Ask The California Employment Tax And Payroll Tax Attorney – The Importance Of Choosing A Tax Return Preparer You Can Trust – The Murrin Case – Part 2

By Robert S. Schriebman
2024

Introduction

This is Part 2 of a 2-Part series.  Choosing a trusted tax return preparer or advisor cannot be overemphasized as will be discussed in this series of articles.  Stephanie Murrin’s tax return preparer was a crook and the fallout from his fraudulent activities caused Ms. Murrin a nightmare of substantially assessed taxes, penalties, and daily accruing interest.

The Murrin Case

Murrin v. Commissioner, US Tax Court T.C. Memo. 2024-10 (January 24, 2023)

Background

This case involves early tax years between 1993 through 1999.  The assessments against Murrin occurred in 2019.  That’s over 20 years!!  How did the IRS legally assess back taxes for these ancient years?  During the years 1993 through 1999 Murrin relied on her tax return preparer, Duane Howell, to prepare joint individual income tax returns as well as two partnerships in which Stephanie Murrin was a general partner.  What Murrin did not know was that Howell placed false or fraudulent entries on those returns with the intent to evade tax.  Murrin did not put any false or fraudulent information on her returns, and she did not intend to evade taxes.  What happened to her was a true nightmare.

After some years the IRS discovered Howell’s fraudulent behavior.  In 2019, despite her innocence, the IRS issued a notice of deficiency to Murrin for the years 1993 through 1999.  The notice determined additional taxes and the accuracy-related penalties under IRC § 6662 against Murrin for all the years in issue.

How is it possible for the IRS to go beyond the basic three-year audit period when the taxpayer herself is innocent?  Admittedly, Murrin signed the returns but did not thoroughly review them.

Basic Rules on Audit Statute of Limitations

The basic rules allowing the IRS to conduct an audit are set forth in IRC §§6501(a) and 6501(c). IRC § 6501(a) states, “…the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed.”  The exception, set forth in IRC § 6501(c), “…in the case of false or fraudulent return with the intent to evade tax, the tax may be assessed…at any time.”  Does the exception mean that the unlimited assessment period applies only when the taxpayer has the fraudulent intent to evade the tax?  OR does the unlimited limitations period also apply if the taxpayer is innocent, but the preparer is the perpetrator of the fraud?

The Allen Case

The US Tax Court has held in a precedential opinion that section 6501(c) exception to the statute of limitations encompasses the case where a tax return preparer prepares a false or fraudulent return with the intent to evade tax.  Allen v. Commissioner, 128 TC 37 (2007).

Stephanie Murrin argued that the Allen case was wrongfully decided, and the issue of fraud should be limited to that of the taxpayer only.  Tax Court Judge Urda disagreed.  The judge held that the Allen case was correctly decided, and that the unlimited exception set forth in IRC § 6501(c) did not restrict the application to cases where taxpayers personally had the intent to evade tax.   Nothing in the plain meaning of the statute suggests the limitations period is extended only in the case of the taxpayer’s fraud.  In Judge Urda’s words, “Instead, Congress showed itself agnostic as to who had to have the intent to evade tax, choosing to key the extension of the limitation period to the fraudulent nature of the return rather than tie it to the taxpayer’s intent.  The obvious construction of the statutory text is that the intent to evade tax must be present in a false or fraudulent return, irrespective of who possess that intent.”  See also BASR P’ship v US, 795F.3d 1338 (Fed.Cir. 2015).

EDD Audit Statute of Limitations

The statute of limitations for EDD audits are found in CUIC §§ 1126 through 1137.  Generally speaking, the audit period of limitations is three years following the due date of a tax return or a specific quarter.  If quarterly returns have not been filed, the EDD can go back as far as 8 years.  If the EDD finds a return is due to fraud or intent to evade, there is no statute of limitations per CUIC § 1132.

FTB Audit Statute of Limitations

The general rule for auditing FTB income tax returns it set forth in R&TC § 19306.  The basic rule is the later of 4 years from the date the return was filed, but only if the return is filed on time by the due date, or the extended due date.  If the FTB believes that a false or fraudulent return with the intent to evade has been filed, there is no statute of limitations for examination.  See R&TC §§ 19057 and 19087.

Conclusion

The Murrin decision did not mention the dollar amount assessed to Murrin.  But it had to be staggering going back more than 20 years!  The initial tax assessment would have more than doubled.  The Court did not discuss any arguments relating to the abatement of the accuracy-related 20% negligence penalty. Penalties and accruing interest on those penalties, on the average, account for about 40% of the overall assessment.

The Murrin case presents a very clear example of the importance of choosing your tax return preparer and tax advisor wisely.  Murrin may have been pleased at the relatively low amounts of taxes during the years 1993 through 1999.  I would be willing to wager that a small voice was telling her that something was wrong.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.  Mr. Schriebman is in private practice.  He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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