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In a landmark decision that will have wide-ranging repercussions on other related cases, the Supreme Court ruled recently that the IRS has up to 3 years from the time of filing or due date to audit taxpayers. The tax code allows the IRS to carry out audits on income within 3 years but at times up to 6 years. This time limit is called the statute of limitation. Previous court decisions of such cases have been evenly split – the courts have decided for 3 years the same number of times as it has decided for 6 years.
On Wednesday, the Supreme Court ruled against the IRS in United States vs Home Concrete & Supply LLC. The IRS argued that it could take up to 6 years to audit in this case but the Supreme Court disallowed it. The tax code says the IRS has up to 3 years from the time of filing to audit any case but allows double that time in cases where there is “substantial understatement of income”, which by definition means you have under-declared your income by 25% or more. So if dividends and bonuses from your investment portfolio amounted to $50,000 for the year but you declared only $25,000, such an understatement would have up to 6 years for the IRS to audit.
Home Concrete & Supply is a “Son of Boss” tax shelter and in cases involving such companies, the IRS usually wins. Therefore the Supreme Court decision (which was split 5-4 in favor of Home Concrete) understandably set many tongues wagging.
“Boss” is the acronym for “Bond and Option Sales Strategies” and involves writing off real profits through creating paper losses. These “Son of Boss” cases have deprived the IRS of billions of dollars in tax revenue since they first emerged in the 90’s. The IRS started cracking down on such cases since 2000 and has so far settled cases with 1,165 “Son of Boss” cases. Many similar cases that went to court received differing decisions at the Appeals Court. But the decision by the Supreme Court, as the highest court in the country, has brought greater understanding on how the law sees such cases.
This ruling might set a precedent in up to $1 billion of taxes the IRS is hoping to collect in about 30 similar tax shelter cases it intends to audit. Home Concrete & Supply LLC is a limited liability company set up to administer “Son of Boss” tax schemes for two North Carolina businessmen, Robert Pierce and Stephen Chandler, who are in the oil and coal business. The two duly filed their 1999 taxes in 2000 but the IRS took until 2006 to audit and bill them for unpaid taxes amounting to some $6 million.
The case went to court and the District Court decided in favor of the IRS but the Appeals Court reversed the district court decision. When the IRS appealed the appellate court decision, the case went up to the Supreme Court, who this week decided for Home Concrete & Supply.
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