Supreme Court Lets IRS Keep the Door Open on Preparer Fraud

The Supreme Court just handed the IRS a quiet but important win.

By declining to hear Murrin v. Commissioner, the Court left in place a Third Circuit ruling that gives the IRS more room to assess taxes long after the normal deadline has passed. The core issue was simple but uncomfortable: when a tax return is fraudulent, whose intent matters?

The taxpayer argued the IRS should only get unlimited time to assess tax if the taxpayer intended to evade tax. The government said the statute does not require that. If the return preparer acted with fraudulent intent, the IRS argued, the usual three-year assessment window never closes.

For accountants, tax pros, and firm owners, the case is a warning. Preparer fraud does not just create criminal or licensing problems for the person who prepared the return. It can follow clients for decades.

The Case Behind the Ruling

Stephanie Murrin filed joint federal income tax returns with her then-husband for tax years 1993 through 1999. The couple used Duane Howell to prepare their individual returns and returns for two partnerships in which Murrin was a general partner.

Howell had serious baggage. According to the case record, his CPA license had been suspended during the years he prepared the Murrins’ returns. He had also previously been convicted in federal court in New York for preparing fraudulent returns for other taxpayers, and later pleaded guilty in 2007 to charges tied to a broader return-preparation fraud scheme.

The parties agreed that Howell put false or fraudulent items on the returns. The government said the returns claimed deductions for “office supplies and expenses” connected to partnerships that did not actually conduct business or incur those expenses. The government also alleged that Howell tried to hide his role by leaving his name off preparer lines, using different preparer entities, changing post office boxes, and sending partnership returns to different IRS service centers.

The IRS did not issue a notice of deficiency to Murrin until 2019, roughly two decades after the returns were filed. Murrin challenged the assessment, arguing that the normal statute of limitations had long expired.

The Three-Year Rule Has a Big Fraud Exception

In most cases, the IRS has three years after a return is filed to assess additional tax. That deadline matters. Taxpayers are not expected to keep records forever, and the government is not supposed to be able to reopen ordinary returns indefinitely.

But tax law has a major exception. If a return is false or fraudulent with the intent to evade tax, the IRS can assess tax at any time.

The fight in Murrin was over whose intent counts.

Murrin argued that the fraud exception should apply only when the taxpayer intended to evade tax. The government argued that the statute only requires a fraudulent return with intent to evade tax. In its view, that intent can belong to someone else, including the preparer.

That distinction makes a massive difference. If Murrin’s view won, the IRS would have been out of time unless it could show taxpayer fraud. Under the government’s view, the preparer’s fraud was enough to keep the assessment period open indefinitely.

The Courts Sided With the IRS

The Tax Court ruled for the government, relying on its earlier position that a return preparer’s fraudulent intent can trigger the unlimited assessment period.

The Third Circuit agreed. It read the statute as focusing on the fraudulent return, not necessarily on the taxpayer’s personal state of mind. The court acknowledged the taxpayer’s frustration but concluded that the law did not require taxpayer intent.

That left Murrin with one more shot: the Supreme Court.

She asked the Court to take the case, arguing that the Third Circuit had created a split with the Federal Circuit. In a 2015 case, BASR Partnership v. United States, the Federal Circuit held that the fraud exception applies only when the taxpayer, not a third party, intended to evade tax.

Murrin also raised a fairness concern. Taxpayers who can afford to pay the disputed tax first may sue for a refund in the Court of Federal Claims, where Federal Circuit precedent applies. Taxpayers who cannot prepay often go to Tax Court and then appeal to their regional circuit. That means the rule may vary depending on geography and the taxpayer’s ability to pay upfront.

The Supreme Court declined to hear the case. That does not mean the Court endorsed the Third Circuit’s reasoning. But it does mean the Third Circuit ruling stays in place.

Why This Is a Big Deal for Taxpayers

The practical result is harsh.

A taxpayer may not face fraud penalties if they personally did not intend to evade tax. But that does not mean they are protected from the tax itself, interest, and other consequences tied to a fraudulently prepared return.

In Murrin’s case, the petition said she faced more than $328,000 in tax, penalties, and interest. The interest alone had grown to more than $250,000 by the time the IRS issued the notice of deficiency.

That is the real operational danger. Time does not just make tax bills larger. It also makes defense harder.

After 10, 15, or 20 years, records disappear. Banks change systems. Businesses close. People move, retire, or die. Clients may not remember what they gave the preparer, what they reviewed, or what questions they asked before signing.

For innocent taxpayers, “I didn’t know” may not be enough to stop the assessment clock.

What This Means for Tax Firms

This case should make every reputable tax firm think harder about documentation, client education, and quality control.

The obvious takeaway is that clients need to choose preparers carefully. But that advice is not enough. Most clients do not know how to vet a tax professional beyond checking price, availability, and maybe credentials. They often assume that if a preparer has an office, a website, or a referral, the person is safe.

Firms can turn this into a trust-building moment. Engagement letters, document requests, review notes, preparer identification, e-file authorizations, and client signoffs all matter. So does explaining to clients that they are responsible for what is on the return, even when a professional prepares it.

For firm owners, this is also a reminder that sloppy internal practices create risk. A return with aggressive deductions, weak support, or missing preparer information is not just a bad look. It can become a problem years later, long after the original staff member has left.

The Geographic Problem Is Not Over

The Supreme Court’s denial leaves the law uneven.

For taxpayers in the Third Circuit, the rule is now clear: taxpayer intent is not required when a preparer directly puts fraudulent items on the return with intent to evade tax.

Elsewhere, the issue remains less settled. The Federal Circuit’s BASR decision still exists, and the government may argue that it is limited to situations where the fraud was more distant from the actual return preparation process. The Tax Court, meanwhile, has taken a position that favors the IRS.

That means advisers need to be careful about giving blanket answers. The right analysis may depend on where the taxpayer litigates, whether they can prepay and sue for a refund, who committed the fraud, and how directly that person was involved in preparing the return.

The Advisory Takeaway

For tax professionals, Murrin is not just a statute-of-limitations case. It is a reminder that return preparation is built on trust, and trust needs a paper trail.

Clients should know who is preparing their returns. Firms should make sure preparer information is accurate and visible. Deductions should be supported. Partnership items should be documented. Review procedures should not be treated as box-checking.

The IRS now has a stronger hand, at least in the Third Circuit, when a fraudulent preparer caused an understatement. That should push good firms to separate themselves from bad actors with cleaner files, better explanations, and stronger internal controls.

The danger for taxpayers is not that they will automatically be branded fraudsters because their preparer cheated. The danger is that the tax bill may still survive long after they thought the year was closed.