limitations period had run out.854 This, the appellate court concluded, wasa whollydifferentargument.855

In the end, the taxpayer failed to persuade the Eleventh Circuit Court of Appeals to overturn the Tax Court decision, so the lower court’s decisionwasaffirmed.856

F. Court of Federal Claims on Limitations Periods and Return-

PreparerFraud

BASR P’ship v. United States, 113 Fed. Cl. 181 (2013)—

Prior to Finnegan and after City Wide Transit, the Court of Federal Claims held that penalties and related interest that were assessed by the IRS against a partnership were barred under IRC §§ 6229(a) and 6501becausethepartnership’staxreturn,whichwasfraudulentwhen it was filed, was prepared by others who intended to evade taxes.857 Thiscourtdifferentiatedthiscasefrom City Wide Transit basedon its readingofthelegislativehistorythatestablishedCongress’sintentand thefactsathand.858

A law-firm partner advised the partnership’s accountants that they could avoid taxation by structuring the sale of a business (Page Printing Co.).859 To do so, a general partnership had to be formed (BASR Partnership) in Texas governed by its law, which was later terminated and reformed as a new BASR Partnership.860 The new partnership members were four sole-member limited liability companies.861 A certified public accountant, Mr. Malone a partner of Malone & Bailey PLLC, prepared the partnership returns and its partners’returns.862

The partnership’s tax-matter partner filed a complaint with the Court ofFederalClaimsseekinga refundfortaxesandinterestpaidbasedon

854 Id. at1271. 855 Id. 856 Finnegan, 926 F.3d at 1275. 857 BASRP’shipv.United States,113 Fed.Cl.181,192(2013). 858 Id. at192-195. 859 Id. at183. 860 Id. 861 Id. 862 Id. at184-85.

the IRS’s final partnership administrative adjustment that resulted from an examination.863 BASR argued that the assessed taxes and relatedinteresthadbeentime-barredunderIRC§ 6501.864 BASR also argued that no penalties may be assessed under IRC § 6662 because the tax benefits that were disallowed were not attributed to valuation misstatements. 865

The court then considered the root arguments that IRC § 6501(c)(1) governs. It considered that if it were to do that, the court had first to determine if a return-preparer’s intent to evade taxes does not keep open the limitations period indefinitely under the fraud exception.866 Todoso,thecourtfirsthadtodetermineifIRC§ 6229displacesIRC § 6501(c)(1).

Thecourtlookedtothegovernment’ssupportforitsclaimsthatIRC§ 6229(c)(1) may extend the limitations period under § 6501.867 It saw that the government was relying on City Wide Transit, Inc. and Allen. 868 Fromthesecases,thegovernmentarguedthatthelimitations periodwasheldopenindefinitelyunderthefraudexceptionbecausea BASRpartnerpreparedthepartnershipreturnwiththeintenttoevade taxes,andthetaxpayer(thepartnershipasa whole)washeldliablefor its agent’s (the evading partner) actions.869 The court also noted that thegovernment’ssecondaryargument,that Allen applied,tiedbackto the belief that “fraud cases ordinarily are more difficult to investigate thancasesmarkedforroutineaudits.”870

The BASR Court resolved the issue as follows: From other caselaw, theU.S.CourtofAppealsfortheFederalCircuitheldthatIRC§ 6501 and§ 6229(a)shouldbereadtogether.871 Theappealscourtconcluded thatIRC§ 6229(a)establishestheminimumtax-assessmentperiodfor partnerships.872 Further, the appeals court concluded that this

863 BASR P’ship, 113Fed.Cl.at185. 864 Id. 865 Id. 866 Id. at189. 867 Id. at190. 868 Id. at190-91. 869 BASR P’ship, 113Fed.Cl. at191. 870 Id. (quoting Badaracco, 464U.S.at398). 871 Id. (citingADGlob.Fund,LLC v. United States, 481F.3d1351, 1354 (Fed.Cir. 2007)). 872 Id.

minimum tax-assessment period may or may not end before or after the three-year limitations period that is set out in § 6501.873 The appealscourtlookedtoothercasesandheldthatIRC§§6229and6501 workintandem.874

It saw that the BASR P’ship Court looked closely at § 6501.875 It concluded that the IRS could assess taxes, penalties, and interest against the partnership within three years of the partnership’s return beingfiled.876 And it concludedthattheremustbean“intenttoevade tax”presenttoholdopenthelimitationsperiod.877

Further, the BASR P’ship Court focused its attention on definitions withintheTaxCodeandthedefinitionsunder§ 6501(a)tosupportits conclusion.878 Thereitfoundthata taxreturnisdefinedas“thereturn tobefiledbythe taxpayer (anddoesnotincludea returnofanyperson from whom the taxpayer received an item of income gain, loss, deduction, or credit).”879 From this, the BASR P’ship Court held that “the fraudulent intent . . . is by implication limited to fraud by the taxpayer.”880 Thiscourt reasonedthat“[b]ecausethelanguageof[IRC §] 6501(a) is expressly limited to a return filed by a taxpayer.”881 As such, the BASR P’ship Court held that the “IRS [sic.] is bound by the standard three-year limitations period in IRC § 6501(a), unless the taxpayerpossessesfraudulentintent,orunlessIRC§ 6229applies.”882 And IRC § 6229(a) also has a three-year limitations period for partnership returns and “and includes a ‘special rule in case of fraud.’”883 UnderIRC§ 6229(c),theTaxCodeuses“falsereturn”and definesit“asonewhere‘anypartnerhas,withtheintenttoevadetax, signed or participated directly or indirectly in the preparation of a partnershipreturn[,]whichincludesa falseorfraudulentitem.’”884

873 Id. 874 Id. (citingPrativ.UnitedStates,603 F.3d1301, 1037(Fed. Cir. 2010) and Irvine v.United States,729F.3d455,461–62(5th Cir. 2013), whichstatedthe “reasoning” in Prati was “logicaland persuasive” reinforcing Prati asthe properinterpretation). 875 BASR P’ship, 113Fed.Cl.at192. 876 Id. 877 Id. (citing IRC§ 6501(c)(1) (2018)). 878 Id. 879 Id. (quotingIRC § 6501(a)(2018)). 880 Id. (emphasisadded). 881 BASR P’ship, 113Fed.Cl.at192 (emphasisadded). 882 Id. 883 Id. (citing IRC§ 6629(c) (2018)). 884 Id. (quoting IRC§ 6229(c)(2018)).

The BASR P’ship Courtfurthersupporteditspositionbylookingatthe legislativehistorybehindIRC§ 6501(c)(1).885 Lookingthere,thecourt found that a taxpayer must have “the intent to evade tax” contained within IRC § 6501(c)(1), because the same language was used in the processor Tax Code “in the Revenue Act of 1918, § 250(b), (d), 40 Stat. 1057, 1083 (1919).”886 Thus, this court held that “‘false or fraudulentwithintenttoevadetax’hadthesamemeaninginRevenue Act§ 250(d)”asitdoesnow.887

Further, it concluded that the statute’s plain language supported this interpretation and meant that § 6501 could only be applied to a taxpayerwhohadtheintenttoevadetaxes.888 Butthatwasnotthecase here. So, “[t]herefore, the court has determined that the meaning of ‘intent to evade tax,’ as . . . used in IRC § 6501(c), is limited to instances in which the taxpayer has the requisite intent to commit fraud.”889 And, in this case, the government conceded that the taxpayers did not have the requisite intent, so the government could not hold the taxpayers accountable for their innocent actions because itwastime-barred.890

This court next looked at City Wide Transit, Inc.891 It concluded that this case did not bind this court.892 City Wide Transit, Inc. was not followed here because the question that the court addressed was framed differently.893 The City Wide Transit, Inc. Court made factual inquiries into “whether a tax attorney’s fraud is ‘secondary or remote to the fraudulent returns.’”894 However, that court applied the fraud exceptionbecausethewrongdoerwasnotanunrelated,thirdpartywho

885 Id. at193. 886 Id. 887 BASR P’ship, 113Fed.Cl.at192. 888 Id. 889 Id. (citing in n.11 Gillsepie v. United States, 231 Ct. Cl. 851, 852 (1982) (per curiam)(emphasisadded),which states “fraud. . .means intentionalwrongdoingon the part of a taxpayer, motivated by a specific purpose to evade a tax known or believedtobeowing.”). 890 Id. 891 Id. at193-94. 892 Id. 893 BASR P’ship, 113Fed.Cl.at193. 894 Id. (citing City Wide Transit, 709F.3dat108).

prepared the returns.895 And, finally, it considered Allen. 896 It determined that the Tax Court “relied on a failed legislative proposal as evidence that Congress considered and rejected requiring the taxpayertohavetherequisiteintenttoevadepayingfederaltaxes.”897 Thus, neither City Wide Transport, Inc. nor Allen was binding on this courtandwouldnotbefollowed.898

Thiscourtalsoconsideredotherpersuasivearguments,whichincluded Badaracco v. Comm’r, 464 U.S. 386, 398 (1984), that proposed that IRC § 6501(c)(1) should be amended but concluded this was neither thetimeorplacetoprovidejudicialinsightoramendtheTaxCodeby thecourts.899

So,intheend,thiscourtheldthatthethree-yearlimitationsperioddoes apply when the return-preparer misrepresents or defrauds the government and when taxpayers have no knowledge of their returnpreparer’sactions.900

G. Court of Appeals for the Federal Circuit on Limitations Periods andReturn-PreparerFraud

BASR P’ship v. United States, 795 F.3d 1138 (Fed. Cir. 2015)—

Priorto Finnegan, theIRSappealedthepriordecisionarguingthatthe three-year limitations period did not time bar its actions to assess penalties when a return-preparer intended to file a false or fraudulent return.901 It argued that the partnership’s outside counsel, an attorney who helped structure financial transactions that were reported on the partnership’s return, acted with the “intent to evade tax” from IRC § 6501(c)(1).902 Thus, according to the IRS, this attorney’s actions suspendedthethree-yearlimitationsperiodallowingittoassesstaxes, penalties, and interest on the partnership under IRC § 6501(c)(1).903 TheappealscourtheldthatthepriordecisiontodisagreewiththeIRS

895 Id. 896 Id. at193 n.12. 897 Id. 898 Id. at194. 899 BASR P’ship, 113Fed.Cl.at194. 900 Id. 901 BASRP’shipv.United States,795F.3d 1338,1339(Fed.Cir.2015). 902 Id. 903 Id.

and hold that the government’s actions were time-barred was correct, so it affirmed the Court of Federal Claims’s decision.904 It reasoned that the three-year limitations period can be extended indefinitely “only when the taxpayer—and not a third party—acts with the requisite‘intenttoevadetax.’”905

In considering its position, the appeals court looked to the statute’s wording.906 The courtlookedfor“‘plainandunambiguousmeaning’” in the statutory language.907 It found that only when the statute’s languageceasestobeunambiguousresultingina statutoryschemethat is no longer coherent or consistent would a court not look to a law’s plain language.908 And this court found that IRC § 6501(c)(1)’s plain language states that “when the IRS [sic.] establishes that the taxpayer actedwiththeintenttoevadetax,”thethree-yearlimitationsperiodis suspended indefinitely.909 So because the government conceded “that it cannot show that either the partnership or any of its partners acted withtheintenttoevadetax,summaryjudgmentinfavorofBASRwas proper.”910

The appeals court then considered Allen and how it could impact this decision.911 Theappeals court sawthatthegovernmentwasusing Allen tobolster their position.912 However, theappeals courtconcluded that the U.S. Supreme Court’s decision in Badaracco did not require it to interpretIRC§ 6501(c)(1)inthegovernment’sfavor.913

The appeals court finally considered City Wide Transit, Inc. 914 The appeals court determined that the government’s reliance on this case wasmisplacedaswell.915 Itconcludedthatthe City Wide Transit, Inc. court only confronted “the issue of whether the person who prepared

904 Id. 905 Id. 906 Id. at1342(citingBarhartv.SigmonCoalCo., Inc., 534U.S.438,450 (2002)). 907 BASR P’ship, 795 F.3d at 1342 (citing Barhart v. Sigmon Coal Co., Inc., 534 U.S.438,450 (2002)). 908 Id. 909 Id. 910 Id. at1342-43. 911 Id. at1346. 912 Id. 913 BASR P’ship, 795 F.3d at 1346 (citing Badaracco v. Comm’r, 464 U.S. 386 (1984)). 914 Id. at1347. 915 Id.

the tax returns acted with the intent to evade taxes.”916 So this court determined that the City Wide Transit, Inc. court “did not address the question of whether the tax preparer’s intent was sufficient to trigger § 6501(c)(1).”917 Assuch,thiscourtheldthatthatcase“hadnobearing ontheinterpretationof§ 6501(c)(1).”918

The appeals court bolstered its position that, “based on the statutory scheme and the absence of persuasive case law,” the appeals court could not agree with the government that IRC “§ 6501(c)(1) unambiguously permits the suspension of the limitations period when thetaxpayerlackedfraudulentintent”919 whenitlookedto2000F.S.A. LEXIS207,notingthattheIRSapparentlychangeditspositiononthis matter.920 And given that Congress had not altered IRC § 6501(c)(1), theappealscourtcouldnotdeterminewhythegovernmentchangedits position.921 Thus,statutoryhistoryforthisCodesection“confirmsand further supports the interpretation that limits to the taxpayer the fraudulentintentrequiredtotriggersuspendingthethree[-]yearstatute oflimitations.”922

So, in conclusion, the Court of Appeals for the Federal Circuit chose not to follow both controlling cases to date—Allen and City Wide Transit, Inc.—and held that for the three-year limitations period to be suspended, the taxpayer had to have willfulness or intent to evade taxes.923 However,thisprecedentonlyappliestocasesintheCourtof FederalClaimsandtheCourtofAppeals fortheFederalCircuit.924

H. BASRPartnershipasa SubstantiallyPrevailingParty

BASR P'ship v. United States, 130 Fed. Cl. 286 (2017)—

After prevailing in the Federal Court of Appeals for the Federal Circuit, making BASR Partnership the prevailing party, the

916 Id. 917 Id. 918 Id. 919 BASR P’ship, 795F.3d at 1347-48. 920 Id. at 1348. 921 Id. (citing Revenue Act of 1921 §250(d), Pub. L. No. 67-98, 42 Stat. 227 and Internal RevenueCodeof1954§6501(c)(1),Pub.L.No. 83-591,68A Stat. 803). 922 Id. at 1349-50. 923 Id. at 1350. 924 IRC § 7482(a)(1)(2018).

partnership sought reimbursement for its costs to defend its position under IRC § 7430.925 The Court of Federal Claims concluded that the partnership was a party that was the prevailing party under § 7430.926 Itconcludedthatthepartnershipmadea qualifiedoffer,thatwasnota sham,andwaswithinthequalified-offerperiod.927 Itincurredfeesand expensestodefendthepositionthatitprevailedinthatwerereasonable and recoverable.928 It incurred supplemental fees that were recoverable, too.929 Sothe courtawardedthepartnership$314,710.69 in fees and expenses because it substantially prevailed over the government when it took an unreasonable position on extending the three-yearlimitationsperiodunderIRC§ 6501(c)(1).930

ANALYSIS SUPPORTING THAT ONLY TAXPAYER INTENTSHOULDBECONSIDERED:

A. HowtheTaxCourtgotitwronginAllenbecauseitisallabout taxpayerintent.

Thestatutorylanguageisclear.Bystatute,a falseorfraudulentreturn must befiled with the intent toevade taxes, orthere must betaxpayer intent to defraud, misrepresent, or evade taxes for penalties to be assessed. And in both instances, the intent is that of the taxpayer and no other. Seems pretty clear, right? Apparently not because the Allen court did not come to the same conclusions and muddied the waters with its holding. Subsequent courts concluded that taxpayer intent is the crux of any case involving fraud or misrepresentation, but their decisionshavesplitthecircuits.

First, Congress has the power to change the Tax Code to address this issue. And it has used this power for things like substantial underreporting,wherethelimitationsperiodisextendedfromthreeto six years. However, it has not made changes for instances like this. Not carving out an exception for the return-preparer fraud clearly speaks to Congress’s feelings on this matter. It feels that where there is taxpayer intent to defraud, the limitations periods should be held

925 BASRP’shipv.United States,130 Fed.Cl.286(2017). 926 Id. at 306.

927 Id. 928 Id. 929 Id. at 313. 930 Id. at 313-14.

open indefinitely. Where there is no taxpayer intent, the limitations periodwillgenerallybethreeyears.

Second, the Allen court’s plain-language analysis seems faulty. The Allen courtarguedthattherewasnothingintheplainlanguageofIRC § 6501(c)(1) that extends only to taxpayer fraud. However, that is not what other courts found. The BASR P’ship court concluded that nothing in that section indicates that a return-preparer cannot be held solely accountable for fraud where the taxpayer is unknowing and without intent, which was consistent with past holdings too (e.g. Gordon and Tinkoff). Thus, absent congressional change or Supreme Court interpretation to the contrary, the plain language in the Code should prevail. As such, the Tax Court should not be making these interpretations.

Third, the Tax Court ignored case precedent dating back decades because intended return-preparer fraud happened only occasionally. Going back over eight decades to Tinkoff, the IRS through the Office of Chief Counsel determined that a very well-versed tax expert and return-preparer intended to evade taxes for his client, a corporation. Then, once this was shown, the return-preparer—and not the taxpayer—was convicted of federal tax crimes and served time in a federal penitentiary. Because the preparer was convicted of a tax crime, the government also had to meet a higher burden of proof: beyond a reasonable doubt. Thus, even with the heightened burden of proof, the Tinkoff court did not struggle to determine Tinkoff's intent to commit tax crimes and conclude his client did not share this intent. Rather, the Tinkoff court concluded that this return-preparer alone shouldbeheldaccountablefortaxevasion.Sothiscourtfelttherewas noneedtoestablishpublicpolicytodetera taxpayerbecausethelaw, asitwaswritten,workedhere.Thiswasalsoseenin Gordon, Baldwin, Whyte, and Stadtmauer, which all preceded Allen, where that court cametothesameconclusions.Forthatmatter,after Allen, othercourts came to this same conclusion too (e.g. Eriksen and BASR P’ship), showingthereisa lotofconsistencyovertimeinthistrainofthought. However, by the Allen court’s determination, prior preparer cases happened only occasionally. And apparently, the Allen court concluded these cases were not on point, so they were merely persuasive. However, the Office of Chief Counsel saw them as more thanpersuasivewhenitwroteitsguidancefortheIRS.

Fourth, the Office of Chief Counsel investigated the same issue prior to Allen andconcluded thatwherethereisnotaxpayerintent,therecan benotaxpayerwillfulness,sotherecanbenotaxpayerfraud;thus,the limitations period cannot be held open. It supported this position throughitsinterpretationoftheTaxCodeandwhatitsawinpastcases. Then it concluded that return-preparer sins should not be imputed to the taxpayer when there is no intent to evade taxes nor any actions taken to evade taxes and gave the IRS that counsel to follow. The OfficeofChiefCounselsawthatwherea return-prepareractedalone, there was no taxpayer willfulness. The return-preparer had the intent to defraud and evade taxes. The return-preparer also took actions to defraud or evade taxes. Therefore, the taxpayer did not intend to defraud or misrepresent or intend to evade taxes. Put another way, only the return-preparer had the requisite intent and took action to misrepresentordefraudthegovernment,whichisneededtocommita tax crime or a civil infraction. The taxpayer did not. It revisited the sameissueafter Allen, anditdidnotchangeitsposition.SotheOffice of Chief Counsel reasonably concluded that the return-preparer’s sins should not be imputed on the taxpayer. With the Office of Chief CounselingbeingtheIRS’slegalarm,whythenwouldthegovernment (the IRS) change its position? And why would the courts determine that the IRS’s Office of Chief Counsel was wrong when it had providedsoundreasoningonthisexacttopic?Thisisunclearandmay not be answered. However, I would speculate that the inconsistency came about as an internal-policy change that the IRS was implementingthroughthecourts,andnotthroughCongressorthrough regulation.I believeitneededmoretimetoinvestigatecaseslikethis, and saw this as a way to extend the limitations period in these cases, soithasmoretimetoassesspenaltiesand collectthem.

Fifth, clearly the Allen court agrees with the government’s argument that it needs more time to assess and collect taxes, penalties, and interest.Then,therearefollow-upquestionsthatshouldbeaddressed. If the government wishes the IRS to have more time to collect taxes, interest, and penalties, why has Congress not provided additional funding to support IRS collection efforts nor the IRS promulgated regulationstoadministrativelyfixthisissue?

I propose that the administrative parts of the government—including the IRS—believe more time is needed, but Congress does not. In the past,theIRShasbeensuccessfulindoingitsjob.Duringthetimewhen

the IRS did not have extensive databases and powerful computers to comb through taxpayer data to find false or fraudulent returns, it was successfulatfindingfraudandtaxevasion(asin Gordon and Tinkoff), andthenprosecutingtheoffenders.Sowhathaschangedsincethen?

TheIRSnowhasautomatedcollectionsthatidentifiesunderreporting issues without human investigations, issues collection letters, and tracks balances as they change. Arguably, this has led to fewer IRS agents working case files. Is more time needed because the IRS is underfunded, which results in staffing shortages and fewer examinations?931 I arguethatitis.

BecauseCongressdeterminestheIRS’sbudgetandrestrictstheagent countbasedonfundingitprovides,Congresscouldchoosetoprovide morefundingtotheIRSanditscollectionactivities.Thiswouldresult in more taxes, penalties, and interest being collected from intentional tax evaders. However, Congress has decided not to. In fact, in recent years, the IRS’s budget has been reduced.932 Through budget allocations, Congress has shown it does not want more agents collecting taxes, penalties, and interest on money owed to the government because it has concluded that its funding levels provide adequatetaxcollections,duringthetimeitpermits,undercurrentlaw.

Absent getting Congressional approval, the IRS can, and does, promulgate its own regulations and enforces them as if they had been issued by Congress. Where the Treasury Department uses the

931 See James Thorne, Years of Budget Cuts Shrink the IRS, and Corporations are the Big Winners, CNBC.COMTAXES (May 12, 2018), http://www.cnbc.com/2018/05/11/budget-cuts-shrink-the-irs-andcorporations-are-the-big-winners.html (looking at $533 million less in spending on the IRS from2012 to 2018 and a 14%drop in staffing for the same period) and see Maureen Groppe, Report: US Government Losing Billions in Corporate Tax Revenue from IRS Budget Cuts, USATODAY.COM POLITICS (Aug. 15, 2019), http://www.usatoday.com/story/news/politics/2019/08/15/irs-cuts-cause-usgovernment-lose-billions-taxes-report-says /2009894001/(looking at the decline in corporate taxation from 2002 to 2014 and whatcouldhave been collectedfrom2000 to 2014); IrinaIvanova, IRS Budgets Cuts Costing the Feds Billions of Dollars, CBSNEWS.COM NEWS (Aug. 16, 2019), http://www.cbsnews.com/news/irs-budgets-cuts-costing-the-feds-billions-ofdollars/(lookingatexaminationsgoingbackto2010).

932 Id.

Administrative Procedure Act933 to promulgate its regulations, it will receive Chevron deference,whichmeanscourtswilltreattheTreasury Regulation as if Congress has given its full authority to enforce them.934 Yet, the IRS has not gone through that process to get exceptions for the limitations period through Treasury Regulations wherethereispreparerfraud.

Sixth,theTaxCourtfoundthatkeepingopenthelimitationsperiodfor tax-preparer fraud was not burdensome for the taxpayers. The Tax Courtholdsthatitisnota burdenfora taxpayertoreviewtheirreturns forobviousmisstatement.However,thisisa bitcounterintuitivegiven the circumstances. In these cases, a taxpayer has gone to a returnpreparertohavetaxreturnscompletedforthemformanyreasons.One common reason is that the taxpayer does not know the Tax Code, so they do not have the appropriate skills or education to be able to complete returns properly, and, thus, they rely on a professional to do it for them. So to say that a naïve and innocent taxpayer can review a prepared return and identify misstatements, errors, or fraud is unreasonable.Thesetaxpayersarealreadyconcedingthatthisworkis not for them and pay another to complete this task. Because these taxpayers do not have the requisite knowledge, background, or education, they are also not able to review returns completed by a tax professional and determine whether the return was properly prepared. So reviewing returns would be burdensome. After all, how can a taxpayerknowwhatheorshedoesnotknow?

Last, the courts have established two disparate treatments for an innocenttaxpayerinvolvedwitha return-preparerwhocommitsfraud. Criminal caselaw consistently punishes only the return-preparer who had the requisite mens rea and actus rea needed to show tax evasion orfraud(e.g. Gordon and Tinkoff).Whereas,under Allen, thetaxpayer assumes the return-preparer’s intent to defraud or evade taxes even when the taxpayer is innocent because the taxpayer has no intent or willfulness. And this dichotomy punishes taxpayers through civil penaltiesthatcanbeassessedindefinitely,while,undertheexactsame facts and circumstances, a criminal court would not be able to hold

933 Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication, 84 Fed. Reg. 55,239, 55,239 (October9,2019). 934 Chevron,U.S..,Inc.v.NaturalRes.Def.Council,Inc., 467U.S.837(1984).

open the limitations period indefinitely or try to convict an innocent taxpayerofa taxcrime. Thatisabsurd!

B. So for the court to impute intent, it must be all about agency, right?

Well, that depends. In an agency relationship, to begin with, we must forgetaboutequality.935 Themastergivesthedirectivesandtheservant executes them.936 In doing so, to protect the servant, agency law imputes that an agent’s937 action is that of the principal; however, it does not permit an agent to operate outside of permissions granted, to operate in the agent’s best interest, or to defraud another by binding a partywithouttheagenttakingresponsibilityforhisorheractions.938

Thus,foroneperson(theprincipalormaster)tobeliableforanother’s actions (the agent’s or servant’s actions), an agency relationship must firstbeshown.939 Thentheagent’sactionsmustbeshowntobewithin the relationship’s scope when the agent acted for the principal.940 Generally, “when one person authorizes another to act on his behalf subject to his control, and the other consents to do so” agency is shown.941 To determine if an agency relationship exists in a given situation depends upon facts and circumstances.942 The determinative factor is “whether the employer (principal or master) has the right to control and direct the servant in the performance of his work and the mannerinwhichtheworkistobedone.”943 Soa courtwilllooktosee if “the right to control, rather than its actual exercise, is usually dispositiveofwhetherthereisanagencyrelationship.”944 Anda court “will look both to the terms of any contract that may exist and to the

935 DepecheMode, Master and Servant, on Some GreatReward(Mute1984).

936 RESTATEMENT(THIRD)OFAGENCY, §1.01(C) (AM. LAW INST. 2006). 937 I am using servant and agent interchangeably, and I will be using master and principalinterchangeably as well.

938 Id. 939 Judah v. Reiner, 744A.2d1037,1039(D.C.Cir.2000). 940 Id. at 1039-40. 941 Id. (quoting Smith v. Jenkins, 452 A.2d 333, 335 (D.C. Cir. 1982) with internal quotes omitted).

942 Id. 943 Id. (quotingLeGrandv.Ins.Co. of N.A.,241 A.2d 734,735(D.C. Cir.1968)with internal quotesomitted). 944 Judah, 744 A.2d at 1040 (referring to Safeway Stores, Inc. v. Kelly, 448 A.2d 856,860(D.C. Cir.1982)).

actualcourseofdealingsbetweentheparties.”945 Thus,theconductor oral directive given by the principal or master to the servant or agent, indicating the servant is to act for the principal and is subject to the principal’scontrol,issufficienttoshowauthority.946

Undercommonlaw,thetaxpayer-preparerrelationshipwouldresultin the taxpayer being the principal or master and the return-preparer beingthetaxpayer’sagentorservant,presumingthatthereisa proper contractual relationship established where the return-preparer is paid for providing services and the taxpayer’s returns are prepared and filed. Therefore, the return-preparer is authorized by the taxpayer to prepare a tax return for the taxpayer, and they often file the return for the taxpayer as well. The taxpayer usually has the ability to discharge thereturn-preparerforjustaboutanyreason.

Under the agency relationship established by contract, the returnpreparer is subject to the taxpayer’s control because the taxpayer is givingthereturn-preparertheirreturninformationwiththeexpectation that it will be used to accurately prepare the taxpayer’s return and determineswhatreturns(e.g.federal,state,orlocal)arecompletedand filed and because the taxpayer will determine if the prepared returns are filed by signing a Form 8879 for electronic filing or mailing the returns. Generally, the taxpayer will expect the returns to be completedincompliancewithlawandregulationssothatthetaxpayer will not be subject to examination. Further, the taxpayer can elect not tosignorfilethereturnthatwasprepared,whichistheultimatecontrol over the return-preparer’s work. And, generally, return-preparers prepare tax returns for others as part of a regular business, which is shown where the return-preparer has a preparer tax identification number (“PTIN”), which is required by the IRS for third-parties to prepare and file returns for taxpayers.947 Thus, agency appears to govern this relationship. However, to be clear, this relationship does not apply for the return-preparer practicing before the IRS for the taxpayer.

945 Id. (referringtoGiles,v.ShellOil Corp., 487A.2d610,613(D.C. Cir.1985)). 946 Id. (quoting Smith, 452 A.2d at 335 (citing the RESTATEMENT (SECOND) OF AGENCY § 26 (AM. LAW INST. 1957)). 947 PTIN Requirements for Tax Return Preparers, irs.gov (http://www.irs.gov/taxprofessionals/ptin-requirements-for-tax-return-preparers, last updated Jan. 6, 2021)(last visitedMay 13,2021).

TheFederalCourtofAppealsaddressedthetaxpayer-prepareragency issue in Loving. 948 In Loving, the District of Columbia Court of Appeals held that a “tax-return preparer does not represent the taxpayer [before the IRS].”949 This court reasoned that a returnpreparerwasnot“practicing”beforetheIRSasanattorney,a certified public accountant, or an enrolled agent would.950 It concluded this because preparing a tax return does not constitute representing a case for the IRS to consider.951 However, Loving falls short of stating that there is no agency relationship between a taxpayer and a returnpreparer.952

Sodoesagencyapply?I argueitdoes,butnotinthesensethat Loving wascontemplating: anagentpracticing beforetheIRS.Rather,inthis relationship, the return-preparer is contracting with a taxpayer to provide a service (return preparation) with the expectation that the return will be prepared accurately and correctly (complying with the TaxCode,TreasuryRegulations,andotherIRSguidance).Thiswould benodifferentthana taxpayercontractingwitha C.P.A.oranattorney to get tax advice (e.g. estate planning to minimize gift taxation, legitimacyofa taxshelter,convertinganindividualretirementaccount to a Roth individual retirement account, etc.) after sharing the taxpayer’s facts and circumstances. In these circumstances, the taxpayerisnotrelyingonoraskinga Circular230agent(i.e.a C.P.A., an attorney, or an enrolled agent) to represent them before the IRS. Instead, the taxpayer is consulting with someone versed in return preparationtodeterminea courseofaction(e.g. which taxformstobe completed and completing them), and then acting on that plan. So Loving wouldnotcontrolhere.

In a taxpayer-preparer relationship, I contend that agency is present androlesareclear.Thetaxpayeristhemasterwithoneintent:tohave tax returns prepared (and filed) by another for personal reasons (e.g. too complex, no time, does not understand, etc.). And the returnpreparer is the servant: the return-preparer completes tax forms with the taxpayer’s information and may file it with the IRS, too. And, generally, the return-preparer accepts compensation for rendering

948 Lovingv.IRS,742F.3d1013,1015(D.C. Cir.2013). 949 Id. at 1017-18. 950 Id. 951 Id. at1017-18. 952 Id. at1020-22.

these services for which the taxpayer receives a completed tax return thatmayalsobefiledwiththeIRSandothertaxingauthorities.

So where an agency relationship can be shown, the master’s intent is what is key versus the servant’s intent when acting for the master. Where the servant fully represents a master’s wishes, the master is bound.953 Whereas, where the servant represents only his or her own wishes, the master is not bound; rather, the servant is.954 Thus, a servant cannot impute his or her intent upon a master that did not authorizetheservant’sactions.955

Inthecontextwheretaxreturnsareprepared,thetaxpayer’sintentand expectations are that returns are prepared correctly, and when this is done, the taxpayer should be held accountable by the IRS for the tax positiontaken.However,wherethereturn-preparer’sintenttodefraud ormisrepresentoverridesthetaxpayer’sintent,thetaxpayercannotbe held accountable by the IRS, because the servant is not representing the master’s wishes; this destroys the agency relationship, leaving the servantonhisorherown.Underthispremise,theIRSmustrecognize that only the three-year limitations period applies when a returnpreparer misrepresents a taxpayer position in a prepared tax return because there is no taxpayer intent to defraud or misrepresent in an agency relationship described in Allen, Eriksen, BASR P’ship, or the like.Instead,thereisonlya servantorreturn-preparerintenttodefraud ormisrepresent.

Consequently, if it is all about agency, then, somehow, some courts got it wrong when they extended the limitations period. I believe the simplest explanation is that the IRS was looking for an efficient and easywaytopenalizetaxevaders,andsomecourtsallowedit.

Imputing willfulness is more efficient for the IRS because the government need only show that one return-preparer was willful then that willfulness could be applied to many taxpayers (e.g. Allen and Eriksen). It is easier because the IRS did not need to show every taxpayerwaswillful;rather,thegovernmentcouldimputewillfulness onto a taxpayer based on their return-preparer’s intent being shown elsewhere (usually a criminal trial) as willful (e.g. Allen). Whereas,

953 RESTATEMENT(THIRD)OFAGENCY, §§ 8.01—8.12.(Am.LawInst.2006).

954 Id. 955 Id.

under agency law, the prosecution’s job would be both less efficient andmoredifficult.

Under agency theory, the process would be less efficient because the prosecution must show that each taxpayer was willful. Put in agency terms, each master (the taxpayer) must be shown to be willful not the servant (the return-preparer). That means no more lumping many taxpayers into one group and prosecuting them all at once (e.g. Allen, where the return-preparer was found guilty of willfully misrepresentingatleast30times,or Eriksen, wherethedeputieswere lumped together in one group). Separate assessments and trials for each will be needed, which costs time and money. Then, the governmentmustshowthateachtaxpayerknewhisorherreturnswere beingmisrepresentedbya return-preparer,orthetaxpayerdirectedthe return-preparer to misrepresent or defraud the government. Under the Cheek decision, which carved out an exception for ignorance of the law, that is difficult because the taxpayer need only show ignorance. The Cheek courtheldthatthegovernmenthasa higherburdentoshow willfulness (clear and convincing); whereas, the taxpayer has a lowered burden (preponderance of the evidence) to defeat the government’scontentions.

This is more difficult for the government to show for a few reasons. From caselaw, taxpayers do not always stipulate to their willfulness nor are willing to self-incriminate, so willfulness must be shown through evidence. Consider the two groups of deputies in Eriksen. There was one deputy who did stipulate to misrepresenting her businessexpenses,andthe Eriksen courtheldopenherreturnposition. However, for the other deputies, they did not stipulate to misrepresentingordefraudingthegovernment.Rather,theycontended thatonlytheirreturn-preparerhad.Theprosecutionspenta lotoftime trying to prove its case against this second group. But, in the end, the government was not able to overcome the taxpayer’s argument becausetheevidenceavailablewasnotsupportive,wastenuous,ordid not exist. So the Eriksen court refused to extend their limitations periods for this group. I cannot criticize the government for seeking efficientandeasierwaystopenalizetaxevaders,andI do notfaultthe courts for enabling this; the ends justify the means.956 However, it is time for change. If the government wants to ignore agency and hold open returns under the fraud exception for return-preparer actions,

956 NICCOLÒ MACHIAVELLI, THEPRINCECH. XVIII(1532).

Congress needs to change the Tax Code, or the IRS needs to promulgate regulations that would receive Chevron deference and allow this. Otherwise, courts must recognize that only taxpayer willfulnesswillholdopentaxreturnsunderthefalse-returnexception.

C. Andisn’titreallyabouttaxpayerintent?

In short, it is. The taxpayer’s intent is the crux of all tax-evasion and tax-fraud issues and should be the only determining factor for the limitations period to be held open. I have concluded this because it is consistentwiththeTaxCode’sfocusonwillfulnessthat,whenshown, is the intent required for a tax crime or for penalization. In case after case, where no willfulness is shown, the IRS cannot seek criminal punishment norcivil penalties (e.g. Cheek).Sowhywould a taxpayer who uses a return-preparer expect to be treated any different? That taxpayershouldnot.

Myreasoningissimple.TheTaxCodeturnsonwillfulness,oratleast thatiswhattheSupremeCourtandCongresshavesaidonthematter. After holding in Cheek that an ignorant or innocent taxpayer—one with no willfulness or intent to defraud—cannot be held accountable for violating an unknown legal duty or obligation, the Supreme Court never looked back and has not overruled that decision.957 And since that holding decades ago, Congress has not intervened to change the Cheek ruling by modifying the Tax Code. Thus, taxpayer intent is the primarydeterminingfactorastowhetherthelimitationsperiodshould beheldopenduetofraudormisrepresentation. Cheek isuniqueinthat it allows for ignorance of the law to bar the government from punishing or penalizing a taxpayer. So where an ignorant taxpayer relies, in good faith, on a return-preparer, why should the results be any different? Where there is no intent to defraud or misrepresent because of ignorance, the U.S. Supreme Court has spoken: Where a taxpayer was not acting willfully to misrepresent or defraud the government, the taxpayer cannot be punished or penalized, which wouldincludeextendingthelimitationsperiodindefinitely.TheOffice of Chief Counsel came to the same conclusion, as did the Court of Claims as well as the Federal Court of Appeals in BASR P’ship, and someCircuitsconcurwiththisassessment,too(e.g. Eriksen).

957 Cheekv.United States,498U.S.192(1991).

D. Mightthisinterpretationlead to abuse?

Where return-preparers see opportunities to make money off unsuspecting taxpayers, they will. Some will be inclined to misrepresent a taxpayer’s expenses to reduce taxable income (as seen in Eriksen or Allen) or to garnermorebusiness(Eriksen). Whileothers may prepare wholly fraudulent returns that benefit an innocent taxpayer, as seen in BSAR P’ship, City Wide Transit, or Finnegan, becausethetaxpayerdidnotknowanybetter.Eitherway,theIRShas beensuccessfulatidentifyingtheseabusersinthepast,anditcontinues to do so now.958 When it does, it has two ways to deal with returnpreparers: penaltiesandcourtactions.

The IRC has a civil-penalty section devoted to return-preparers.959 Return-preparers who are not diligent in determining tax-credit availabilitywillfacepenaltiesof$500.00peroccurrence.960 However, civilpenaltiesforaidingandabettingtaxunderstatementsarestiffer.961 Civil aiding and abetting is shown where a return-preparer aids or advises a taxpayer in return preparation and knows, or should know, thatatleastpartofthepreparedreturnwillbefiledandknowsthatthe prepared return will result in an understatement.962 Where shown, the penaltywillbe$1,000forindividualreturnsand$10,000forbusiness returns.963 The taxpayer need not know that the return-preparer is misrepresenting the taxpayer’s position.964 This extends to subordinates under the return-preparer’s control.965 But it does not applytoa personwhotypes,reproduces,orprovidesothermechanical

958 United Statesv.Senat, No.20-10777, ___ F. App’x ___,2021U.S.App. LEXIS 17654, *1 (11th Cir. June 14, 2021)(holding for the government in an appeal in a criminal conviction for “aiding and assisting the preparation of false tax returns, in violation of 26 U.S.C. §7206(2)”); United States v. Hairston,825F.App’x 327,328 (6thCir.2020)(holdingforthegovernmentinanappeal in acriminalconvictionfor “twenty-five counts of assisting in the preparation of false tax returns. . .”); and United States v. Manlapaz, 825 F. App’x 109, 111 (4th Cir. 2020)(holding for the government in an appeal in a criminal conviction for commiting “27 counts of assisting in thepreparationoffalsetaxreturns.. .”). 959 IRC §6695(2018);IRC §6701(2018). 960 IRC § 6695(g)(2018). 961 IRC § 6701(2018). 962 IRC § 6701(a)(2018). 963 IRC § 6701(b)(2018). 964 IRC § 6701(d)(2018). 965 IRC § 6701(c)(2018).

assistance.966 And these penalties can be in addition to other coordinated penalties.967 When civil penalties are not suffice to deter fraudulentreturnpreparation,thegovernmentcantakeactionincourt.

As an example, in United States v. ITS Fin., LLC, 2013 U.S. Dist. LEXIS 160171 (2013), the nation’s fourth largest return-preparer business(InstantTaxServiceorITSFinancial)wasfoundtobeusing fake Form W-2s in preparing tax returns for low-income clients.968 Thistaxpreparationfirmalsousedunsupportedmileagedeductionsto lower taxable income for its clients.969 The IRS used field audits and electronic-return monitoring to determine that ITS Financial was not complying with the Tax Code.970 The government sought out injunctive relief and received it.971 The government was able to show that this business, through its return-preparers, was substantially interfering with internal-revenue laws,972 eventually shut down the franchise,andpermanentlyenjoinedthecompany’sagentsfrombeing involved in tax preparation services again.973 So, clearly, the IRS, in conjunction with other governmental agencies, can determine when return-preparersareviolatingthelaw,and,wherenecessary,shutthem down and enjoin them from working within this industry ever again.

974

966 IRC § 6701(e)(2018). 967 IRC § 6701(f) (2018). 968 United States v. ITS Fin., LLC, 2013 U.S. Dist. LEXIS 160171, at *11-12 (S.D. OhioNov.6,2013). 969 Id. at *11. 970 Id. at *21. 971 Id. at *29.

972 Id. 973 United Statesv.ITS Fin.,LLC,2013 U.S. Dist. LEXIS177200,at*2(S.D. Ohio Nov.6,2013). 974 Aysha Bagchi, Liberty Tax Settles with DOJ Over Fraudulent Returns, BLOOMBERG LAW (Dec. 3, 2019), . http://www.bloomberglaw.com/product/tax/document/X3SMBISG000000?emc=B LTX%3A273154791%3A6&link=ewogICAgImN0eHQiOiAiRE9DIiwKICAgICJp ZCI6ICJYM1NNQklTRzAwMDAwMD9yZXNvdXJjZV9pZD02YTcxZjkzMzk4 MzI3NzI2MDA5ZmIzNTQwYTNiOTRhOSIsCiAgICAic2lnIjogInBpKzBCWU83 azlFK05FZlhFcUJTRGhcLzI4RWc9IiwKICAgICJ0aW1lIjogIjE1NzU0NzE2OTci LAogICAgInV1aWQiOiAiV2Q4N1RPcHNvaXozbmpXVlJRM3A1UT09UVJJa2 hwcFBIbW5BdVF2eWFQbEFSQT09IiwKICAgICJ2IjogIjEiCn0K&resource _ id=6 a71f93398327726009fb3540a3b94a9&search32= (referring to United States v. Franchise Group Intermediate L1, LLC, Docket No. 2:19-cv-00653 (E.D. Va. Dec. 3, 2019) where the government and Liberty Tax Service are settling their issues related to earned-income tax credits, fabricated expenses, false or improper

Withouta doubt,sometaxpayerswillabusethisbyclaiminginnocence whenthetaxpayerwaswillful,aswasseenin Eriksen withthedeputy that stipulated to misrepresenting her position and later challenged it. There will always be tax cheats. . .that is a foregone conclusion. But the present system works, which was shown in Eriksen. The IRS can identifyreturn-preparerswhoarecheatingthesystemfortheirclients. “Badges of fraud” routinely flag returns for examination by IRS agents. And where the taxpayer intent does not rise to criminal willfulness, because there are fewer indications that fraud or misrepresentation is present, the IRS has been effective in using civil penaltiestochangetaxpayerbehavior.

TheunspokenissuepervadingthesecasesisthattheIRSdoesnothave the resources to adequately examine taxpayer returns, investigate return-preparer fraud, and assess penalties on those who defraud or misrepresent.975 Thecourtsseethis,andtheyareusingtheirpowersto assist the government to collect taxes, interest, and penalties when Congress is unwilling or unable to provide adequate funding to the IRS.Underthisreasoning, Allen makes sense.The Allen courtusedits power to establish a case precedent that strictly favored the IRS by holding open the limitations period so the IRS could eventually examinereturnsandpenalizebeyondthethree-yearlimitationsperiod. In this way, the IRS, with limited resources, can assess taxes when it has agents available. So, although it does not provide the government witha fix(morefunding),itdoesprovidea remedy(moretime),butis inequitableandnotconsistentwith punishingwillfuloffenders.

dependents, and fraudulent claims for education credits at numerous Liberty Tax franchisesmakingitsubject to penalties underIRC §§ 6694,6695,or6701), see also Department of Justice, Dallas Tax Return Preparer Pleads Guilty to Preparing False Tax Returns, JUSTICE NEWS, http://www.justice.gov/opa/pr/dallas-tax-returnpreparer-pleads-guilty-preparing-false-tax-returns(lastvisitedNovember24,2019); Department of Justice, North Carolina Tax Return Preparer Pleads Guilty to Conspiracy to Defraud the IRS, JUSTICENEWS http://www.justice.gov/opa/pr/northcarolina-tax-return-preparer-pleads-guilty-conspiracy-defraud-irs (last visited November24, 2019); Department of Justice, Brooklyn Tax Preparer Pleads Guilty to Preparing Fraudulent Tax Returns for Clients and Himself, JUSTICE NEWS http://www.justice.gov/usao-edny/pr/brooklyn-tax-preparer-pleads-guiltypreparing-fraudulent-tax-returns-clients-and (last visited November 24, 2019); and Department of Justice, Tax Preparer Pleads Guilty to Filing False Returns, JUSTICE NEWS, http://www.justice.gov/usao-wdmo/pr/tax-preparer-pleads-guilty-filingfalse-returns(lastvisitedNovember24,2019). 975 See note 352, supra.

ThefixshouldcomefromCongressthroughadequatefundingforU.S. TreasuryoperationsandspecificallytheIRS’staxcollectionactivities. WhenCongressdecidesthatcollectingtaxesthataredueandowingis a high priority, it will increase the IRS’s funding to collect what is already owed. That would result in more automated exams, more automated collections, more manual exams, more manual collections, more agents collecting on already-assessed taxes, more agents being hired to examine returns, and more civil collection actions being brought to court. Put simply, Congress must conclude that tax collectionisworthfundingadequatelysothetimeneededtocollecton taxesdueandowingisnolongeranissue.Then,thelimitationsperiod will not need to be extended through the courts because the IRS will beabletoadequatelydoits jobpromptly.

E. Conclusion

The IRS should not be able to hold open the limitations period indefinitely when an innocent taxpayer uses a return-preparer who commitsfraudormisrepresentsthetaxpayer’sposition,asdetermined by the Office of Chief Counsel in its guidance and as held in Eriksen and BASR P’ship. The IRS should not look to impute intent onto another to extend limitations periods, so it can collect taxes due and owing later. Rather, only when there is taxpayer intent to defraud the government or misrepresent a tax position should a taxpayer be held accountable for his or her actions. And for a taxpayer who commits fraud or misrepresents a tax position, the limitations period should be held open indefinitely by the IRS to allow it to thoroughly examine andassesstaxes,penalties,andinterestona willfultaxpayer.Whereas, ifthereisnotaxpayerintenttodefraudthegovernmentormisrepresent a tax position—based on clear and convincing facts and circumstances—and the taxpayer used a return-preparer who was willful in evading taxes or misrepresenting the taxpayer’s position, only the return-preparer should be held accountable because only the return-preparer had the requisite intent and acted on that intent by creatinga falsereturn.Andwhenthereturn-preparerissolelythecause formisrepresentationorfraud,thetaxpayer’slimitationsperiodshould benomorethanthreeyears.

If this position is adopted, I would posit that Congress might want to pass legislation to be assured that return-preparers will comply.

Congress can choose to impute the taxes, interest, and penalties from theinnocent taxpayertothewillfulreturn-preparerincaseswherethe return-preparercommittedfraudormisrepresentation,whichparallels what is in place currently for trust-fund fraud or fraud related to withholdingtaxesbeingabscondedbya responsibleperson.Congress couldevenholdopenthelimitationsperiodagainstdefraudingreturnpreparers longer to allow the IRS to adequately investigate and bring actions against these people, which would be akin to what is in place for substantial under-reporting cases where the limitations period is extendedtosixyears.I suggestthisbecausetheIRSwouldstillbeable to collect the taxes, interest, and penalties it would have assessed on the taxpayer, so the government can still collect what it is due. And thiswouldcreatea verystrongdeterrencefortheIRS.Itwouldhavea tool to compel return-preparers not to defraud or misrepresent a taxpayer’sposition.Deterrencewouldbeespeciallystrongifthetaxes, interest, and penalties were treated as non-dischargeable tax debt in bankruptcy much like trust-fund cases and excise taxes are treated now.

The Distinguished Brief Award is given in recognition ofthe most scholarly briefs filed before the Michigan Supreme Court, as determined by a panel of imminent jurists. Two briefs are chosen each year and printed in the WesternMichigan University Thomas M. Cooley Law Review. To preserve the author's style, the brief has been reprinted in its entirety, exactly as submitted to the Michigan Supreme Court

INTRODUCTION

PEOPLE OFTHESTATEOF MICHIGAN,

v Plaintiffs-Appellee,

KELLYWARREN,

Defendant-Appellant. BRIEFONAPPEAL OF DEFENDANTS-APPELLANTS

ABSTRACT

The People’s brief in People v Warren addressed whether trial courts are required—either by our court rules or the Due Process Clause— to inform defendants about the possibility of consecutive sentences before accepting guilty pleas. Michigan’s court rule on the acceptance of guilty pleas, the People’s brief pointed out, was notably silent on this point, despite several attempts over the years to write in this requirement. That history, coupled with the rule’s plain language, compelled the conclusion that the court rule does not require this information. As for the Due Process Clause, its role in this area is quite limited, requiring only that trial courts inform defendants about the “definite, immediate, and largely automatic” consequences of their plea. Citing the consensus of courts on this question, the People argued that the possibility of discretionary consecutive sentencing did not fit that narrow category of information. The People encouraged the Court to address this perceived blind spot in the guilty-plea procedure using its constitutional rule-making authority, not via a