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. 

Tax Court Holds that IRS Must Prove Return Fraud After a Convicted Spouse is Convicted for Tax Evasion (5/30/26)

In Li v. Commissioner, T.C. Memo. 2026-42 (T.C. Case 12133-23 at #35, here, at #35, and GS here, the Court addressed proof issues for applying the unlimited statute of limitations for a joint return spouse (“unconvicted spouse”) after the other spouse was convicted of tax evasion (“the convicted spouse”). Of course, as to the convicted spouse, collateral estoppel will apply to establish fraud for the unlimited statute of limitations (§ 6501(c)(1)) and the civil fraud penalty (§ 6663). Li addresses the issue of the effect of the convicted spouse’s conviction on the unconvicted spouse’s statute of limitations (§ 6501(c)(1)),

The background is the Allen issue. In Allen v. Commissioner, 128 T.C. 37 (2007), the Court held that fraud on a return by a return preparer without the taxpayer’s personal fraud invoked the unlimited statute of limitations in § 6501(c)(1). The issues Allen raises are discussed in several blog entries over the years, but I think they are presented in my most recent blogs: Update on Murrin Petition for Cert re Unlimited Civil Statute of Limitations for Non-Taxpayer Fraud Reported on Tax Return (Federal Tax Procedure Blog 5/19/26), here; and Further on Murrin and Allen and the Unlimited Statute of Limitations for Fraud on the Return (Federal Tax Procedure Blog 4/30/26), here.

Stripped down to basics, the current status of the Allen issue is as follows:

• for courts applying the Allen holding (that the preparer’s fraud alone will suffice to the unlimited statute of limitations; the taxpayer’s fraud is not required). This includes all courts addressing the issue except the Federal Circuit.
• the Federal Circuit held that the taxpayer’s fraud is required, at least in a context where the fraud on the return was not the preparer’s fraud (although the Federal Circuit did not intimate that preparer fraud would suffice).

Li dealt with the unlimited statute of limitations for the unconvicted spouse after the convicted spouse’s tax evasion conviction. The holding was that, as to the unconvicted spouse, the IRS must prove fraud on the return by clear and convincing evidence of fraud on the return (which need not necessarily be the unconvicted spouse’s personal fraud). In the Li facts, that means that the unconvicted spouse is not subject to collateral estoppel for the convicted spouse's conviction. Li does not address the issue I discuss in the first blog above as to whether fraud on the return committed by others than the tax return preparer (e.g., tax shelter promoters) will suffice.

I have synthesized the Li Opinion in my working draft for the Federal Tax Procedure Editions for 2026 (to be published in early August). I offer that synthesis here in the paragraph after discussing the Allen issue (note that the footnotes are presented after the text; the numbering on the footnotes will not be the same in the working draft or the final 2026 Practitioner Edition):

Second Circuit Holds That Fraud on the Return -- Even If Not the Taxpayer's -- Causes an Unlimited Civil Assessment Statute of Limitations to Apply (2/4/13)

THIS BLOG ENTRY IS A CUT AND PASTE FROM AN ENTRY WITH THE SAME TITLE ON MY FEDERAL TAX CRIMES BLOG, HERE.

I have written in the past on nontaxpayer fraud as the fulcrum for an unlimited statute of limitations under Section 6501(c)(1) & (2), here.  I provide a list of the most pertinent blogs on my Federal Tax Crimes Blog this issue.  The issue arose from the Tax Court's opinion in Allen v. Commissioner, 128 T.C. 37 (2007), which held for the first time that preparer fraud invokes the unlimited statute of limitations.  The IRS had earlier held that, where a joint tax return was filed, one spouse's fraud would permit the unlimited statute as to the innocent spouse.  But the conventional wisdom to that point was that some taxpayer fraud was required to the unlimited statute.  The Tax Court in Allen read the statute literally; it included no requirement of taxpayer fraud.

In City Wide Transit, Inc. v. Commissioner, 709 F.3d 102 (2d Cir. 2013), here, the Second Circuit -- the second court to confront the issue head on -- aligned itself with Allen in a case involving preparer fraud that was included on the return of otherwise innocent taxpayers.  I quote the key parts of the Second Circuit decision (I have bold-faced some portions that, I think, are worthy of attention):

In analyzing § 6501(c)(1), we remain mindful that "limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the [Commissioner]." Bufferd v. Comm'r, 506 U.S. 523, 527 n.6 (1993) (internal quotation marks and citations omitted). "Accordingly, taking [that obligation] into account, we conclude that the limitations period for assessing [the taxpayer's] taxes is extended if the taxes were understated due to fraud of the preparer." Browning v. Comm'r, 102 T.C.M. (CCH) 460, 2011 WL 5289636, at *13 n.14 (2011) (quoting Allen v. Comm'r, 128 T.C. 37, 40, 2007 WL 654357, at *40 (2007)). This makes intuitive sense because "the special disadvantage to the Commissioner in investigating fraudulent returns is present if the income tax return preparer committed the fraud that caused the taxes on the return to be understated." Allen, 2007 WL 654357, at *40.

Relationship Between Tax Court and Refund Fora - Burden to Prove Fraud (10/20/12)

In my Federal Tax Procedure course (and I presume similar courses taught by others), we cover the principal fora to litigate tax disputes.  Historically, tax disputes were litigated in the district courts and sometimes in the predecessor to the Court of Federal Claims.  With the enactment of the broader based income tax after the 16th Amendment, Congress felt that there were two key problems with the refund fora -- (i) the requirement of prepayment and (ii) the sometimes daunting technicalities of pleading and proof particularly in the district courts prior to adopt Federal Rules.  Accordingly, Congress created the Board of Tax Appeals to offer a prepayment tax litigation forum and a less technically daunting litigation experience.

The Board of Tax Appeals and its predecessor Tax Court occasionally struggled with the issue of the precise relationship of its jurisdiction to resolve tax disputes in comparison to that of the district court.  This struggled evidenced itself in the issue of whether the Tax Court had jurisdiction to consider equitable concepts such as equitable recoupment that district courts could apply in resolving tax disputes.  In our class, I assign Estate of Branson v. Commissioner, 264 F.3d 904 (9th Cir. 2001) here, that presents this issue well.  The Branson decision is by Judge Sneed (Wikipedia entry here), formerly a tax professor at several law schools and then Dean at Duke before being appointed to the Ninth Circuit.  There are technical jurisdictional issues involved because the Tax Court is a court of limited jurisdiction whereas the district court is a court of general jurisdiction.  However, I thought the issue should always turn upon whether, given the purpose of the Tax Court (and its predecessor Board of Tax Appeals), different substantive results should obtain in the district court than in the Tax Court when these equitable concepts otherwise could apply.  I think that there is no evidence that Congress intended such different results.  The Tax Court now has these powers.

Regarding the differences in the Tax Court and the refund fora, I just re-read a delightful decision by Judge Henry Friendly of the Second Circuit Court of Appeals.  Judge Friendly was one of the leading jurists of all time (Wikipedia entry here).  In Paddock v. United States, 280 F.2d 563 (2d Cir. 1960), here, the Court held that the same requirement that the Government prove fraud applied in the district court as applied in the Tax Court.  Congress expressly so provided as to the Tax Court in the predecessor to Section 7454(a) but did not make that provision applicable to the other fora.  So, in this refund case, the Government rotely chanted the "money had and received" refund burden in Lewis v. Reynolds, 284 U.S. 281 (1931), here, that the taxpayer must prove the right to refund, including the amount, and thus argued that the taxpayer must prove the absence of fraud where the taxpayer wants a refund of a civil fraud penalty he paid.  Essentially, working in the reverse, Judge Friendly was persuaded that Congress could not have wanted the IRS to bear that burden in a Tax Court case but not in a refund suit.

Case on Collateral Estoppel [Issue Preclusion] as to Civil Fraud (9/9/12)

I have just posted on my Federal Tax Crimes Blog a short discussion of the recent case of Anderson v. Commissioner, 2012 U.S. App. LEXIS 18831 (3d Cir. 2012), here.  The blog entry for that discussion is Walter Anderson Re-Appears But Unsuccessfully (9/9/12), here.  Anderson involves the collateral consequences of a conviction for tax evasion.

We study in Tax Procedure two key collateral civil tax consequences of a conviction of tax evasion.  These consequences both flow from the taxpayer convicted of tax evasion under Section 7201, here, being collaterally estopped [precluded by issue preclusion] as to civil fraud, an estoppel which invokes the 75% civil fraud penalty in Section 6663, here, and the unlimited statute of limitations in 6501(c)(1), here.   The statute of limitations consequence is straight-forward.  The application for the civil fraud penalty is a little more complex.

The amount subject to the civil fraud penalty must be quantified.  The conviction for tax evasion does not necessarily establish the amount subject to the 75% civil fraud penalty.  Unless the taxpayer stipulates the amount in the plea agreement, all a conviction will establish is the elements of the crime of tax evasion -- (i) willfulness, (ii) some amount of tax due and owning (most courts required it to be significant but not quantified), and an affirmative act of evasion.

Section 6663(b) provides a sequential burden of proof requirement in order to impose the civil fraud penalty.  First, the IRS must establish by clear and convincing evidence that the taxpayer committed fraud as to some portion of the underpayment.  The conviction will be collateral estoppel [issue preclusion] as to this IRS burden.  Second, once the first step is met, all of the underpayment is deemed attributable to fraud except for the portion that the taxpayer shows by a preponderance of the evidence is not due to fraud.

Civil Tax Fraud - IRS Burden of Proof and Negative Inference from Fifth Amendment Silence (8/2/12)

In the Tax Procedure class, we study fraud with respect to tax obligations.  Fraud has criminal and civil components.  Although we cover briefly the criminal components, I cover those in detail in a separate class, titled Tax Fraud and Money Laundering which will be taught next in the Spring of 2013 (see web page here).  In this Tax Procedure class we focus more on the civil components.

There are two key civil fraud penalties in the Code.  The one principally encountered in practice is Section 6663, here.  That section imposes a civil fraud penalty of 75% of the portion of an underpayment required to be shown on a return if "attributable to fraud."  The other key civil fraud penalty is Section 6651(f), here, which triples the failure to file penalty, to a maximum of 75%, if the failure to file is "fraudulent."  Each of these is viewed as a civil counterpart of the tax evasion crime under Section 7201 which can apply to a fraudulent return and a fraudulent failure to file.

Tax Procedure students might want to review an example of how the Government proves civil fraud that I discuss in a recent Federal Tax Crimes Blog entry, titled Tax Court Finds Fraud Based, in Part, On Negative Inference from Fifth Amendment Assertion (7/31/12), here.  The key points relevant to Tax Procedure that I discuss in that blog entry are:  (1) general rules of civil tax fraud cases, including certain "badges of fraud" permitting an inference of fraud for purposes of meeting the requirement that the IRS prove fraud by clear and convincing evidence and (2) the role of a negative inference when the taxpayer asserts the Fifth Amendment in a civil proceeding.