Statute of Limitations Flashcards
What is an assessment?
Under IRC 6203, assessments are the formal recording of a tax liability.
What are the 3 different types of assessments and what are they?
- “Summary” – based on taxpayer’s filed tax return;
- “Deficiency” – IRS determines additional tax is due an owing, often an audit, and requires the IRS to send a “Statutory Notice of Deficiency”
- “Jeopardy” and “Termination” – Allows the IRS to bypass certain procedures and immediately assess when it believes assessment or collection will be jeopardized by delay.
What is the Beard v. Commissioner 4 elements test for whether a return has been filed?
Beard v. Comm’r – Elements of valid tax return:
- Contains sufficient data to calculate a tax liability;
- Purports to be a return;
- Represents an honest and reasonable attempt to satisfy the requirements of the tax law; and
- Is executed by the taxpayer under penalties of perjury
How much time does the IRS to assess tax, penalties, and interest on a return?
Under IRC 6501, the IRS has 3 years from the date that a tax return is filed to assess tax, penalties, and interest.
What are the exceptions to the 3-year general rule?
1) False or fraudulent return - with the intent to evade tax– UNLIMITED statute of limitations
(2) Willful Attempt Evade Tax – unlimited statute of limitations
(3) No return – unlimited statute of limitations
(4) Extension by Agreement (Form 872) – statute of limitations as agreed between IRS and taxpayer; can be issue or item basis.
(8) Failure to Notify Secretary of Certain Foreign Transfers
(10) Listed Transactions – 1 year after report of listed transaction filed
What are the rules for:
1) False or fraudulent return - with the intent to evade tax
AND
(2) Willful Attempt Evade Tax
Fraud has same meaning for penalties and statute of limitations rules.
Typically fraud in the context of employment tax and other kinds of tax. Willfulness = voluntary and intentional violation of a known legal duty.
But essentially, they have the same meaning. Both have unlimited statute of limitations.
What are the rules for:
(8) Failure to Notify Secretary of Certain Foreign Transfers
What is the reasonable cause exception?
If you don’t file one of the following forms:
Form 8938 - specified foreign financial assets
Form 5471 - ownership and certain relationships relating to foreign corporations (*must file form 8938)
Form 3520 - receipt of foreign gift or bequest or transactions with a foreign trust
… the IRS will have 3 years to have unlimited time until you file it.
Doesn’t apply to FBAR; just applies to the code based penalties; failure to one of the forms will extend the time
Reasonable cause exception: If you HAD reasonable cause for not filing foreign form, then IRS has extended statute of limitations ONLY to items related to that failure to file the foreign information return and not other unrelated items.
If you didn’t have reasonable cause for not filing foreign form, then the statute of limitations is OPEN/UNLIMITED for your ENTIRE RETURN, including items not related to foreign information. Open for ALL PURPOSES.
What are the rules for:
(10) Listed Transactions – 1 year after report of listed transaction filed
A listed transaction is one that the IRS has identified as having the potential for tax avoidance or abuse.
They require special reporting.
If you timely file your listed transaction = 3 year statute of limitations apply.
If you don’t timely file your listed transaction = then the IRS has until one year after you file for the 3-year statute of limitations to run.
So if you never file the report, the statute of limitations NEVER RUNS.
*Can write protective note on return saying that by filing the return you’re not conceding that you engaged in bad transaction, but only filing for protection of the the statute of limitations rules.
What happened in Badaracco v. Comm’r?
If the taxpayer files a false or fraudulent return, but later files a nonfraudulent amended return, does the 3-year statute of limitations apply? Or does the unlimited statute of limitations for civil fraud apply?
A taxpayer self-corrected his return. Then the IRS came after him more than 3 years after the amended return. Taxpayer said self-correcting the return should give him the 3 year statute of limitations and therefore bar the IRS.
The Supreme Court said no, an original fraudulent return keep the statute of limitations open. An amended return does not change the fact that a fraudulent return was filed.
Holding: There’s unlimited statute of limitations for civil fraud. IRS can still come after you for fraud penalties, etc. at any point.
What are the statute of limitations rules for foreign income?
- What is the statute of limitations if you don’t file?
- What is the statute of limitations once you do file?
- What is the reasonable cause exception?
- If a taxpayer omits from his tax return more than $5,000 of income
- Fails to file = return is incomplete and SoF does not begin to run on the entire return until the form is filed. IRC 6501(c)(8).
- Once you file = 3-year SoF starts to run.
- The statute of limitations would begin to run on the original filing date of the return for all income items except for those that should have been reported on the Form 8938.
- If a taxpayer omits from his tax return more than $5,000 of income attributable to an asset that is reportable on a Form 8938 = deemed to be a “substantial omission” + 6-year statute of limitations applies to the omission
(even if the asset was reported on the Form 8938). IRC 6501(e)(1)(A)(ii).
If you file an amended return, what happens to the SoF?
If you file an amended return within 60 days of the date that the IRS SoF would expire, the IRS gets another 60 days.
“The period for the assessment of such additional amount shall not expire before the day 60 days after the day on which the Secretary receives such document.”
What is the SoF when taxpayer understated their gross income in an amount in excess of 25% of their gross income?
What is the exception to this exception rule?
The SoF is 6 years, not 3 years.
Applies if:
1. gross understatement of income, which is defined as more than 25% of your income; and
- Your understatement of income is by reason of an overstatement of BASIS = also counts as gross understatement of income.
Exception: If you disclosed the item of income in a manner that adequately apprise the nature and amount of the item, then SoF goes back to 3 years. The disclosure can be on any part of the return. Example: your partnership filed a K-1; could be enough that you have income from the partnership
If you want to go to appeals but SoF is running out, what do you do?
Sign the 870 form (Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment) to extend the SoF.
SoF will not expire while you’re at appeals. The IRS will protect that SoF. If IRS doesn’t continue to have time to assess after your SoF is over, you’re just not going to get an appeal. They’re going to go ahead and move forward with the statutory notice = a deficiency.
If you go to tax court, they’re going to send you back to appeals, but you won’t get one free assessment.
