Limitation period extended due to preparer fraud.

• Author: Beavers, James A.
• Position: 2016 Tax Court memorandum decision in Finnegan v. Commissioner

The Tax Court held that the extended statute-of-limitation period under Sec. 6501(c)(1) applied to the taxpayers' returns because the IRS had proved clearly and convincingly that the taxpayers' preparer had prepared the returns falsely or fraudulently with the intent to evade tax.

Background

Joan Finnegan worked at a community college and her husband, John, worked as a plumber. The Finnegans, who lived in New York, owned a condominium in Daytona Beach, Fla. During the years in question (1994 through 2001), the Finnegans did not use the condo themselves but rented it out through a real estate rental company in Daytona.

After their original accountant moved, the Finnegans hired Duane Howell to prepare their tax returns. Howell advised the couple to form a partnership to report the condo rental activity, claiming (incorrectly) that this would allow them to contribute income they received from renting the condo to a Keogh plan account. The Finnegans agreed and with Howell's help set up a partnership named Jomarjen, through which the rental activities of the condo were reported on Schedule E, Supplemental Income and Loss, of the Finnegans' returns for all the years in question. The Finnegans, however, did not transfer title to the condo to the partnership and otherwise did not change anything concerning the operation of the condo rental.

Between 1994 and 2001, the Finnegans did contribute some money to a Keogh account. Howell told the Finnegans how much to contribute each year, but they did not always contribute those amounts, and Joan Finnegan testified that she could not recall whether Howell entered his suggested contribution amounts on their returns.

Howell also invented another partnership, Gannan Co., to help out the Finnegans. For five of the tax years in question, partnership returns for Gannan were filed showing the Finnegans as its sole owners, and the partnership was listed on Schedule E of the couple's returns. The Finnegans, apparently not the inquisitive sort, claimed that they had never heard of Gannan Co. until the IRS examined their returns.

On examination, the IRS noticed a peculiarity on the Finnegans' returns that it had also noticed on returns of other clients of Howell. The returns included amounts for certain expenses that were identical over returns and years, for the most part with vague descriptions, and for each Form 1040, U.S. Individual Income Tax Return, the Finnegans showed $2 of net income on Schedule C, Profit or...