For years, the standard advice was simple: keep your tax records for three years. That is how long the IRS generally has to audit a return under the statute of limitations in Section 6501(a). File your return, wait three years, and the year is closed.
That advice is no longer safe to give, at least not to any client whose return was prepared with help from a third party.
In a recent decision, the Third Circuit Court of Appeals ruled in Murrin v. Commissioner that the IRS's unlimited audit window under Section 6501(c)(1) applies even when the taxpayer had absolutely no intent to evade taxes. The case involved Stephanie Murrin, who relied on a return preparer named Duane Howell to file her returns from 1993 to 1999. Howell turned out to be a fraud, and he pleaded guilty in 2007 to preparing false returns for clients. Murrin herself was entirely innocent. She had no idea her returns contained fraudulent entries. The IRS still issued a notice of deficiency in 2019, more than 26 years after the first year at issue.
The court upheld the assessment.
Section 6501(c)(1) says that in the case of a false or fraudulent return "with the intent to evade tax," the IRS has unlimited time to assess. Murrin argued, reasonably, that since she had no fraudulent intent, the exception should not apply. The Third Circuit disagreed, ruling that the intent to evade can belong to anyone involved in preparing the return, not just the taxpayer.
What does this mean practically? If a return preparer is ever convicted of fraud, even fraud unrelated to your client's specific return, your client's tax years could be reopened indefinitely. The IRS has already shown it uses criminal convictions as a trigger to audit the convicted preparer's entire client list. One recent case involved a preparer with 90,000 clients. Every one of those clients is now potentially subject to audit with no time limitation, regardless of their own innocence.
The Third Circuit's position currently conflicts with the Federal Circuit, which has held that only the taxpayer's intent matters. That means where a client files, Tax Court versus a refund suit, affects which rule applies. For now, there is a circuit split, and Congress has not resolved it.
Here is what you need to communicate to your clients, and what you need to do in your practice:
If a client's return was ever prepared by someone other than themselves, and that means virtually every client you serve, the three-year comfort zone no longer applies with certainty. Until Congress clarifies the law or the Supreme Court steps in, clients should retain their tax records, supporting documentation, and related financial records indefinitely.
On the defensive side, if the IRS invokes the unlimited period based on a preparer's criminal conviction, the burden is still on the government to prove fraud by clear and convincing evidence as to each specific return. That proof is not automatic. Returns not specifically identified in the criminal prosecution documents, and clients who can demonstrate that disputed deductions represented legitimate expenses, have successfully challenged IRS assessments in these situations.
The bottom line for practitioners: update your client communications, revisit your engagement letters, and start advising permanent record retention for anyone who has ever used a paid preparer. The law has changed, and your clients need to know.
Dr. Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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