Optima Tax Relief Shares What the Latest Tax Court Ruling Means for Taxpayers

For many taxpayers, filing a tax return provides a sense of finality. After several years pass, most assume the IRS can no longer revisit old returns or assess additional taxes. However, a recent federal court decision has highlighted an important exception to that general rule: fraud.

In Murrin v. Commissioner, the Third Circuit Court of Appeals held that when fraud is involved in the preparation of a tax return, the IRS may retain the ability to assess taxes well beyond the standard statute of limitations period—even if the fraud was committed by the tax preparer rather than the taxpayer. The U.S. Supreme Court later declined to review the case, leaving the Third Circuit’s decision in place. However, because other federal courts have reached different conclusions, the legal issue remains unsettled nationwide.

This decision highlights an important reminder for taxpayers: relying on a tax professional does not necessarily eliminate responsibility for the accuracy of a filed return. Understanding how this ruling affects IRS enforcement and tax preparer liability can help taxpayers better protect themselves.

Understanding IRS Time Limits on Tax Assessments

A statute of limitations is a legal time limit that restricts how long the IRS has to examine a tax return or assess additional taxes.

Under normal circumstances, the IRS generally has three years from the date a return is filed to audit the return and assess additional tax. This three-year period applies to most taxpayers and provides a level of certainty that older tax years will eventually become closed. However, there are several exceptions to this rule.

If a taxpayer omits more than 25% of their gross income, the IRS generally has six years to assess additional taxes. In more serious situations, such as fraud or failure to file a return, there may be no statute of limitations at all.

This means the IRS may be able to examine tax years that would otherwise be considered closed.

The Court Decision That Expanded IRS Authority in Fraud Cases

The central issue in Murrin v. Commissioner was whether the unlimited statute of limitations for fraud applies only when the taxpayer commits fraud or whether it also applies when fraud is committed by a tax preparer.

The Third Circuit adopted a broad interpretation of the law, concluding that fraud connected to the preparation of a tax return can eliminate the normal statute of limitations protections, regardless of who committed the fraudulent act.

In other words, if a preparer intentionally includes false information on a return, the IRS may still be able to assess additional taxes years later—even if the taxpayer was unaware of the misconduct.

The Supreme Court’s decision not to hear the case leaves the Third Circuit’s ruling in place but does not resolve the disagreement among federal courts. For example, the Federal Circuit previously reached the opposite conclusion in BASR Partnership v. United States, holding that the unlimited statute of limitations generally requires fraudulent intent by the taxpayer. As a result, the nationwide application of this issue remains unsettled, and how it is interpreted may depend on the jurisdiction.

Why Taxpayer Responsibility Doesn’t End With Hiring a Preparer

Tax preparer fraud can take many forms. Some preparers may inflate deductions, create fictitious business expenses, underreport income, or claim credits that taxpayers do not qualify for.

In many cases, taxpayers may not realize that inaccurate information has been included on their returns.

Unfortunately, tax law generally places ultimate responsibility on the taxpayer who signs the return. Signing a return indicates that the taxpayer has reviewed the information and believes it to be accurate.

As a result, taxpayers may still face additional taxes, penalties, and interest even when the misconduct originated with a preparer. The recent court decision reinforces this principle and increases the importance of carefully reviewing returns before filing.

How Far Back Can the IRS Collect Taxes?

Many taxpayers wonder how far back the IRS can go when collecting taxes. For audits and assessments, the IRS generally has three years from the date a return is filed. However, this period may extend to six years if substantial income was omitted.

When fraud is involved, there is generally no time limit on the IRS’s ability to assess taxes. Likewise, if a taxpayer never files a return, the statute of limitations typically never begins.

Once a tax has been assessed, the IRS generally has ten years to collect the debt. This period is commonly known as the Collection Statute Expiration Date (CSED).

However, certain actions can extend the collection period, including bankruptcy proceedings, installment agreement requests, collection due process hearings, and time spent outside the country.

Because multiple statutes of limitations can apply simultaneously, determining exactly how far back the IRS can pursue a case can become complicated.

Which Taxpayers May be at Risk

Certain taxpayers may face increased exposure following this ruling. Small business owners often have more complex tax returns involving deductions, payroll reporting, and business expenses. Taxpayers with foreign income, investments, rental properties, or multiple income streams may also face greater scrutiny because these returns are generally more complicated.

Individuals who relied on inexperienced, unlicensed, or aggressive tax preparers may also be at greater risk if fraudulent positions were taken on prior returns.

Although the ruling does not automatically increase audits for all taxpayers, it may encourage the IRS to examine older tax years when fraud indicators are present.

Why Long-Term Recordkeeping Matters

The IRS generally recommends keeping tax records for at least three years from the date a return is filed. However, taxpayers may want to retain records for longer periods depending on their circumstances.

If income was substantially understated, records should generally be kept for at least six years. When fraud or unfiled returns are involved, retaining records indefinitely may be advisable.

Important records may include:

Filed tax returns

W-2s and 1099s

Bank statements

Business expense documentation

Receipts supporting deductions and credits

Communications with tax preparers

Maintaining detailed records can become especially important if the IRS later revisits older tax years.

How to Protect Yourself From Tax Preparer Fraud

Because taxpayers remain legally responsible for their returns, taking steps to protect yourself is essential. Before filing, carefully review every return prepared on your behalf. Make sure income, deductions, credits, and account information appear accurate.

Taxpayers should also avoid preparers who promise unusually large refunds, ask taxpayers to sign blank returns, or refuse to provide copies of completed filings.

Maintaining copies of all filed returns and supporting documentation can also help taxpayers respond more effectively if questions arise in the future. If discrepancies are discovered on prior returns, addressing them promptly may help reduce future complications.

What to Do If You Suspect Tax Preparer Fraud

Taxpayers who suspect preparer misconduct can report the issue to the IRS. Generally, complaints against tax return preparers may be submitted using Form 14157, Complaint: Tax Return Preparer. If the preparer’s actions resulted in an improper refund or altered return information, taxpayers may also need to file Form 14157-A.

In situations involving identity theft, forged signatures, or intentionally false information, additional reporting steps may be necessary.

Because preparer fraud cases can become complex, taxpayers may benefit from obtaining professional guidance when determining how to respond. Because courts have reached different conclusions on how the law applies, taxpayers facing questions about older returns or alleged preparer fraud should seek advice based on the laws applicable in their jurisdiction.

Frequently Asked Questions

What is statute of limitations?

A statute of limitations is a legal deadline that limits how long the IRS has to audit a return or assess additional taxes. In most cases, the IRS has three years after a return is filed, although exceptions may apply.

How to report tax preparer fraud?

Tax preparer fraud can generally be reported to the IRS using Form 14157. Depending on the circumstances, taxpayers may also need to submit Form 14157-A and provide supporting documentation.

How long do I need to keep tax records?

Most taxpayers should keep tax records for at least three years. However, records may need to be retained for six years or longer if substantial income was omitted or if fraud concerns exist.

How far back can IRS collect taxes?

The IRS generally has ten years to collect assessed tax debts. However, there may be no time limit for assessing taxes in cases involving fraud or unfiled returns, and certain events can extend collection periods.