Section 6501(a) does place limits on assessments. With certain limited exceptions not relevant here, the Commissioner must assess a tax liability within three years after a return is filed. Sec. 6501(a). Crites argues that because penalties are generally included within the definition of "tax", see sec. 6665(a)(2), section 6501(a) prevents the Commissioner from assessing a penalty against her under section 6702(a) more than three years from the time she filed her original return.
We disagree. As the Commissioner observes, penalties under section 6702 do not have a readily observable statute of limitations. The section penalizes not just frivolous "returns"—and even here Congress was careful to penalize not just returns but "what purports to be a return"—but frivolous "submissions". It would be odd if penalties keyed to "submissions" had somehow to be tied to the limitations period for tax that is supposed to be shown on a "return".
But let us assume—and here we are expressly assuming without deciding—that Crites is right that the filing date of her "return" is the key date. She had two returns, and the one that the Commissioner wants to punish her for is the amended return that she sent the IRS in October 2008. He assessed the penalty in July 2009, well within three years of her submitting it. Crites of course would prefer that we hold that the clock for penalizing her under section 6702 began to run when she filed her original return, but she cites no authority for her implicit proposition that a statute of limitations can start running before a cause of action accrues or, in a case like hers, before a taxpayer even files a sanctionable submission.
Quite apart from Crites's subtle attempt to shift our focus from "submission" to "return", her construction of section 6702(a) would be exceptionally unreasonable. Section 6702's purpose—evident from its text—is to deter frivolous submissions that gum up the IRS's work. If we held that the statute of limitations for the Commissioner to penalize frivolous amended returns began to run with the filing of the original return, section 6702 would quickly lose its deterrent effect. Tax protesters would have no disincentive to submit such frivolities once more than three years had passed from the filing date of an original return.Although, the taxpayer in Crites had a loser because the assessment was within one year of the return being penalized (the amended return), the case does raise the issue of the statute of limitations, if any, that applies for Section 6702. The Court observed that there was no "readily observable statute of limitations." I note in my Federal Tax Procedure book that, in some cases where there is no such readily observable statute of limitations, courts sometimes borrow a statute of limitations applicable to a closely related matter. As noted, since the penalty was a frivolous return penalty, it might be logical to borrow the return statute of limitations, but the Tax Court did not decide the issue. I thought it would be helpful to readers to cut and paste my Federal Tax Procedure book discussion of borrowing of statutes of limitation as amended to include the Crites case (footnotes omitted):
E. Exceptions -- No Statute of Limitations for Some Assessments.
Although, as noted above, tax statutes of limitations reflect a general policy that statutes of limitations are an essential element of fairness, there are some instances in which tax claims may be made forever, with no statute of limitations. We have already noted above that there is no statute of limitations if taxpayer fails to file the return with respect to which the assessment may be made or files a fraudulent return with respect to which the assessment may be made. You can easily, I hope, understand that, in those cases, countervailing policies may outweigh the need for repose and, in those cases, Congress has mandated an unlimited statute of limitations.
Still, in Anglo-American jurisprudence, there is a bias toward statutes of limitation even where the statute may seem to provide none. Consider the following from the estimable Judge Posner in a case where the IRS, by regulation, provided the equivalent of a statute of limitations for an administrative claim:
[T]he Tax Court's basic thought seems to have been that since some statutes (in this case, some provisions of a statute) prescribe deadlines, whenever a statute (or provision) fails to prescribe a deadline, there is none. That is not how statutes that omit a statute of limitations are usually interpreted. Courts “borrow” a statute of limitations from some other statute in order to avoid the absurdity of allowing suits to be filed centuries after the claim on which the suit was based arose. They borrow an existing statute of limitations rather than create one because “the length of a limitations period is arbitrary -- you can't reason your way to it -- and courts are supposed not to be arbitrary; when they are, they get criticized for it.” Courts even say that in borrowing a statute of limitations from one statute for use in another they are doing Congress's will: “Given our longstanding practice of borrowing state law, and the congressional awareness of this practice, we can generally assume that Congress intends by its silence that we borrow state law.”
As in other areas of the law adverted to by Judge Posner, there are situations in which the Code just does not address the issue of a statute of limitations for assessment. Given the Anglo-American predilection for repose, courts will look for some related statute of limitations to borrow. Let’s consider, by way of example, the trust fund recovery penalty (“TFRP”) which we shall discuss in more detail below (pp. 621 ff.). For present purposes, I will just summarize the nature of the penalty. As you know, an employer is required to withhold from employees and pay over to the Government an amount for income tax with regard to compensation paid and the amount of the employee's share (½) of the FICA obligation. The employer is said to hold these amounts in trust between the time they are withheld from the employee and the time they are paid over to the Government, hence the taxes are often referred to as trust fund taxes. As a mechanism to collect the amounts that should have been withheld and paid over, § 6672 imposes a penalty in the amount of the unpaid trust fund tax on the person or persons in the employer’s organization who had the responsibility and authority to insure that the taxes were withheld and paid over. The § 6672 penalty applies only in the amount of the withheld taxes not actually paid over to the Government and, although each responsible person is subject to the tax not paid over, in the aggregate the IRS collects only the amount of the tax not paid over by the employer. As such, the § 6672 penalty is just a collection mechanism for the underlying tax not paid over. Now, as you may already know, the employer's liability for the tax not paid over is subject to a limitations period under the general rules noted above. So, if the employer files a nonfraudulent employment tax return reporting trust fund tax liability, the statute of limitations is generally three years from the date of filing to assess additional tax trust fund tax liability against the employer. What is the limitations period for the trust fund penalty against the responsible person?
There is no requirement of a return for the trust fund tax penalty (i.e., the putative responsible person does not voluntarily report trust fund tax liability on an IRS form). So the general rules, technically applied, are not applicable to commence and end a statute of limitations on the trust fund penalty. Is there a statute of limitations on assessment of the trust fund penalty?
The answer is yes. The courts have held -- and the IRS has acquiesced in the holding -- that the § 6501 statute of limitations applies by reference to the employer’s return. The theory is that, because the penalty is not a real penalty but a collection mechanism (via an alternative source to collect the employee’s withheld taxes), the statute should not be longer than the period allowed to assess the tax from the person directly liable (the employer). Thus, although responsible persons are not required to file returns reporting the penalty, the penalty does relate to the return that the employer is required to file and the liability related to that return and the statute is the same as for the employer on trust fund taxes.
Still, there will be cases where the courts may not be willing to stretch to borrow and grant repose when the statute is silent. For example, § 6111 requires that persons involved in the promotion of certain tax shelters must register the tax shelter with the IRS. Section 6707 imposes a penalty for failure to register. There is no Code provision for a statute of limitations during which the IRS must assess these penalties. The IRS takes the position that the § 6707 penalty has no statute of limitations, relying on cases holding that other penalties not linked to a return filing requirement have no statute of limitations. Another example is § 905(c) which requires taxpayers to notify the IRS if foreign tax credits differ from the foreign tax accrued. The IRS appears to have an unlimited statute of limitations to assess any tax related to those differences. Still another is the § 6702 penalty for frivolous returns which, as the Tax Court recently observed, has no “readily observable statute of limitations.”
These are the tools for analysis. If the Code provides that a tax liability or a penalty may be assessed, but provides no statute of limitations upon assessment, the assessment may be made at any time, unless liability is somehow related to and in lieu of a tax liability for which there is a statute of limitations. The practitioner will want to think creatively about how these equitable arguments can be marshaled to support a statute of limitations (in the case of desiring the avoid an open-ended assessment period) or support an argument that a limitation period should not apply.This still does not answer the question of whether, in a Section 6702 penalty case where the penalized return (original or amended) was filed more than three years earlier than the penalty assessment, a court might be willing to borrow the Section 6501 three year statute. Crites leaves that issue open, but the foregoing would offer a framework for analyzing the issue.
I have added Section 6702 to the quoted discussion about no readily discernible statutes of limitation in the text, with Crites in the footnote, on p. 193 of the footnoted version and p. 137 of the nonfootnoted version.
Addendum: A reader of this blog entry pointed me to IRM 4.10.12 Frivolous Return Program, here. In that IRM at 188.8.131.52.9 (02-23-2012), Statutes, the IRS for administrative purposes does borrow the Section 6501 3 year return limitations period for frivolous return assessments on a valid originally filed return. It does not directly speak to penalties applying to amended returns and, of course, there is no statute of limitations for amended returns, hence there is no statute to "borrow." I think Judge Holmes recognized that in Crites, but his point is that, if the 6501 3 year concept could apply to a frivolous amended return, then it could not apply to the original return to which it was not applied but must instead apply to the amended return. My thanks to the reader for calling this to my attention.