IRC 6038D & IRC 6501(e)(1(A)(ii)

Originally published by Houston Tax Attorney.

IRC 6038D & IRC 6501(e)(1(A)(ii) – Extended Statute of Limitations on Omitted Income from Foreign Financial Assets

I.R.C. sec. 6038D, enacted on Mar. 18, 2010, and effective for taxable years beginning after the date of enactment, imposes reporting requirements with respect to certain “specified foreign financial assets”. The requirements are satisfied by an accurately filed Form 8938.

Form 8938, Statement of Foreign Financial Assets, is required to be filed by specified individuals who are beneficial owners of specified foreign assets in excess of the filing threshold.

Form 8938 & Statute of Limitations – A Tax Court Case

IRS statute of limitations are time periods established by law to review, analyze, and resolve taxpayer and/or IRS tax related issues.The Internal Revenue Code requires the IRS to assess, refund, credit, and collect taxes within specified limits. Once the statute of limitations has expired, the IRS cannot assess additional tax, allow a claim for refund, or take collections action.

A recent tax court opinion provides a good analysis of the interaction between IRC 6038D (the “Form 8938 requirement”) and IRC 6501(e)(1(A)(ii) (extended statute for substantial omission of items). Mehrdad Rafizadeh v. CIR (opinion available here).

Issue
Petitioner (the taxpayer) timely filed his Federal income tax returns for 2006, 2007, 2008, and 2009 but did not report income earned on a foreign account he held. The IRS served a John Doe summons seeking information relating to petitioner’s account among others, and on November 16, 2010, that John Doe summons was finally resolved. On December 8, 2014, respondent issued a notice of deficiency determining deficiencies and accuracy-related penalties on underpayments for 2006, 2007, 2008, and 2009.

Respondent (the IRS) has conceded that the notice of deficiency was issued after the expiration of the general three-year period of limitations for each year at issue and more than three years after the final resolution of the John Doe summons.

I.R.C. sec. 6501(e)(1)(A)(ii) extends the 3 year general statute of limitations to 6 years when taxpayer omits from gross income of amounts attributable to assets with respect to which the reporting requirement of I.R.C. sec. 6038D is applicable (or would be applicable without regard to threshold amounts). Is I.R.C. sec 6501(e)(1)(A)(ii) effective for tax periods prior to 2010 before which 6038D was legislatively enacted?

Rule
The general statute of limitations on a tax return is three years. Where Form 8938 is not filed, the statute may be extended to 6 years with respect to the omitted income from the specified assets. The IRS may assess taxes and civil penalties for up to 6 years in such situations.

 

• 6501(e)(1)(A)(ii) provides that the IRS may assess tax within six years after a return is filed “[i]f the taxpayer omits from gross income an amount properly includible therein and…such amount (I) is attributable to one or more assets with respect to which information is required to be reported under section 6038D and (II) is in excess of $5,000”
• Section 6038D in turn requires reporting of additional information relating to “specified foreign financial assets”. Section 6038D also has a dollar threshold that is disregarded for purposes of section 6501(e)(1)(A)(ii). Also disregarded are any exceptions to the
  reporting requirement prescribed by the IRS pursuant to authority granted under section 6038D(h)(1) (including for classes of assets that might be subject to duplicative reporting). Sec. 6501(e)(1)(A)(ii)(I).

For example, Bob and Mary, both U.S. citizens, live abroad and the value of their specified foreign financial assets is $300,000. The applicable filing threshold for married filing jointly persons living abroad is $400,000 on the last day of the tax year or $600,000 at any time during the year. Although they are beneficial owners of specified foreign financial assets, they do not meet the Form 8938 reporting threshold. The foreign income associated with the specified accounts is omitted from their tax returns. The unreported income with respect to the amounts is over $5,000. In applying 6501(e)(1)(A)(ii), the statute on Bob and Mary’s tax returns would remain open for a period of 6 years with respect to the income omitted from the foreign financial assets. This is regardless of the fact that they are below the Form 8938 filing threshold.

Analysis
Under IRC Sec 6501, the Internal Revenue Service (IRS) must assess tax within three years of the date a tax return was due, without extensions, or the date the return was actually filed, whichever is later, subject to certain exceptions. Two exceptions were applicable in this case:

1. First, the period of limitations under section 6501 is suspended beginning six months after the service of a John Doe summons and ending with the final resolution of that summons.
2. Second, section 6501(e)(1)(A)(ii) provides that the IRS may assess tax within six years after a return is filed “[i]f the taxpayer omits from gross income an amount properly includible therein and such amount (I) is attributable to one or more assets with respect to which information is required to be reported under section 6038D, and (II) is in excess of $5,000”. Section 6038D in turn requires reporting of additional information relating to “specified foreign financial assets”.

In this case, the taxpayer’s dollar threshold of $50,000 is disregarded for purposes of section 6501(e)(1)(A)(ii). Also disregarded are any exceptions to the reporting requirement prescribed by the IRS pursuant to authority granted under section 6038D(h)(1) (including for classes of assets that might be subject to duplicative reporting). Sec. 6501(e)(1)(A)(ii)(I).

This is an important point. An 8938 is NOT required to be filed (i.e., where the value of the specified foreign assets is less than the threshold reporting amount) to trigger the 6 year statute of limitations under 6501(e)(1)(A)(ii) where more than $5,000 of unreported foreign income is attributable to specified foreign assets.

I.R.C. sec. 6038D, enacted on Mar. 18, 2010, and effective for taxable years beginning after the date of enactment, imposes reporting requirements with respect to certain “specified foreign financial assets”. I.R.C. sec. 6501(e)(1)(A)(ii), also enacted on Mar. 18, 2010, provides a six-year period of limitations if the taxpayer omits from gross income amounts attributable to one or more assets with respect to which information is required to be reported under I.R.C. sec. 6038D.

Conclusion
The Tax Court concludes that the wording of the effective date for section 6501(e)(1)(A)(ii) limits its application to years for which the reporting requirement of section 6038D also is effective. In other words, the effective date of I.R.C. 6038D is Mar. 18, 2010. It was not effective at the time the income from the specified foreign assets was omitted, and therefore the government may not assess taxes or penalties on unreported foreign income on the taxpayer’s 2006-2009 tax returns.

The post IRC 6038D & IRC 6501(e)(1(A)(ii) appeared first on Law Office of Kunal Patel, LLC | Houston Tax Attorney.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

from Texas Bar Today http://ift.tt/2AkTgDe
via Abogado Aly Website