Recent Tax Court Ruling Limits Statute of Limitations for Foreign Account Reporting
By: Tiffany D. Bell, Esq.
In 2010, Congress added to the anxiety of tax practitioners when it expanded the statute of limitations for the IRS to assess income taxes to six years when a taxpayer fails to include Form 8938 with his tax return. Taxpayers use Form 8938 to report to IRS foreign bank accounts and other specified foreign financial assets they own even if the accounts don’t affect their income tax liability. If a taxpayer fails to include this form with his return when he is supposed to, he could give the IRS an extra three years within which to audit his tax return.
Recently, the IRS has been using the 2010 laws to extend its statute of limitations for years even before the enactment of the new law. The Tax Court, in a new opinion, Rafizadeh v. Commissioner, 150 T.C. No. 1 (January 2, 2018), drew the line and limited application of the six-year statute of limitations period to only periods in which a report was required under I.R.C. Section 6038D.
I.R.C. Section 6038D is effective for taxable years beginning after March 18, 2010. The statute requires that an individual who, during the taxable year, holds an interest in a “specified foreign financial asset” shall provide certain information with their tax return relating to the specified foreign financial asset. A specified foreign financial asset is defined in Section 6038D(b)(1) as, inter alia, any financial account maintained by a foreign financial institution. Pursuant to Section 6038D(d), a penalty will be imposed for any individual who fails to timely furnish the required information. Congress also added I.R.C. Section 6501 (e)(1)(A)(ii) in its amendment, which adds the extra sting of adding these additional years to the Statute of Limitations.
Section 6501, in general, provides that the IRS must assess tax within three years of the date a return was due or the date the return was actually filed, whichever is later. See 26 U.S.C. § 6501. However, there are exceptions to this general rule. Section 6501(e)(1)(A)(ii), is one such exception. It provides that the IRS will have six years within which to assess tax 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.”
In Rafizadeh, the Tax Court considered whether the IRS acted properly when it applied section 6501(e)(1)(A)(ii) to tax years for which the reporting requirement of section 6038D did not apply. Mr. Rafizadeh timely filed his Federal income tax returns for 2006, 2007, 2008 and 2009 but did not report income earned on a foreign account that he held. On December 8, 2014, after the three-year statute of limitations expired, the IRS issued a notice of deficiency for 2006, 2007, 2008 and 2009. Since the IRS was late under its three-year statute, it argued that the six-year statute of limitations applied because Mr. Rafizadeh did not report his foreign accounts. IRS argued that the six-year statute of limitations applied to these years, reasoning that the new Section 6501(e)(1)(A)(ii) would open those otherwise closed years. The Taxpayer argued that Section 6501(e)(1)(A)(ii) expressly states the six-year limitations statute applies to “assets with respect to which information is required to be reported under 6038D” and section 6038D did not become effective until March 18, 2010. Therefore, Mr. Rafizadeh claimed, no such information had to be reported prior to that time and the six-year limitations statute does not apply to these earlier years. The Tax Court agreed and concluded that the “most natural reading of this phrase is that the six-year statute of limitations applies only when there is a section 6038D reporting requirement .”
The Tax Court found that the notice of deficiency issued for Mr. Rafizadeh on December 8, 2014 was untimely because the six-year limitations period under section 6501(e)(1)(A)(ii) did not apply to his 2006, 2007, and 2008 returns. “Because I.R.C. sec. 6501(e)(1)(A)(ii) applies only to omissions 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 specified exceptions), it is effective only for tax years with respect to which the reporting requirement of I.R.C. sec. 6038D is effective.” Rafizadeh v. Commissioner, 150 T.C. No. 1.
The Rafizadeh opinion is important and timely, as it addresses the very real possibility that the IRS will aggressively seize on arguments to extend otherwise time-barred years, particularly when large tax deficiencies are at stake. In another example, the Tax Court rejected the IRS’ attempt to claim that a tax return filed pursuant to IRC Section 932(c) with the Virgin Islands Bureau of Revenue is not really a tax return that starts the statute of limitations. Coffey, et. al. v. Commissioner, 150 T.C. No. 4, (litigated by our firm).
In this climate, tax professionals must do a careful statute of limitations analysis for their clients who may be subject to an expanded limitations period. The IRS may file an untimely notice of deficiency or request statute extensions for closed tax years and so it is incumbent upon tax professionals to be diligent in understanding the limitations periods for the various information returns. The attorneys at Andreozzi Bluestein have extensive experience navigating the nuances of IRS statutes of limitation. If you think you or a client may have an issue related to the application of the IRS statute of limitations, please call us today to discuss the issue with no obligation.
 IRS later conceded in the case that Section 6501(e)(1)(A)(ii) did not apply for the 2009 taxable year because the omitted income earned on the foreign account was less than $5,000.
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