Posted by: sbbrown64 | April 6, 2018

Tax Court Limits IRS’s Time to Assess Unreported Income from Undisclosed Foreign Accounts by Sandra R. Brown


Generally, when a taxpayer files a tax return, the federal tax laws afford the Internal Revenue Service (“IRS”) with a limit of only three-years within which it must act to examine and assess additional taxes and penalties on any unreported income. While the Internal Revenue Code provides various exceptions to this three-year limit[i], on January 2, 2018, the Tax Court in Rafizadeh v. Commissioner[ii], not only narrowed one of those exceptions, but did so in the context of the IRS’s ability to assess tax on unreported income derived from an undisclosed foreign bank account.

In February 2009, the United States entered into a deferred prosecution agreement with Switzerland’s largest bank, UBS AG, in connection with the bank’s facilitation of the creation and use of non-disclosed foreign bank accounts by U.S. taxpayers. The agreement was unprecedented and resulted in the IRS obtaining secret bank account information on tens of thousands of U.S. taxpayers.

The landmark settlement with UBS was further exemplified by the concerted efforts of the Department of Justice and the IRS to not only utilize its criminal powers but also its civil tools to obtain additional secret foreign bank account information, such as the filing of a John Doe summons action, whereby the IRS received thousands of additional undisclosed foreign accounts and the Offshore Voluntary Disclosure Initiative, an administrative compliance program which resulted in over 14,700 additional taxpayers coming forward to report previously-undisclosed foreign bank accounts.

Notably, at the time the government was involved these efforts, which can fairly be described as very public actions to obtain information about what were previously viewed as “secret” foreign bank accounts, the U.S. tax laws did not impose a separate filing obligation on U.S. taxpayers, under Title 26, with respect to such interests in foreign bank accounts. Congress, on March 18, 2010, as part of the Hiring Incentives to Restore Employment (HIRE) Act, created this additional filing obligation by enacting Section 6038D. Section 6038D imposes a duty on U.S. taxpayers to file a report of information relating to an interest in a “specified foreign financial asset,” e.g., foreign bank accounts, where the aggregate value of such asset(s) exceed $50,000.  This newly enacted reporting obligation applied only to tax years ending after December 19, 2011.[iii]  Thus, for tax years ending after 2011, the tax laws required that U.S. taxpayers – in addition to the underlying obligation to report all income from all sources – separately report, on Form 8938, their interests in foreign bank accounts. Form 8938 is then required to be submitted with the U.S. taxpayer’s income tax return.[iv]  

In imposing the new Form 8938 reporting requirement on taxpayers, Congress determined that the IRS should be entitled to additional time to examine and assess a tax related to the foreign bank account information now required to be disclosed directly to the IRS under Section 6038D. As a result, Congress, under HIRE, also enacted Section 6501(e)(1)(A)(ii), which provided a six-year statute of limitations for the IRS to assess a tax deficiency, rather than the more narrow three-year limit, in cases involving omitted gross income attributable to assets required to be reported under Section 6038D, where the amount of omitted gross income exceeded $5,000.

This brings us to Mr. Rafizadeh. For the tax years 2006 through 2009, Mr. Rafizadeh, a U.S. taxpayer, owned a foreign bank account, the gross income of which he did not disclose when he filed his tax returns for those years. Prior to his attempt to submit an offshore voluntary disclosure, the bank at which the taxpayer owned this account received a John Doe summons from the IRS. As a result, the IRS determined that the taxpayer was not eligible for the administrative compliance program. The IRS then proceeded to examine not only the taxpayer’s foreign account issues for 2006 through 2009, but also his income tax returns for those same years.

On December 8, 2014, the IRS, relying upon the six-year statute of limitations under Section 6501(e)(1)(A)(ii), issued a notice of deficiency to the taxpayer asserting tax deficiencies as well as the accuracy-related penalty for each of those years. The additional tax assessed for each year, other than 2009, exceeded $5,000.  The taxpayer petitioned the Tax Court, asserting the three-year statute of limitations to assess additional tax for the years 2006-2009 had expired and the six-year statute upon which the IRS had relied was inapplicable to these tax years as Section 6038D, unambiguously on its face, did not impose a duty on him to file the Form 8938 for these tax years.

The IRS in response, after conceding the inapplicability of Section 6501(e)(1)(A)(ii) to 2009 on grounds that the amount in issue for that year was less than $5,000 (an additional factor mandated for the application of the six-year statute of limitations), asserted the six-year statute extension should be interpreted to apply to not only years in which the Form 8938 was required but years, such as 2006-2008, in which the omitted gross income involved the type of assets required to be reported under Section 6038D as long as the statute of limitations on the underlying income tax return was still open.

The Tax Court, relying upon Supreme Court precedent[v], noted that it “must presume that a legislature says in a statute what it means and means in a statute what it says there” found that absent a preexisting obligation to file a report under Section 6038D (akin to the statute’s unambiguous $5,000 threshold), the six-year statute of limitations did not apply.[vi]  As such, the Tax Court found the notice of deficiency for 2006, 2007, and 2008 to be untimely.[vii]

In short, while the holding in Rafizadeh serves to limit the IRS’s ability, under Section 6501(3)(1)(A)(ii), to extend the general three-year statute of limitation for years prior to 2011, where the taxpayer’s omission of income from any source, including but not limited to a “specified foreign financial asset” exceeds 25% of the gross income reported on the return or is the result of fraud, the IRS doesn’t need that statute to extend its time to six years, or even, to forever. At least in the context of the IRS’s use of its civil tools. Of course, the IRS’s criminal tools are a whole different story . . .

Sandra R. Brown is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., and specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court. Prior to joining the firm, she served as the Acting United States Attorney, the First Assistant United States Attorney and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal).  Ms. Brown may be reached at or 310.281.3217.

[i] 26 U.S.C. §6501, et seq.

[ii] Rafizadeh v. Commissioner, 150 T.C. No. 1 (2018).

[iii] Treas. Reg. §1.6038D-2(g).

[iv] Treas. Reg. §1.6038D

[v] Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-254 (1992).

[vi] Rafizadeh, 150 T.C. No. 1, at 7.

[vii] Id. at 12-13.


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