Prior Year Tax Return Exposure: The Risk on Your Books That May Not Be Closed 

Stephanie Murrin signed her 1993 tax return in good faith, a fact central to the Third Circuit’s decision in Murrin v. Commissioner. Her preparer placed false entries on it. She did not know. The IRS later stipulated she had no intent to evade tax. 

In 2019, twenty years after the last return in the period, the IRS issued a Notice of Deficiency. The Tax Court ruled against her. The Third Circuit affirmed. A petition for a Writ of Certiorari was filed with the Supreme Court in February 2026. As of this writing, no decision or grant of certiorari has been announced. The petition is pending. 

The underlying assessment is roughly $65,000. Accrued interest exceeds $250,000. Total exposure: over $315,000 on returns filed when the youngest practice owner reading this article was finishing medical school. 

That is not the part of this story that should concern you most. Prior year tax return exposure is the risk that old returns may still affect current tax, interest, documentation, or business decisions after the owner assumed those years were closed. 

The Cost Is Not Contingent on the Outcome 

The Supreme Court may grant cert or deny it. The legal outcome matters enormously to Stephanie Murrin. It matters far less to the argument this post is making. 

The costs she has absorbed since 2019 are not refundable regardless of how the case ends. Seven years of attention diverted toward an exposure she did not create. Seven years of compounding interest. Attorney fees through Tax Court, through the Third Circuit, through cert preparation. Records reconstruction on returns filed before current tax software existed. The opportunity cost of every hour and every dollar directed at defending old returns instead of building current ones. 

If the Supreme Court rules in her favor tomorrow, she does not get those seven years back. She gets the next chapter back. The seven years are spent. 

Most practice owners with prior-year preparer history are paying a version of that same cost right now, in a form that has no docket number and no line item. 

Why Old Tax Returns May Not Be Fully Closed  

Section 6501(a) of the Internal Revenue Code gives the IRS three years from the filing of a return to assess additional tax. That rule exists for a reason. It is the structural feature that allows a taxpayer to stop carrying a return as an open question and begin treating it as closed. 

Without it, financial planning becomes impossible. A practice owner who could never close a tax year could never deploy capital with confidence, never make a long-horizon compensation decision without reserving against an undefined liability, never look at last year’s return as anything other than a contingent claim on next year’s cash. 

Section 6501(c)(1) carves an exception. If a return is false or fraudulent with intent to evade tax, the IRS can assess at any time. Most practitioners historically read that exception as requiring the taxpayer’s own intent. The Third Circuit read it differently: that the intent of anyone who participated in preparing the return may be sufficient to keep the window open indefinitely, regardless of what the taxpayer knew or did. 

Whatever the Court ultimately decides, one thing is already true: the three-year statute is no longer a fixed structural feature of a practice’s financial position. It is a contingent one, dependent on facts the owner cannot directly verify about preparers they may no longer employ. 

The Prior-Year Exposure Most Practices Are Carrying 

Every practice owner has a portfolio of prior-year returns. Some were prepared by their current firm. Some were prepared by firms they no longer use. Some were prepared by individuals they have lost contact with entirely. 

The exposure profile of that portfolio is not a function of the practice owner’s intent. It is a function of facts the owner has not investigated and, in most cases, is not positioned to investigate alone. 

The structural problem with using a tax preparer to evaluate this risk is that the preparer is the source of the exposure being examined. A preparer asked to assess whether they or a predecessor placed anything questionable on a prior return is being asked to audit themselves. The role conflict is not malicious. It is structural. The person with the technical knowledge to read the return for risk is the person whose interests are most aligned with the conclusion that no risk exists. 

That is not cynicism. It is the predictable output of how the relationship is designed. 

What Unexamined Prior-Year Exposure Actually Costs  

Prior year tax return exposure has a carrying cost that operates independently of whether an IRS notice ever arrives. It accumulates in four layers: 

• Attention load: the background awareness that old returns may not be as closed as they appear, which is a tax on cognitive capacity that compounds quietly 

• Decision drag: capital commitments and compensation elections sized conservatively because the owner is carrying an undefined contingent liability 

• Records degradation: documentation that was borderline adequate at filing becomes inadequate as time passes and the preparer relationship ends 

• Planning discontinuity: tax strategies built on the assumption that prior years are closed may need to be revisited if that assumption turns out to be wrong 

None of these costs appear on a financial statement. They compound in the background regardless of whether the exposure ever materializes into an assessment. The carrying cost does not depend on the terminal event. It depends on the open question. This is why some of the most important business risks are the costs that do not appear in your financial reports. 

Stephanie Murrin’s $315,000 of pending exposure is visible. The seven years of carrying cost she has already paid are not in that number. They were paid in currencies the case will never refund. 

When Should a Practice Owner Review Prior-Year Tax Returns?  

The question most practice owners ask: “Could what happened to Stephanie Murrin happen to me?” 

The harder question: “What am I already paying, in attention and deferred decisions, to carry an exposure I have never priced?” That is where unpriced exposure begins to affect future decisions more than the return itself. 

Prior year tax return exposure is not an April problem. It is a standing feature of a practice’s financial position that deserves deliberate attention, not default assumption. The practice owner who examines it is not looking for trouble. They are looking at what they already have, clearly, while there is still room to act. That examination requires a function whose role is structurally separate from preparation. Not a preparer reviewing their own work. A standing financial governance function whose job is to hold the tax position, including prior years, as a continuously revisable object of attention. 

What Comes Next 

If your practice has changed preparers in the last ten years, or you have never had a direct conversation about what your prior-year portfolio actually looks like, that conversation is worth having now. It does not start with a tax return. It starts with understanding what you are carrying and whether the structure around it is designed to govern it or simply ignore it. 

Our Tax Planning and Compliance work is where that conversation starts. Schedule a Leadership Call at seflemingcpa.com.