Most tax practitioners understand the basic assessment statute of limitations rules in the Code: three years after the return is filed, six years after the return is filed for 25% omission of income, or forever in the case of fraud and/or failure to file.[i] Practitioners may be less familiar with the raft of additional special assessment statutes of limitation rules found in the Code, but one of these additional rules demands special attention. That rule is section 6501(c)(8) which provides that in the case of any information on foreign activities which is required under section 6038, 6038A, 6038B, 6046, 6046A, or 6048, the time for assessment of any tax shall not expire until three years after the date on which the IRS is furnished the information required to be reported.
Until recently, section 6501(c)(8) was often overlooked both for assessment and financial statement tax provision purposes. As stated above, section 6501(c)(8) set forth an exception to the general rule. In March of 2010 the Hiring Incentives to Restore Employment Act (the “HIRE Act”), amended the section 6501(c)(8) exception to the general statute of limitations and it has been made applicable to the entire income tax return – not just the tax consequences related to the information required under the relevant foreign information reporting provision. The new section 6501(c)(8) is applicable to any tax return filed after March 18, 2010 and any other return for which the assessment period specified in section 6501 had not yet expired as of that date. As long as a failure to comply with one of the specified foreign information reporting requirements for a tax return exists, the limitations period for that tax return remains open indefinitely. The statute will not commence to run until the time at which the information required under the reporting provision is filed with the IRS and will not expire before three years after the filing of the required information.
In addition to expanding the information reporting requirements subject to section 6501(c)(8) the HIRE Act expands the scope of the exception by adding the term “tax return” to the statute. As revised, the new section reads:
In the case of any information which is required to be reported to the Secretary pursuant to an election under section 1295(b) or under sections 1298(f), 6038, 6038A, 6038B, 6038D, 6045, 6046A or 6048, the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is three years after the date on which the Secretary is furnished the information required to be reported under such section. [Emphasis added]
In general, such information reporting is due with the taxpayer’s return; thus, the three-year limitation period commences when a timely and complete return (including all information reporting) is filed. The foreign information reporting provisions include:
- Section 6038: certain foreign corporations (Form 5471) and partnership (Form 8865), and foreign disregarded entitles (Form 8858);
- Section 6038A: certain foreign-owned U.S. corporations (Form 5472);
- Section 6038B: certain transfers to foreign persons (Form 926 and 8865);
- Section 6046: organizations, reorganizations, and acquisitions of stock of foreign corporations (Form 5471);
- Section 6046A: changes in interest in certain foreign partnerships (Form 8865);
- Section 1295 (Form 8621) , qualifying electing fund elections by passive foreign investment companies (PFICs); and
- Section 6038D: information with respect to foreign financial assets (Form 8938).
Without the inclusion of the foreign information reporting with the return, the limitation period does not commence until such time as the information reports listed above are subsequently provided to the IRS, even though the return has been filed. The taxes that may be assessed during this suspended or extended period are not limited to those attributable to adjustments to items related to the information required to be reported by one of the enumerated sections.
The prior version of the statute provided that the time for assessment of any tax imposed was only with respect to any event or period to which such information relates shall not expire before the date which is three years after the date on which the IRS is furnished the information required to be reported.[ii] Back in 2000 the application of section 6501(c)(8) was clarified in response to public comments on the proposed regulations. The preamble to the 2000 final regulations under sections 6038 and 6038B stated:
The IRS and Treasury wish to clarify that if a U.S. person fails to comply with sections 6038, 6038B, or 6046A, the extended statute of limitations provided by section 6501(c)(8) shall apply only to the tax consequences related to the information required to be reported under the relevant reporting section and not to all transactions within the U.S. person’s tax year at issue. Accordingly, section 6501(c)(8) keeps the assessment period open beyond the normal three-year period of limitations only for the tax imposed with respect to any event or period to which information required to be furnished to the Service relates. Therefore, the extension of the statute of limitations does not apply to the entire income tax return.
After the HIRE Act changes to the 6501(c)(8) statute many practitioners publically expressed concerns regarding the implications of the “ tax return” language and the practical implications of substantially complying. In response to public comments the August 2010 Hiring Incentives to Restore Employment Act[iii] added a reasonable cause exception to section 6501(c)(8). This technical correction modified the scope of the exception to the limitations period but only if a failure to provide information on cross-border transactions or foreign assets is shown to be due to reasonable cause and not willful neglect.[iv] In the absence of reasonable cause or the presence of willful neglect, the suspension of the limitations period and the subsequent three-year period that begins after information is ultimately supplied apply to all issues with respect to the income tax return. In cases in which a taxpayer establishes reasonable cause, the limitations period is suspended only for the item or items related to the failure to disclose. To prove reasonable cause, it is anticipated that a taxpayer must establish that the failure was objectively reasonable (i.e., the existence of adequate measures to ensure compliance with rules and regulations), and in good faith.
The technical correction was the direct result of practitioner input after the section 6501(c)(8) amendment was enacted and applies for returns filed after March 18, 2010, the date of enactment of that Act, as well as for any other return for which the assessment period specified in section 6501 had not yet expired as of that date. The Joint Committee of Taxation report provided that:
In the absence of reasonable cause or the presence of willful neglect, the suspension of the limitations period and the subsequent three-year period that begins after information is ultimately supplied apply to all issues with respect to the income tax return. In cases in which a taxpayer establishes reasonable cause, the limitations period is suspended only for the item or items related to the failure to disclose.
For example, the limitations period for assessing taxes with respect to a tax return filed on April 15, 2011 ordinarily expires on April 15, 2014. In order to assess tax with respect to any issue on the return after April 15, 2014, the IRS must be able to establish that one of the exceptions to the assessment statute of limitations applies. If the taxpayer fails to attach to that return one of multiple foreign information forms required, the limitations period does not begin to run unless and until that missing information form is supplied. Assuming that the missing form is supplied to the IRS on January 1, 2013, the limitations period for the entire return begins, and elapses no earlier than three years later, on January 1, 2016. All items are subject to adjustment during that time, unless the taxpayer can prove that reasonable cause for the failure to file existed. If the taxpayer establishes reasonable cause, the only adjustments to tax permitted after April 15, 2014 are those related to the failure to file the information return. For this purpose, related items include (1) adjustments made to the tax consequences claimed on the return with respect to the transaction that was the subject of the information return, (2) adjustments to any item to the extent the item is affected by the transaction even if it is otherwise unrelated to the transaction, and (3) interest and penalties that are related to the transaction or the adjustments made to the tax consequences.
What all this means is that, in preparing foreign information forms, taxpayers need to make sure that the forms are complete and accurate at the time of filing or if an error or missing information is discovered taxpayers should consider filing an amended tax return including the form to start the running of the statute of limitations.[v] The potential cost of reporting failures is too significant given the IRS’ tougher administration of the information reporting penalty provisions, the amount of such penalties, and now with the expanded limitations period extended to the entire tax return. Not only does this impact the tax return but will impact reserves established or possibly released for financial statement purposes.
For those felonious taxpayers wishing to keep their secret, undisclosed foreign bank accounts, their assessment statute of limitations will never expire so long as the taxpayer maintains the secrecy of the account, in part, by failing to file the required foreign information schedules on their tax returns.
For more information please contact Edward M. Robbins, Jr. –EdR@taxlitigator.com Mr. Robbins is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C. He is the former Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at www.taxlitigator.com .
[i] See IRC § 6501.
[ii] IRC § 6501(c)(8). On October 7, 2009, the IRS published proposed regulations on the exception to the general three-year assessment limitations period under IRC § 6501(c)(10) for listed transactions that a taxpayer failed to disclose as required under IRC § 6011. The proposed regulations explain how to determine whether IRC § 6501(c)(10) applies, and if so, the applicable assessment limitations period. IRC § 6501(c)(10) generally applies to all open years for which the taxpayer failed to disclose its participation in a listed transaction as required under the IRC § 6011 disclosure rules. If IRC § 6501(c)(10) applies, the limitations period for the listed transaction remains open until the earlier of one year after the date on which the taxpayer provides the information required under IRC § 6011 or the date on which a material adviser provides the information required under IRC § 6112. The regulations provide a rule on the application of IRC § 6501(c)(10) for when taxpayers are partners in partnerships, shareholders in S corporations, or beneficiaries of trusts. See 74 F.R. 51527—51535; 2009-47 IRB 657.
[iii] The provision is effective as if included in section 513 of the Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147.
[iv] Presumably, “reasonable cause” will be evaluated similarly to the rules under section 6664(c), section 6651(a)(1) , or section 6651(a)(2).
[v] None of these foreign information forms are “stand alone” forms that may be filed by themselves. They all need to be filed as part of a tax return. Compare Forms 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) and 3520A (Annual Information Return of Foreign Trust With a U.S. Owner) which are filed by themselves.