FTPB Working Draft 2026 Revisions on § 6501(c) Unlimited Civil Statute of Limitation for Fraud (7/12/26)

In working on my working draft for the Federal Tax Procedure 2026 editions (due for publication on SSRN in early August), I have substantially revised the discussion of § 6501(c)(1). Readers will recall that one hot issue in tax litigation is whether § 6501(c)(1) requires taxpayer fraud or may apply when nontaxpayer fraud is on the return without the taxpayer having committed the fraud.

The working draft revisions with footnotes may be downloaded here. The following is the text for the Student Edition without Footnotes (same as Practitioner Edition without footnotes).

          C.     Exceptions to the General Three-year Statute.

          The exceptions to assessment statutes of limitations are in the statute. The key exceptions to the general 3-year rule are: 

                   1.     False Return or Attempted Evasion.

                             a.      General Rule-Fraud on Return and Unlimited Statute.

          Section 6501(c)(1) and (c)(2) provide exceptions to the normal 3- or 6-year statutes of limitation in certain instances involving tax fraud:

          (1) False return. In 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.

          (2) Willful attempt to evade tax. In case of a willful attempt in any manner to defeat or evade tax imposed by this title (other than tax imposed by subtitle A or B), the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.

We encountered the (c)(1) Exception in Badaracco (p. 161) where the Supreme Court held that a subsequently filed nonfraudulent amended return does not avoid the unlimited statute of limitations for an original fraudulent return. Fraud for this purpose is the same as the definition for fraud for purposes of the civil fraud penalty under § 6663. I often refer to these two civil consequences of fraud as “civil fraud.”

          Badaracco addressed a potential anomaly between failure to file a return and filing a fraudulent return. The anomaly is this: A person who fails to file a timely return with the intent to evade tax can get the benefit of the three-year statute of limitations by simply filing a delinquent nonfraudulent original return. Yet, a person who files a fraudulent original return but then files an amended nonfraudulent return cannot achieve the benefit of the statute of limitations. That is the holding of Badaracco. Consider the following examples:

           Example 1. Assume the taxpayer files a Year 01 original fraudulent return on April 1 of Year 02 and then files a nonfraudulent amended return on January 1 of Year 03. Under Badaracco's holding, there is no statute of limitations because his original return was fraudulent. 

          Example 2. Same example, except that instead of filing an original fraudulent return, the taxpayer files no return timely and then on January 1 of Year 03 files a nonfraudulent delinquent original return. Section 6501(c)(3), which provides an unlimited statute in case of failure to file, does not apply because the taxpayer filed a nonfraudulent original return, albeit delinquently. Accordingly, there is an original return filing date to anchor the § 6501(a) statute of limitations and it will be three years from the date of filing the delinquent nonfraudulent return (except, in the case of a 25% omission, the statute is six years).

          Example 3. Same as Example 2, except that, under the facts, the taxpayer’s failure to file a timely return for Year 01 was fraudulent, meaning that by failing to file the taxpayer intended to evade the tax. Certainly, the Code contemplates that failure to file may be fraudulent. Section 6501(c)(3), failure to file a return (timely or delinquent) can’t apply because a return, albeit delinquent, was filed. As the Court noted in Badaracco, § 6501(c)(1) can’t apply because it requires a false return and here the return, albeit delinquent, was not false. Section 6501(c)(2) which speaks of a willful attempt in any manner to evade tax does not apply to income tax because of the exception in the parenthetical.

          Unlimited Statute is Remedial Rather than Punitive. One issue that these exceptions for fraud raise is whether the exceptions are remedial or punitive in nature. The distinction, if meaningful at all, could affect how courts interpret the sparse text. The conventional answer is that the exceptions are remedial rather than punitive. The unlimited statute of limitations merely eliminates a procedural affirmative defense and requires the taxpayer to pay tax and interest that owed all along rather than some extra amount for punishment. Any fraud penalty, civil or criminal, requires the taxpayer’s fraud. The unlimited civil statute of limitations can expose the taxpayer to civil penalties other than the civil fraud penalty, but those penalties were applicable even during the normal statute of limitations, so in this sense those penalties expose the taxpayer only for liabilities that are not a consequence of the unlimited statute of limitations.

          Difference Between § 6501(c)(1) and § 6501(c)(2). Section 6501(c)(1) requires a fraudulent return. Section 6501(c)(2) requiring “willful attempt in any manner to defeat or evade tax”:

          • applies only to taxes other than income tax or estate and gift tax (subtitles A & B) and

          • the attempt to evade parallels the type of fraud required for § 6501(c)(1)) but does not require a fraudulent return (although a fraudulent return will often be involved).

In the further discussion of the unlimited statute of limitations for fraud, except where noted specifically, I will assume a fraudulent return and potential application of § 6501(c)(1)).

                             b.     Whose Fraud Invokes Unlimited Statute?

           Taxpayer’s Fraud. Section 6501(c)(1) keeps the statute of limitations open indefinitely for “a false or fraudulent return with the intent to evade tax.” If the taxpayer signing the return had fraudulent intent, the statute is plainly satisfied; on a joint return, one spouse's fraud suffices for both for purposes of § 6501(c)(1). The harder question is whether fraud by someone other than the taxpayer—e.g., a return preparer or a tax shelter promoter—can also trigger the unlimited statute.

          Return Preparer’s Fraud. Allen v. Commissioner, 128 T.C. 37 (2007) held that, even if no taxpayer signing the return had the fraudulent intent, the return preparer’s fraud resulting in fraudulent return reporting will suffice to trigger the unlimited statute of limitations. The opinion appears correct from a literal (textual/textualist) interpretation of the statute (the statute text requires only that the return be fraudulent) and rests on a policy notion that the IRS needs more time to audit a fraudulent return whether taxpayer fraud is involved or preparer fraud is involved. But the opinion has been criticized by taxpayers (who else would or could complain?) on the claims that the statutory text is cryptic and Allen does not consider, much less properly consider, history and context. Perhaps the strongest criticism was that, until Allen, the IRS never sustained the unlimited statute in § 6501(c)(1) in litigation when taxpayer fraud was not involved.

          Subsequently, the Second Circuit held, consistent with Allen, that the unlimited statute applies if fraud is on the return is the preparer’s fraud and not the taxpayer’s fraud. The Third Circuit in 2025 held, consistent with Allen, that return preparer’s fraud on the return without the taxpayer’s fraud invokes the unlimited statute of limitations; the holding was a textual/textualist’s reading of § 6501(c)(1) which provides no limitation to the actor causing the fraud on the return. The holding arguably conflicts with the Court of Appeals for the Federal Circuit discussed in the next paragraph.

          Tax Court cases involving preparer fraud, the latest in 2024, have held that Allen stands in the Tax Court and would not be reviewed by the full Tax Court which would be required to reverse Allen.

          Actors More Remote than Return Preparer (e.g., Fraudulent Tax Shelter Actors). The Court of Appeals for the Federal Circuit held that the fraud of a tax shelter promoter who was not the return preparer did not suffice for § 6501(c)(1).

          This issue requires context. The classic example is a fraudulent tax shelter promoter (including an attorney advising) causing the fraud on the return where the evidence does not show that the taxpayers or the return preparer committed the fraud. In a series of major tax shelter promoter prosecutions involving variations of Son-of-Boss and related tax shelters, some promoters were convicted of tax evasion with respect to shelters reported on taxpayers’ returns (meaning the returns were fraudulent) regardless of whether the taxpayers themselves participated in the fraud (i.e., were guilty of tax evasion). Under the Allen reasoning, provided that the IRS can prove a third-party’s fraud on the return by clear and convincing evidence (without res judicata from the promoter’s convictions), all of the returns that thus reflected fraud would have open statutes of limitation forever. And this would be true of similar shelters even where the promoters have not been prosecuted if the IRS could prove by clear and convincing evidence in the civil case that the returns were fraudulent.

          Is Preparer and More Remote Actor a Material Distinction? The Solicitor General’s Brief in Opposition to a petition for certiorari in a case applying Allen to return preparer fraud distinguished (no conflict) the Federal Circuit case that rejected Allen for more remote actors (tax shelter promoters rather than return preparers). Whether § 6501(c)(1) makes that a valid distinction among possible third-party actors is an open question.

          Does Clear and Convincing Standard Apply to Nontaxpayer Fraud? I assumed above that for actors other than the taxpayer, the IRS must prove fraud by clear and convincing evidence. Section 7454(a) imposes on the IRS the burden to prove fraud by clear and convincing evidence. Section 7454(a) textually applies only when the issue is “whether the petitioner has been guilty of fraud with intent to evade tax.” Does that mean that where, as in Allen, the taxpayer’s fraud was not involved with the item on the return, the clear and convincing standard would not apply? Tax Court Rule 142, titled “Burden of Proof” provides in subsection (b) that “In any case involving the issue of fraud with intent to evade tax, the burden of proof in respect of that issue is on the respondent, and that burden of proof is to be carried by clear and convincing evidence. See Code sec. 7454(a).” The way the Rule phrases the burden, it is not textually limited to the petitioner as is § 7454(a). Accordingly, the IRS will bear the burden to show fraud on the return regardless of whose fraud it is. A related issue is whether the promoter (or other remote actor’s) conviction of tax evasion with respect to the return would be proof by clear and convincing evidence (although not subject to doctrines of res judicata as to the taxpayers filing the returns). I don’t know but think (speculate)  that (i) res judicata concepts would not apply because the taxpayer was not a party to the criminal case, so that the Government must prove fraud by clear and convincing evidence. That raises the further question of whether the conviction(s) of the remote actor(s) would be evidence considered in determining whether the Government has met the clear and convincing evidence burden? I don’t know. (Have we exhausted the possibilities of dancing on the head of a pin?)

          Related Issues. In addition to denial of repose of the statute of limitations based on a fraudulent return, criminal and civil penalties may apply to fraudulent returns. I discuss these in more detail below (p. 340, criminal penalty) and (p. 387 civil penalty)), but note here that, as to a taxpayer having the fraudulent intent, the fraudulent return the civil fraud penalty under § 6663 would apply. Accordingly, in a tax case where the assessment would be beyond the normal statute of limitations, the civil issues normally riding on fraud of the taxpayer will be (1) the IRS's ability to assess any tax and interest (i.e., the statute of limitations issue) and (2) the taxpayer's liability for the fraud penalty under § 6663 which I discuss below beginning p. 387. Note, however, that if the statute of limitations is open only by virtue of third-party fraud, the § 6663 civil fraud penalty cannot apply because it requires the taxpayer’s fraud.

          Possible Legislation to Require Taxpayer Fraud. A House bill, titled “Protecting Taxpayers from Ghost Preparers Act,” would amend § 6501(c)(1) to require taxpayer fraud. The proposed amendment applies “to assessments made or proceedings begun after the date of the enactment of this Act.” It is not clear how many assessments or proceedings were made or begun on the theory of nontaxpayer fraud (or even what proceedings means), but assessments usually occur on the cases to which § 6501(c)(1) could apply at the end of a long process (often extended), this will relieve a broad swath taxpayers potentially liable for nontaxpayer fraud. The relief is huge in terms of potential revenue involved for nonfraudulent taxpayers innocently or not claiming the major tax shelter fraudulent benefits because of third-party fraud reported on the returns; in such cases the revenues would include penalties (20% or 40% accuracy-related) and interest on tax and penalties from the due dates of the returns.

          What About § 6501(c)(2) Willful Attempt to Evade? Section 6501(c)(2) provides an unlimited statute of limitations for any tax “In case of a willful attempt in any manner to defeat or evade tax (other than tax imposed by subtitle A or B).” Subtitle A is income tax; subtitle B is estate and gift tax; § 6501(c)(2) is thus irrelevant to most of the discussion tax involved in of § 6501(c)(1) cases discussed above. But, like § 6501(c)(1), § 6501(c)(2) textually agnostic as to whose intent must be involved. The crime of tax evasion can be committed by third parties (both preparers and more remote actors) without taxpayer fraud being involved. I am not aware of such cases, but § 6501(c)(2) might still come into play in such cases. If § 6501(c)(2) comes into play, could the IRS or a court draw an interpretive inference for § 6501(c)(2) covering nontaxpayer fraud from the need to amend § 6501(c)(1)?

          Practical Considerations with Unlimited Statutes of Limitations. Even if there is fraud, the unlimited statute of limitations is subject to practical limitations. The difficulty in obtaining information about really old years may make it impossible or impractical for the IRS to pursue unpaid taxes. This practical limitation often comes into play when a taxpayer is considering filing amended returns or delinquent original returns to correct prior years. The number of years that the taxpayer will correct is influenced principally by the 6-year criminal statute of limitations but also by this phenomenon of records and information being unavailable. Thus, although in the case of fraud, the IRS can go back forever, it usually will not do so. Hence, in advising the taxpayer that there is an unlimited statute of limitations for fraud, the practitioner should also advise as to the practical reality that the IRS will do so.