Question

In: Accounting

Fred Fraud timely filed his 2011 return with many fabricated deductions and credits. In 2013, Fred...

Fred Fraud timely filed his 2011 return with many fabricated deductions and credits. In 2013, Fred could no longer bear the guilt of having filed a fraudulent return, and he filed an amended return correcting the fabrications on the original return. In 2017, the IRS assessed additional tax on Fred for the 2011 year. Has the statue of limitations run on the 2011 return, barring the IRS from assessing additional tax? Explain.

Solutions

Expert Solution

The applicable provisions of the U.S. Taxation Code states that an assessment of the income tax return filed must be completed within 3 years of filng the original tax return,this period of limitations stated is also known as the the 'Statute of Limitations' or the 'SOL' . Such SOL may be extended on different exceptional circumstances. Further the provisions states that on an amendment ofa return the SOL shall be the date calculated fron date of filing of the original return if the latter was a 'valid return'.

Hence in the given case it appears that for the original rwturn filed in 2011,being a valid return, the assessment must be within 3 years ,that is, by the year 2014. However the provisions firther state that if there is substantial underpayments by the taxpayer or, importantly, where no time limit applies (in the case of fraud, per Section 6501(c)(1)—the "Fraud Exception" . Hence in the given case since Fred Fraud filed his return with a fraudulent intention with many fabricated deductions and credits, the assessment can be done done within 6 years from 2011,that is, 2017. Therefore the SOL extension os applicable for the given case and the assessment is a valid one ,however such assessment must base the facts as finally stated in the amended return filed by the assessee, after paying off all additional interests and penalties,if any.


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