IRC 6501(e)(1) Foreign Income Extended Statute of Limitations
IRC 6501(e)(1): Foreign Income Extended Statute of Limitations for 8938: The general statute of limitations for IRS enforcement is 3-years. In other words, the IRS usually has 3-years to initiate and audit or examination. There are some exceptions, such as civil tax fraud (no statute of limitations) or failure to file (no statute of limitations), but audits for foreign income associate with FATCA reporting can also be extended. Whether or not the IRS can extend the time to audit from 3-to-6-years depends on various factors as set forth in 26 U.S.C. 6501(e)(1).
Let’s explore the IRC 6501(e) Foreign Income Extended Statute of Limitations for 8938 & FATCA Income:
26 U.S.C 6501
26 USC 6501 (a) – General Rule
“(a) General rule
Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on which any part of such tax was paid, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. For purposes of this chapter, the term “return” means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit).”
What does this Mean?
It means that unless somewhere else in section 6501 the rule calls for something different (see below), the amount of tax to be assessed will generally be assessed within 3-years after the return was filed.
26 USC 6501(e) – Extended Statute
(e) Substantial omission of items Except as otherwise provided in subsection (c)—
(1) Income taxes In the case of any tax imposed by subtitle A—
(A) General rule
If the taxpayer omits from gross income an amount properly includible therein and—
(i) such amount is in excess of 25 percent of the amount of gross income stated in the return, or
(ii) such amount—
(I) is attributable to one or more assets with respect to which information is required to be reported under section 6038D (or would be so required if such section were applied without regard to the dollar threshold specified in subsection(a) thereof and without regard to any exceptions provided pursuant to subsection (h)(1) thereof), and
(II)is in excess of $5,000, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time within 6 years after the return was filed.
What does this Mean?
When there is a substantial omission of income, the time to assess or pursue a proceeding may extended to 6-years. The two main scenarios that this subsection applies is excess of 25% of amount of gross income underreported in the tax return, or more than $5000 generated from assets attributed to 6038D.
26 U.S.C. 6038D
6038D refers to FATCA (Foreign Account Tax Compliance Act).
For U.S. Taxpayers, it is reported on Form 8938.
As provided by the 6038D:
Any individual who, during any taxable year, holds any interest in a specified foreign financial asset shall attach to such person’s return of tax imposed by subtitle A for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe).”
Form 8938 & 6038D
The IRC 6038D provision is a relatively new provision to the Internal Revenue Code.
As provided by the IRS:
Foreign Account Tax Compliance Act (FATCA)
Explanation of Section 6038D Temporary and Proposed Regulations
“The Foreign Account Tax Compliance Act, enacted in 2010, created new IRC Section 6038D and requires individuals to file a statement with their income tax returns to report interests in specified foreign financial assets if the aggregate value of those assets exceeds certain thresholds.
Temporary regulations implementing IRC 6038D have been issued. Under the regulations, specified individuals (U.S. citizens, residents and certain non-resident aliens) are required to complete and attach Form 8938, Statement of Specified Foreign Financial Assets, to their income tax returns. This is effective for tax years starting after March 18, 2010, which for most people will be their 2011 tax returns filed during the 2012 filing season.
In developing the regulations IRS considered the potential burden this new self-reporting requirement could have on affected taxpayers. To balance reporting burden and the need for compliance improvement, there are higher asset thresholds for married couples and those residing abroad. There are also exceptions that relieve taxpayers from reporting certain assets, and special rules for valuing assets.”
In conclusion, under most circumstances the Internal Revenue Service is 3 years to assess tax against the taxpayer. In some situations, the IRS will have six years to do so. one common scenario is when the taxpayer has more than $5000 of income generated from a FATCA asset under 6038D.
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