My earlier article reviewed the various tax statutes of limitations prescribing the length of time the Internal Revenue Service has to audit a taxpayer and assess more tax. The SOL simply does not start if a tax return is false or fraudulent or if there is a “willful” attempt to evade taxation. This means the IRS can look back as far as it wants, no matter how long ago the tax return was filed.
While forever is a long time, what happens if the fraud is not committed by the taxpayer, but by the return preparer who incorporated the fraud into the tax return without the taxpayer’s participation? Is the taxpayer still on the hook? Unfortunately, the IRS and courts have punished innocent taxpayers for the bad actions of others to whom they have entrusted their tax returns.
The Tax Court recently confirmed its earlier holding on this SOL issue when the fraud was committed by the return preparer. In Murrin v. Commissioner, T.C. Memo. 2024-10 (January 24, 2024) the IRS successfully beat the SOL, going back almost 20 years since the tax returns were filed. The IRS very simply relied on the indefinite SOL that applies in cases of fraud or willful tax evasion. The taxpayers did not intend to evade tax, but sadly, their tax return preparer did, and, to that end, he put false or fraudulent information on their tax returns. The Tax Court determined this was sufficient to cause the SOL to remain open indefinitely.
Fraud and the U.S. International Tax Return Preparer
A self-described “international tax expert” was convicted in May, 2024 of 33 counts of tax fraud as a result of filing fraudulent U.S. tax returns for hundreds of clients around the world. According to the U.S. Attorney’s Office (N.D. Texas), although this individual had described himself as an attorney, he was unsuccessful at ever passing the bar exam and had never been licensed to practice law in any State. In addition to claiming fraudulent deductions on tax returns for his clients, he often filed these returns without their knowledge or permission.
While he faces a possible prison term of 99 years, the true victims are the taxpayers who relied on the claims of his international tax expertise to their complete detriment. They are now facing IRS audits, penalties, filing amended tax returns and experiencing significant emotional turmoil and financial hardship.
Five Red Flags
When fraud is committed by a tax return preparer it typically involves the preparer knowingly filing hundreds of tax returns that claim deductions to which taxpayers are simply not entitled. These can take the form of phony medical expenses, or mortgage interest deductions (even when the taxpayer does not own a home), fake dependency claims and more.
Here are some red flags to look out for:
- The taxpayer is not asked to provide proof of earnings, deductions or credits.
- The taxpayer is asked to sign a blank or partially filled-out tax return, or the return is filled out in pencil. Remember, taxpayers are responsible for the final tax return submitted to the IRS, even if the information is later changed by the preparer after the taxpayer has signed. The taxpayer should not feel pressured or rushed to sign the return and must carefully verify all information before signing.
- The return preparer’s fee is based on a percentage of the tax refund.
- Payment of the refund is directed to a bank account over which the taxpayer has no control.
- The return preparer reacts in a threatening or berating manner when questioned or challenged by the taxpayer about the return or positions taken on it.
U.S. International Tax Returns Require Great Care
What do taxpayers need to look out for when engaging a U.S. international tax professional? In a nutshell, due diligence is the order of the day. Check credentials carefully, ask questions, and then ask more questions. If the advisor lacks the U.S. international tax experience needed for the particular case, the taxpayer’s reliance on the tax advice may not be considered “reasonable,” meaning if mistakes are made, tax penalties assessed by the IRS will be upheld by the courts.
When it comes to U.S. international tax, the issues are quite complex. While most tax professionals are honest individuals, many may claim to have the experience needed to assist U.S. taxpayers living abroad or owning foreign assets, but often they simply do not. The temptation to blindly trust the tax professional can be more pronounced when the tax issues are complicated, as is typical for an American with foreign interests. The tax professional must have significant experience with “controlled foreign corporations”, “passive foreign investment companies”, “GILTI”, foreign trusts, foreign tax credit rules, foreign financial assets, to name but a few. The U.S.-based tax professional may not see such cases with any regularity, if at all. Going cheap on tax help is not a panacea when the tax issues are complex, as is typically the case when any U.S. international/foreign tax issues are involved.
Unfortunately, as in the case of fraud, the SOL will not start to run if the taxpayer fails to file certain foreign-related information returns. Having an honest preparer is therefore not enough. The effect of having a return preparer who lacks the relevant international expertise can result in the same unlimited SOL if things are not done right.
Pay attention; be careful out there.
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