Foreign Nationals & Expats
Houston Tax Attorney
Form 8938 & Statute of Limitations
IRC § 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.
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 applicable statute of limitations has expired, the IRS cannot assess additional tax, allow a claim for refund, or take collections action.
The general statute of limitations on assessment of taxes on a tax return is three years under IRC § 6501(a). There are at least two exceptions unique to offshore compliance cases:
- IRC § 6501(e)(1)(A)(ii) Where income attributed to a specified foreign financial asset is omitted and in excess of $5,000, the statute may be extended to 6 years with respect to the omitted income from the specified asset.
- IRC§ 6501(c)(8)(A) Where Form 8938 or any other international information return is required to be filed with a tax return, the statute is extended for any tax imposed under Title 26 with respect to any tax return, event, or period to which such information relates for three years after the information is provided (e.g., filing an accurate and complete form).
IRC § 6501(e)(1)(A)(ii)
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).
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.
IRC § 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 IRC § 6038D is applicable (or would be applicable without regard to threshold amounts). Is IRC § 6501(e)(1)(A)(ii) effective for tax periods prior to 2010 before which IRC § 6038D was legislatively enacted?
IRC § 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.”
IRC § 6038D in turn requires reporting of additional information relating to “specified foreign financial assets”. IRC § 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).
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.
Under IRC § 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.
The government in this case seeks to extend the statute to 6 years through application of IRC § 6501(e)(1)(A)(ii) to IRC § 6038D. Section 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”. IRC § 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 Section 6038D.
According to the tax court’s analysis and reading of IRC § 6501(e)(1)(A)(ii), the taxpayer had no preexisting obligation to report the information required by section 6038D:
While the effective date of section 6038D was not imported by the cross-reference to section 6038D, we conclude 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 (or would be barring an exception that is to be disregarded). Section 6501(e)(1)(A)(ii) does not simply incorporate the definition of assets in section 6038D; it also specifies that the assets are subject to the reporting requirement (or would be but for an exception that is disregarded).
The Tax Court concludes that section 6501(e)(1)(A)(ii) limits its application to years for which the reporting requirement of section 6038D also is effective. The effective date of IRC § 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 by applying section 6501(e)(1)(A)(ii) to extend the statute beyond the general 3 year period.
IRC § 6501(c)(8)(A)
In cases of unreported foreign financial assets on Form 8938, another exception to the general 3 year statute may apply under IRC § 6501(c)(8)(A) which reads that “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 3 years after the date on which the Secretary is furnished the information required to be reported under such section.”
IRC § 6501(c)(8)(A) was not invoked in Rafizadeh because it only applies where an international information form is required to be filed. It was not applicable here. Under section 6501(c)(8)(A), the limitation period for assessment of tax does not expire until three years after the required information is provided to the IRS. This applies to the following code sections:
- Form 8938 (IRC § 6038D)
- Form 8621 (IRC § 1298(f)
- Form 5471 (IRC §§ 6038 and 6046)
- Form 8865 (IRC §§ 6038 and 6046A)
- Form 8858 (IRC § 6038)
- Form 5472 (IRC § 6038A)
- Form 926 (IRC § 6038B)
- Form 3520-A (IRC § 6048)
The significance of IRC § 6501(c)(8)(A) for those who are non-compliant with the above filing requirements is that the statute of limitations on assessment will remain open indefinitely for any tax imposed under Title 26 with respect to any tax return, event, or period to which such information relates until the information is reported (e.g., the forms are properly filed). If the failure to furnish the information is due to reasonable cause and not willful neglect, IRC § 6501(c)(8)(A) shall apply only to the item or items related to such failure.
IRC § 6501(c)(8)(A) requires the failure to file the requisite form (i.e., the taxpayer must have an actual filing requirement). IRC § 6501(e)(1)(A)(ii), on the other hand, extends the statute based on the omission of income.
Options for Non-Compliant Taxpayers
Those who have been non-compliant with foreign accounts and income reporting could potentially have the statute of limitations remain open forever due to IRC § 6501(c)(8)(A). Such taxpayers should consider either the streamlined filing compliance procedures (SFCP) or offshore voluntary disclosure programs (OVDP) to become complaint. Voluntary compliance for the specified periods covered in the SFCP (3 years Title 26) and OVDP (8 years Title 26) programs cures previous non-compliance. Those who have unreported foreign accounts on one or more of the international reporting forms but who have little or no unreported additional tax may file their returns with reasonable cause statements pursuant to the delinquent international information submission procedures. Foreign accounts compliance requires a thorough analysis of your particular situation and you should consult with an attorney to carefully assess your risks and options.