A tax preparer's intentional inclusion of false itemized deductions on Schedule A means that the statute of limitations never ends.

The normal rule is that the IRS only has three years after a tax return is filed to assess additional tax.  Once the three years have passed, the IRS can't come back and audit the return.  There are exceptions to this rule, however.  For example, a substantial understatement of gross income (more than 25% of the amount of gross income stated in the filed return) extends the statute of limitations to six years.

Under some circumstances, there is no statute of limitations.  If a false or fraudulent return is filed with the intent to evade tax, then there is no time limitation on audit or assessment. 

What if you give your tax preparer accurate information, but he invents false deductions and puts them on your Schedule A, and then you sign and file the return without realizing what has happened?  The US Tax Court recently answered that question, holding that even if the taxpayer did not intend to evade any tax, if his tax preparer used false information with the intent of evading tax, the statute of limitations never ends.  Vincent Allen, 128 T.C. No. 4 (2007)

In that case, Gregory Goosby prepared Mr. Allen's tax returns.  Mr. Allen gave Mr. Goosby his W-2's, 401(k) statements, mortgage interest statement and property tax statement for the years 1999 and 2000.  Mr. Goosby fabricated charitable contributions, meals and entertainment expenses and pager and computer expenses and added them as itemized deductions on Mr. Allen's Schedule A's for those years.  Mr. Allen signed and filed the returns by the due dates, and received copies of them from Goosby. 

In March, 2005, almost five years after filing his 1999 return, and almost four years after filing the 2000 return, the IRS issued deficiency notices to Mr. Allen, disallowing a number of the itemized deductions for those years.  Mr. Allen petitioned the US Tax Court, and the IRS stipulated that Mr. Allen did not have any intent to evade tax when he signed and filed his 1999 and 2000 returns.  Mr. Allen agreed that the returns contained false deductions, and that Mr. Goosby had included the deductions with intent to evade tax.

The Tax Court reasoned that every taxpayer is obligated to review his returns for items that are obviously false or incorrect and "cannot hide behind an agent's fraudulent preparation of his returns."  It held that because Mr. Allen received copies of the returns, and did not file amended returns for those years correcting the errors, he should be required to pay the tax due and should not have the benefit of any statute of limitations.

Apparently, it had been Mr. Goosby's practice to prepare fraudulent tax returns.  In 2006 he was indicted, tried and convicted of 30 violations of willfully aiding and assisting other clients in the preparation of false and fraudulent income tax returns.  By allowing the IRS an indefinite amount of time to assess deficiencies in cases like these, the Tax Court gives the IRS ample opportunity to examine all of the other returns prepared by Mr. Goosby without any deadlines.

This case illustrates how important it is to have an honest tax preparer that you can trust to protect you from a lifetime of looking over your shoulder.


 


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