There is a general statute of limitations that limits the time period the Internal Revenue Service can audit and/or adjust income tax returns. It basically says the return that is filed within three years of the due date is open and the IRS can assess additional tax and penalties.
However, if the taxpayer files a false or fraudulent return, with the intent to evade tax, there is no limit of time that the IRS can audit the return and charge taxes, penalties and interest.
The Tax Court Memo decision 2019-85 for Mr. and Mrs. Shahram Kohan is an illustration of no limit on time the IRS can audit and assess additional tax, penalties and interest.
The IRS audited their 2008 and 2009 returns. IRS assessed $114,184 additional taxes for year 2008 and $85,638 and $22,837 additional penalties. Similar amounts were assessed for year 2009.
Of course, the IRS will audit the 2010-18 returns, but this tax court case was only for 2008 and 2009.
IRS analysis of bank deposits in 2008 showed $295,276 was not reported as income for his dental practice. That was the cash, check and credit card payments by patients less $20,000 he told his CPA that was received for co-payments.
He did not have a separate bank account for the dental practice, but deposited only into his personal bank account.
His CPA noted that his reported income was only the total of insurance company payments. She asked for the copayments he received and he estimated that was $20,000 in 2008. He did not tell her of any of the other payments he received by cash, check or credit cards.
The CPA also prepared payroll tax returns for the dental practice from information he supplied. Those amounts were also wrong, significantly understated.
Fraud is the intentional wrongdoing to evade tax owed. It is usually established by circumstantial evidence with intent to conceal, mislead or otherwise prevent collection of taxes. He did not answer IRS questions and gave incorrect information; he failed to maintain adequate books and records. He did not cooperate with the IRS auditor or IRS legal representatives until one week before trial when he hired an attorney. The evidence clearly supported the court finding of fraud.
The cost of the additional penalties, plus interest for all those years, is significant. He would have been better to just report all his income and pay only the taxes.
Did you hear, “Who you are tomorrow begins with what you do today.” — Tim Fargo
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.