Statute of limitation tolled by fraudulent tax returns.

The Second Circuit held that the filing of fraudulent tax returns for a corporation by an accountant to embezzle money that was owed to the IRS was an intentional evasion of taxes that tolled the statute of limitation on assessment.

Background

Ray Fouche owned several bus companies, including City Wide Transit Inc. City Wide transported handicapped children throughout New York City. By the end of 1998, Fouche's bus companies, including City Wide, collectively accrued about $700,000 in outstanding payroll tax liabilities.

To negotiate a reduction of these liabilities, Fouche hired Manzoor Beg, who falsely held himself out as a CPA, and gave him a blank power of attorney. Fouche also hired a third-party payroll service to prepare City Wide's Forms 941, Employer's Quarterly Federal Tax Return, for the quarters June 1997; December 1998; March 31, June 30, and Dec. 31, 1999; and March 31 and June 30, 2000. For each of those last five quarters, Fouche drafted checks payable to the IRS sufficient to cover City Wide's liabilities and gave them, along with the corresponding returns, to Beg, who in turn promised, to deliver them to the revenue officer with whom he was negotiating.

Instead of filing the correct returns, however, Beg prepared, signed, and filed another set of returns on Forms 941 for those five quarters. In those returns, Beg fraudulently added advance earned income credit (EIC) payments that significantly reduced City Wide's tax liabilities. Beg then altered the checks that City Wide drafted by changing the payee, deposited or cashed those checks for his own personal use, and drafted new checks to cover City Wide's fraudulently reduced tax liabilities on the returns he had prepared. He also subsequently filed amended Forms 941 for several previous periods with fraudulent EIC payment amounts, presumably in an effort to conceal his embezzlement.

Beg's scheme was eventually uncovered, and in 2002 Beg was prosecuted. He pleaded guilty to preparing false tax returns, but died before sentencing. In 2004, the IRS commenced a civil examination of City Wide to recover the underassessed taxes due to Beg's fraud and assessed City Wide additional taxes as a result of the examination in February 2007.

City Wide challenged the assessments administratively as time-barred under Sec. 6501(a), which requires that the IRS assess any tax within three years after a return is filed. However, the IRS upheld the assessment, ruling that the statute of...