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Supreme Court rules against IRS in statute of limitations case

Statutes of limitations are an essential part of tax law, limiting how far back the Internal Revenue Service can go in attempting to assess penalties and collect back taxes against taxpayers from Florida and around the country. The IRS must generally abide by a three-year statute of limitations for many tax matters, though there are circumstances under which there is a longer statutory period or indeed none at all. As an example of their importance, the Supreme Court issued a ruling this week against the IRS in a tax case where the case turned on which statute of limitations applied.

The case involved one of a number of tax shelters the government alleged were designed for tax evasion. They were dubbed "Son of BOSS," because they appeared to be modeled on a prior shelter named "BOSS." The acronym stands for "bond and option sales strategy." The shelter promoted creative ways to raise the purchase price of a capital asset so that when it came time to sell it, the realized gain--and the tax on that gain--would be smaller.

The trouble for the IRS was that the three-year statute of limitations had run by the time it was able to uncover individual uses of the shelters. It still attempted to bring cases against taxpayers, however, taking the position that it was entitled to a six-year statute of limitations. Some agreed to settle their cases with the IRS, but others challenged the applicability of the longer statutory period.

By a 5-4 margin, the Supreme Court ruled in favor of two taxpayers who took the case to court. The ruling may help the cases of others who used similar tax shelters. Statutes of limitations are a vital consideration in any tax controversy, and taxpayers engaged in a tax controversy should know what statute applies in their case.

Source: The Wall Street Journal, "IRS Loses Tax-Shelter Case," John D McKinnon, April 25, 2012.

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