Preparer’s intent to evade tax extends taxpayer’s limitation period

The Third Circuit, affirming the Tax Court, held that the “intent to evade tax” necessary to trigger the Sec. 6501(c)(1) exception to the three–year statute–of–limitation period on assessment is not limited to the taxpayer’s intent and can include the intent of the taxpayer’s tax preparer.

Background

Stephanie Murrin underpaid her taxes from 1993 to 1999 because her tax preparer, Duane Howell, placed false or fraudulent entries on her tax returns with an intent to evade tax. Murrin did not intend to evade tax and was not involved in Howell’s entries of false or fraudulent information on her returns.

Many years later, in 2019, the IRS took action against Murrin, issuing her a notice of deficiency for the underpayments on her tax returns between 1993 and 1999. Murrin challenged the deficiency in Tax Court. She agreed with the IRS that she had underpaid her tax for those years and that she was liable for an underpayment penalty; however, she argued that the IRS had not assessed the amounts due within the three–year statute of limitation on assessment in Sec. 6501(a).

The Tax Court held that the statute of limitation on assessment was still open under Sec. 6501(c)(1) because Howell prepared Murrin’s false or fraudulent tax returns with an intent to evade tax, and, consequently, the normal three–year statute–of–limitation period under Sec. 6501(a) did not bar the IRS’s notice of deficiency (Murrin, T.C. Memo. 2024–10). Murrin appealed the Tax Court’s decision to the Third Circuit.

The Third Circuit’s decision

The Third Circuit, affirming the Tax Court, held that taxpayer intent to evade tax is not required for the Sec. 6501(c)(1) exception to the Sec. 6501(a) three–year statute of limitation to apply. Therefore, the intent to evade tax by Murrin’s tax preparer was sufficient to subject Murrin to Sec. 6501(c)(1)’s indefinite period for assessment.

As the Third Circuit explained, Sec. 6501(a) states that “any tax imposed by [the Code] shall be assessed within 3 years after the return was filed” — that is, three years from the filing of “the return required to be filed by the taxpayer.” However, Sec. 6501(c)(1) provides an exception to the three–year statute of limitation, stating that “[i]n the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.” To determine whether taxpayer intent is necessary to trigger the Sec. 6501(c)(1) exception, the court analyzed (1) the text of Sec. 6501(c)(1), (2) its statutory context, and (3) relevant case law precedent. The court found that all three showed that “intent to evade tax” for purposes of Sec. 6501(c) is not limited to a taxpayer’s intent.

Text of Sec. 6501(c)(1): In analyzing the plain text of the statute, the Third Circuit, citing the Supreme Court in Williams v. Taylor, 529 U.S. 420, 431 (2000), said it was required to give the statute’s words their “ordinary, contemporary, common meaning,” absent an indication Congress intended them to bear a different meaning.

The Third Circuit found that the plain and ordinary meaning of the phrase “intent to evade tax” in Sec. 6501(c)(1) reveals no taxpayer–only limitation. In the court’s view, neither “intent” nor “to evade” confined the phrase “intent to evade tax” to a taxpayer because nothing about either term is restricted to certain individuals. “[W]hile an ‘intent to evade’ does concern the taxes a taxpayer owes,” the court stated, “the plain meaning of the words does not imply a specific actor.”

The Third Circuit also found that Congress’s use of the passive voice in Sec. 6501(c)(1) further showed that the statute does not depend on a taxpayer’s intent. As the court observed, the Supreme Court has stated that Congress drafted Sec. 6501(c)(1) using the passive voice to focus “on an event that occurs without respect to a specific actor, and therefore without respect to any [specific] actor’s intent or culpability” (Dean, 556 U.S. 568, 572 (2009)). Thus, the court concluded that by wording the provision this way, without listing who must intend to evade tax, Congress was “agnostic” about who must evade tax, and, therefore, taxpayer intent is not required.

Statutory context: The Supreme Court has stated, “It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme” (Davis v. Michigan Department of Treasury, 489 U.S. 803, 809 (1989)). The Third Circuit found that the statutory context showed that Congress knows how to limit statutes to taxpayer conduct but did not do so in Sec. 6501(c)(1).

The Third Circuit contrasted Sec. 6501(c)(1) with Secs. 6663, 6664, and 7454. Sec. 6663(a) authorizes the IRS to impose a fraud penalty when “any part of any underpayment of tax required to be shown on a return is due to fraud.” However, the fraud penalty does not apply when “the taxpayer acted in good faith” and had “reasonable cause” (Sec. 6664(c)(1)). It also does not apply to a joint return filed by a married couple with respect to a spouse unless some part of an underpayment is “due to the fraud of such spouse” (Sec. 6663(c)). And “[i]n any proceeding involving the issue whether [the taxpayer] has been guilty of fraud with intent to evade tax,” the IRS carries the burden of proof on that issue (Sec. 7454(a)).

The Third Circuit found that two important lessons flow from the Code’s fraud provisions in Secs. 6663, 6664, and 7454. The first is that the fraud penalty in Sec. 6663(a) simply states it applies when an underpayment is “due to fraud,” but because of Congress’s three references to a taxpayer’s conduct in Secs. 6663(c), 6664(c)(1), and 7454(a), it is clear from the context that the “fraud” in Sec. 6663(a) refers to that of a taxpayer and not a third party’s fraud. However, for the phrase “intent to evade tax” in Sec. 6501(c)(1), Congress included no such contextual limitation, which confirmed to the court that “intent to evade tax” includes no implied limitation.

The second lesson the Third Circuit found flowed from Secs. 6663, 6664, and 7454 is that Congress knows how to limit statutes to taxpayers. As a result, the Third Circuit stated that it was “difficult to believe that despite Congress limiting provisions elsewhere by reference to a taxpayer’s conduct or allegations directed against the taxpayer, Congress included a limitation within ‘a false or fraudulent return with the intent to evade tax’ [in Sec. 6501(c)] despite not saying so.”

Case law precedent: With regard to the relevant case law precedent, the Third Circuit found that its position on Sec. 6501(c) was supported by the Supreme Court’s analysis of Congress’s use of the passive voice in Bartenwerfer v. Buckley, 598 U.S. 69 (2023). In that case, the Supreme Court analyzed a provision of the Bankruptcy Code, 11 U.S.C. Section 523(a)(2)(A), which specifies that debt is not dischargeable when money is obtained by fraud. The plaintiff in the case, Kate Bartenwerfer, did not know about the fraud committed by her partner, so she argued that Bankruptcy Code Section 523(a)(2)(A) did not apply and that thus the judgment against her was dischargeable in bankruptcy. She reasoned that the statute is most naturally read to bar the discharge of debts for money obtained by the debtor’s fraud, because the passive voice of the statute “hides the relevant actor in plain sight” (id. at 75). The Supreme Court unanimously disagreed, finding that the statute’s “[p]assive voice pull[ed] the actor off the stage,” meaning that all the Bankruptcy Code required was that “debt must result from someone’s fraud” (id. at 75–76).

According to the Third Circuit, Sec. 6501(c)(1)’s “intent to evade tax” language is similar to the “obtained by fraud” language in Bankruptcy Code Section 523(a)(2)(A) at issue in Bartenwerfer. In both cases, the language does not identify who must intend to evade tax or who must obtain property by fraud. But like the language in Bankruptcy Code Section 523(a)(2)(A), the court found that Sec. 6501(c)(1) “focuses on an event without regard to an actor — that is, Congress focused on a ‘false or fraudulent return with the intent to evade tax’ without saying who must act.” By pulling the taxpayer off the stage, the court concluded, Congress had made it clear that the exception in Sec. 6501(c)(1) applies when someone intends to evade tax in the filing of a false or fraudulent return, whether it is the taxpayer or not.

The Third Circuit in addition found that the Supreme Court’s analysis in Bartenwerfer about the use of the passive voice in statutes aligned with the last opinion in which the Court interpreted Sec. 6501(c)(1), Badaracco, 464 U.S. 386 (1984). In its opinion in Badaracco, the Supreme Court explained that a statute of limitation like Sec. 6501(c)(1) “must receive a strict construction in favor of the Government” (id. at 391, quoting E.I. Dupont de Nemours & Co. v. Davis, 264 U.S. 456, 462 (1924)). The Third Circuit noted that the taxpayers’ position in Badaracco was like Murrin’s, with both advocating for a position unsupported by the statute’s generally applicable language. Based on Badaracco, the court determined it must read that language in the IRS’s favor. Thus, the Third Circuit stated, “we see nothing in the text of [Sec.] 6501(c)(1) or in case law from the Supreme Court supporting Murrin’s preferred interpretation; instead, we see case law supporting the opposite conclusion.”

Reflections

In BASR Partnership, 795 F.3d 1338 (Fed. Cir. 2015), the Federal Circuit held that Sec. 6501(c)(1) suspends the three–year limitation period only when the IRS establishes that the taxpayer, and not a third party, acted with the intent to evade tax. The Federal Circuit based its opinion on an examination of the overall statutory scheme of the Code, the case law, and Sec. 6501(c)(1)’s historical roots. However, the BASR Partnership opinion predates the Supreme Court’s analysis of the use of the passive voice in statutes in Bartenwerfer, which the Third Circuit relied on in coming to the opposite conclusion of the Federal Circuit’s.

Murrin, No. 24–2037 (3d Cir. 8/18/25)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.