Missing Foreign Filings May Subject Entire Tax Return to Extended Statute of Limitations (article)
In March of 2012, the IRS issued a memorandum for its examination executives advising of amendments to section 6501 of the Internal Revenue Code, which provides the statute of limitations on the rights of the IRS to assess or collect taxes. The Hiring Incentives to Restore Employment Act ("HIRE Act") modified section 6501(c)(8) to provide exceptions that extend the normal three-year period of time for assessment in certain situations, and the recent memorandum expanded and clarified the exceptions. These exceptions essentially give the IRS the ability to audit a tax return outside of the normal statute of limitations if the return is missing any of the specified foreign reporting forms.
Extended Period for Assessment
The exceptions extend the limitations period for assessment of tax. Specifically, in situations where the exception applies, the limitations period will not expire any earlier than three years after the required information is provided to the IRS by the person required to file the return. Importantly, this exception applies to the entire return, and is not limited to items impacted by information not previously provided. However, if the taxpayer is able to show the failure to provide the required information was due to reasonable cause and not willful neglect, the extended time for assessment may be limited to items associated with the information that was not previously provided.
The exceptions apply to information required to be reported for cross-border transactions or foreign assets, including provisions under sections 1295(b), 1298(f), 6308, 6038A, 6038B, 6038D, 6046, 6046A, or 6048. The exceptions relate to foreign reporting on many IRS forms, including Forms 5471, 5472, 926, 8865, 8621, 3520, 8858, and 8938.
The statute of limitations for assessment of taxes is extended to six years if a taxpayer fails to report more than 25% of his gross income. The HIRE Act expanded this provision to provide that an omission of gross income attributable to specified foreign financial assets in excess of $5,000 extends the period of assessment to six years from the date the return was due (without regard to extensions) or filed, whichever was later. Specified foreign financial assets include financial accounts maintained by a foreign financial institution and certain foreign financial assets if they are held for investment and not held in an account maintained by a financial institution. The extension of the period of assessment applies irrespective of whether or not the specified foreign financial assets were actually reported on the required Form 8938.
With the exception of reporting under section 6038D (Form 8938), the amendment to the six year statute of limitations applies as long as the period of time for assessment of taxes has not expired as of March 18, 2010. It therefore appears that retroactive treatment is intended for returns filed in 2006 through 2009 if the statute for assessment under section 6501(c)(8) had not expired as of March 18, 2010.
These amendments to the statute of limitations provisions effectively means that the IRS can audit a taxpayer's return and make changes or assess additional taxes outside of the normal statute of limitations if any of the foreign informational filings noted in the specified code sections are not filed. This potential for examination of a tax return can extend indefinitely until the informational return is filed, making it even more important to submit the requisite foreign informational filings. Further, the IRS may not only change items that may be affected by the informational filings, but rather any item on the entire return — a significant departure from prior guidance. Finally, it appears inaccurate or incomplete filings may be treated as a failure to file as well. The taxpayer's only recourse is to prove the failure to file was due to reasonable cause and not willful neglect, in which case the suspension of the statute of limitations will only apply to items related to the failure to file.
The 2011 Voluntary Disclosure Program, which previously expired but has been reinstated with similar provisions and no stated expiration date as of yet, provided guidance for the mechanics of making late foreign informational filings in certain circumstances in its FAQs. FAQ #18 reads as follows:
A taxpayer who has failed to file tax information returns, such as Form 5471 for controlled foreign corporations (CFCs) or Form 3520 for foreign trusts but who has reported and paid tax on all their taxable income with respect to all transactions related to the CFCs or foreign trusts, should file delinquent information returns with the appropriate service center according to the instructions for the form and attach a statement explaining why the information returns are filed late. (The Form 5471 should be submitted with an amended return showing no change to income or tax liability). The IRS will not impose a penalty for the failure to file the information returns if there are no underreported tax liabilities and the information returns are filed by September 9, 2011.
Absent new or specific guidance regarding the mechanics of making the aforementioned filings, taxpayers should consider the options and process noted above and evaluate whether they should make the late filings in order to prevent the ramifications of an indefinitely extended statute of limitations.
To determine whether you have missed any foreign filings and to assess the potential impact of an extended statute of limitations, contact your local CBIZ MHM tax advisor.
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