Thursday, January 27, 2022

Ninth Circuit Clarifies Affirmative Act for Evasion of Assessment After Return Filed Can Restart Statute Of Limitations (1/27/22)

In United States v. Orrock , ___ F.4th ___, 2022 U.S. App. LEXIS 2373 (9th Cir. 1/26/22), CA9 here and GS here, the Court resolved potential confusion in the 9th Circuit as to whether the evasion of assessment statute of limitations runs from (i) the first date that all elements of the crime existed (often in evasion of assessment cases when the taxpayer files the return) or (ii) a later date where the taxpayer committed an affirmative action of evasion (e.g., lie in an audit or, as in Orrock, file some false related return). The Court held that the latter date could, in effect, restart the statute of limitations. In other words, if the taxpayer had done no affirmative act after filing the return, the statute of limitations applies from the date of filing the return. If the taxpayer does an affirmative act after filing the return, the statute of limitations is in effect “refreshed.”

I am surprised that this could really be a continuing issue. I think that, in the 9th Circuit cases that appeared to create uncertainty on the point, there was just confusion that has now been clarified.

I offer on this subject the following from Michael Saltzman and Leslie Book, IRS Practice and Procedure, ¶ 12.02[1][c][iv] Affirmative act of evasion (Thomsen Reuters 2015) (some footnotes omitted) (note: I am the principal author of Chapter 12,  titled Chapter 12: Criminal Penalties and the Investigation Function):

We discuss statutes of limitations below, but it is important to note here that the statute of limitations begins to run on the date of the last affirmative act of evasion. To illustrate, assume the taxpayer files a false return with intent to evade tax. That filing alone can be the affirmative act. If it is the only affirmative act, then the statute of limitations runs from the date of filing. There can be later affirmative acts with respect to a previously filed return. For example, if, incident to an audit of the return, a taxpayer makes a false statement to the agent in order to hide the original fraud on the return, then the statute of limitations on evasion will run from the date of the false statement.n104 Although the affirmative act element and the willfulness element of tax evasion are stated as separate elements, the elements are related in that the affirmative act element requires a willful intent to evade motivating the affirmative act. Stated otherwise, if the affirmative act element is satisfied, then wouldn't the willfulness element necessarily be satisfied? The cases discussing the issue are sparse, but the logic seems compelling.
   n104 United States v. Beacon Brass Co., 344 US 43 (1952) . The false statement is also a separate crime under 18 USC 1001. The Ninth Circuit, in an opinion many practitioners believe was wrongly decided, held that where the filing of a false return was an act of evasion of assessment, the crime was complete and started the statute of limitations, so that subsequent false statements in audit to avoid assessment were not separate acts of evasion starting a new statute of limitations. United States v. Galloway, 125 AFTR2d 2020-803 (9th Cir. 2020) (unpublished). The reasoning is not consistent with Beacon Brass where a taxpayer’s later false statements in the course of an audit effectively refreshed the statute of limitations.

 I will revise that footnote in the next cumulative supplement to the Saltzman treatise.

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