Pinckney: Tax Fraud Kept the IRS Assessment Period Open After the Three-Year Deadline Passed

When a return is false or fraudulent with intent to evade tax, the IRS can assess the tax at any time, but in Tax Court it must prove that fraud by clear and convincing evidence. In Pinckney v. Commissioner, T.C. Memo. 2026-113 (Nov. 4, 2026), the IRS carried that burden against a South Carolina tax-return preparer, so its 2019 notice of deficiency for 2008 and 2009 was timely even though the usual three-year periods had run while a criminal case was pending.

Judge Morrison’s memorandum opinion also sustained 75% fraud penalties for both years and most of the income the IRS rebuilt from the preparer’s business bank account, with the tax to be recomputed under Rule 155. Eric Pinckney represented himself; absent a stipulation, an appeal would go to the Fourth Circuit.

A suspended audit and a criminal case

Pinckney was the sole member of Daitech Tax Services, LLC, a return-preparation business. The court found that Daitech manipulated customers’ Schedule C income to maximize earned income credit refunds, sometimes by falsely claiming cost of goods sold. On his own returns, Pinckney reported Daitech gross receipts of $200,500 for 2008 and $143,080 of gross receipts and other income for 2009, reduced by cost of goods sold of $23,231 and $30,667.

A random 2008 audit, later expanded to 2009, produced a January 2012 30-day letter proposing about $16,000 of tax per year and 20% accuracy-related penalties. In April 2012 an IRS criminal investigator had the civil case suspended. Pinckney was indicted in 2014, pleaded guilty in 2015 to conspiring to file false customer returns and, testifying at a co-defendant’s 2016 trial, admitted lying on his own 2008 and 2009 returns.

The civil case resumed in 2017. A May 2018 30-day letter raised Daitech’s gross receipts to figures drawn largely from the indictment and asserted fraud penalties. The February 6, 2019 notice of deficiency determined deficiencies of $71,581 for 2008 and $75,638 for 2009. The IRS obtained the Daitech bank records only in October 2021, during the litigation.

Fraud kept the assessment period open

Section 6501(a) generally allows three years after a return is filed to assess tax. Pinckney argued that the six-year period for omitting more than 25% of gross income applied and had run for both years before 2019. He also relied on his lapsed 2008 extension consent and the absence of any 2009 consent. The IRS relied only on section 6501(c)(1), which allows assessment at any time for “a false or fraudulent return with the intent to evade tax.”

Because the court had already found both returns fraudulent in its penalty analysis, it held that “assessment of tax and the fraud penalties for these years is not time barred by section 6501(a).” It found no need to address the consent and six-year arguments. A separate argument based on the 10-year collection period also failed: That period runs from assessment, and the deficiencies had not yet been assessed.

How the IRS proved fraud

Section 7454(a) puts the burden of proving fraud on the IRS, and Tax Court Rule 142(b) requires clear and convincing evidence. For each year, the IRS had to prove that an underpayment existed and that some part of it was due to fraud. The court stressed that the IRS cannot prove the underpayment merely because the taxpayer failed to carry his own burden on the deficiency.

The IRS proved one false item by clear and convincing evidence: cost of goods sold. Daitech sold services, not goods, and the Forms 1120-S Pinckney later submitted for Daitech claimed none, which the court treated as an admission. On intent, the court relied on that concession, Pinckney’s use of the same false cost-of-goods technique on customer returns, his conspiracy conviction and his sworn admissions. The IRS did not argue that the conviction itself barred him from denying fraud, as an evasion conviction under section 7201 can.

Once part of each underpayment was proved fraudulent, section 6663(b) treated the whole underpayment as fraudulent unless Pinckney proved otherwise, which he did not. The penalties met the written supervisory approval rule because the examiner’s supervisor signed the 2018 letter that first communicated them.

Bank deposits rebuilt the income, with the burden on the IRS

The notice of deficiency did not mention a bank-deposits analysis, and that analysis required different evidence, so the court treated it as a new matter on which the IRS bore the burden of persuasion. The court accepted the deposits an IRS revenue agent tied to the tax business through bank-statement descriptions, customer checks marked for tax preparation and teller cash tickets. It excluded $3,613 of 2008 deposits whose source the agent could not identify.

The result was $376,712 of 2008 gross receipts, below the $382,243 in the notice. For 2009, taxable deposits of $416,182 exceeded the $340,765 the notice determined, so the notice’s lower figure stood. The court rejected the argument that the analysis was invalid for ignoring payments out of the account: The IRS must account for deductible expenses it knows about but need not follow leads, and the taxpayer must prove his deductions.

What else the court decided

The bank records supported $72,906 of 2008 Daitech expenses, less than the $132,444 the IRS had allowed, so that figure stood; for 2009 they supported $66,963, more than the $63,199 allowed. Cost of goods sold was zero for both years. Daitech remained a disregarded entity, so its profit was self-employment income, because the Form 2553 Pinckney filed in 2012 came too late. Whether the IRS assessed restitution too early was outside this deficiency case.

What the decision means

Our reading: The limitations ruling rested entirely on the fraud finding, so the three-year, six-year and consent questions dropped out. That proof came from an item the taxpayer later conceded, a matching pattern on customer returns and his sworn admissions, not just the size of the income gap. The bank-deposit ruling also turned on the burden: Untraced deposits dropped out only because the deposits analysis was a new matter on which the IRS bore the burden. Had the notice rested on the deposits, Pinckney would have had to prove them nontaxable.

Our guide on what the IRS must prove to assess after three years covers the deadlines and records to check.