Foreign Account Reporting: Time Limit for IRS Action

by Moskowitz LLP

To conduct an audit or otherwise take action on a tax return, the IRS must generally act within three years from the later of either the return’s due date or the date it was filed. That time limit may be extended to six years if there has been a “substantial omission” of more than 25% of gross income on your return.

The statute of limitations may also be extended to six years under 26 U.S. Code § 6501(e)(1)(A)(ii) for failure to include $5,000 or more of gross income that should have been reported under U.S. Code § 6038D, the code section that requires that taxpayers reveal their foreign financial interests.

A recent Tax Court decision focused on this Section 6501(e)(1)(A)(ii) statute of limitations extension:

Mehrdad Rafizadeh v. Commissioner
The IRS discovered Mehrdad Rafizadeh’s foreign account through a John Doe summons, and issued him a notice of deficiency on December 8, 2014 for underpaying his 2006, 2007, 2008 and 2009 taxes. Rafizadeh petitioned the Tax Court for a review of the notice of deficiency, which included Section 6662(a) accuracy-related penalties equal to 20% of his alleged underpayment.

The Tax Court held that since there was no Section 6038D filing requirement until 2011, the IRS could not use the six year statute of limitations to reassess taxes for the years 2006, 2007 and 2008 (the IRS had already conceded that 6501(e)(1)(A)(ii) did not apply for 2009 because the amount omitted was less than the required $5,000). Since the reporting requirement was not in effect during the years at issue, Rafizadeh’s tax returns for those years did not fail to report income from his overseas assets.

The court held that the six year statute of limitations was therefore inapplicable, and granted Rafizadeh’s motion of summary judgment on the basis that the IRS notice of deficiency was untimely.

No IRS deadline when a tax return is not filed, fraud or tax evasion
Keep in mind that there is no IRS deadline if you (1) intentionally filed a false or fraudulent return, (2) never filed the return, or (3) otherwise attempted to evade tax reporting and payment!

Also note that the IRS has ten years to pursue legal action to collect on tax debt after an assessment has been made.

Effective tax representation
The IRS Statute of Limitations is intended to limit the government’s ability to pursue taxpayers. But taxpayers often have to assert the statute of limitations defense. If you are being audited or are otherwise being pursued by the IRS, you need to be represented by an attorney who is intimately familiar with the procedural tax rules.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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