No Statute of Limitations Defense Where Fraud is Involved!

The Tax Court found in Kohan, TC Memo 2019-85 that a dentist's underreporting of income was due to fraud. Therefore, there was no period of limitations to assess the taxes he owed.

IRC Sec. 6501(a) generally requires the IRS to assess a tax within three years after the filing of a return.

However, when a taxpayer has filed a false or fraudulent return with the intent to evade tax, there is no period of limitations, and the tax may be assessed at any time. (Code Sec. 6501(c)(1))

Circumstances that may indicate fraudulent intent, often referred to as "badges of fraud," include but are not limited to:

1. understating income,
2. keeping inadequate records, 
3. giving implausible or inconsistent explanations of behavior, 
4. concealing income or assets, 
5. failing to cooperate with tax authorities, 
6. engaging in illegal activities, 
7. supplying incomplete or misleading information to a tax return preparer, 
8. providing testimony that lacks credibility, 
9. filing false documents (including false tax returns), 
10. failing to file tax returns, and 
11. dealing in cash.

(Schiff, (CA 2 1990) 67 AFTR 2d 91-1062)

Dr. Kohan was a dentist in New York. He was reimbursed by insurance companies for some of the work he did. But many of his patients paid him in cash. He would occasionally use this cash to pay for his employees' lunches or give them cash bonuses. He took the rest of the cash home with him.

In 2001, Dr. Kohan acquired the building in which his practice was conducted. Although Dr. Kohan's brother was listed as the purchaser on the title certificate for the property, his brother appears to have acted as a nominee.

The dentist hired a CPA to prepare his tax returns. He presented her with forms showing how much he received from insurance. But he did not disclose the cash payments, nor payments he received by check or credit card.

IRS audited his 2008 and 2009 tax returns.

Kohan conceded that he understated his income by $366,185 for 2008 and $380,124 for 2009. IRS found that these understatements were chiefly attributable to Dr. Kohan's underreporting the gross receipts of his dental practice. All of these receipts were deposited into his personal bank account.

Dr. Kohan admitted that his recordkeeping practices were poor. He did not keep a general ledger for his dental practice, and he kept no receipts for cash expenditures. He failed to keep separate bank accounts for his business and his personal affairs. He delegated his responsibility to identify business expenses to his office manager, who had no accounting or bookkeeping experience.

He told the IRS that his recordkeeping was poor because, among other reasons, he did not have a computer in the office. But he did take deductions in 2008 and 2009 for almost $20,000 in computer software and related expenses.

In addition, IRS felt that Dr. Kohan did not cooperate with it during the examination. He declined to produce his receipts book or the payment information included on patients' charts. He declined to produce the income and expense summaries that he supplied to his CPA for use in preparing his tax returns. And he falsely told the IRS auditor that he leased the dental office building from a relative whom he refused to name.

IRS did not issue notices of deficiency for the 2008 and 2009 tax years until 2017. The dentist contended that assessments were barred by the three-year statute of limitations.

The Tax Court found that the assessments were not time-barred because the underpayments were due to fraud. The Tax Court found that eight of the 11 badges of fraud overwhelmingly demonstrated that Dr. Kohan acted with fraudulent intent for both tax years at issue and the Court of Appeals agreed.

 

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