Section 6501(c)(8): Time to Enforce International Tax Penalties

26 USC 6501(c)(8) Statute of Limitations

26 USC 6501(c)(8) Statute of Limitations

When it comes to international tax and reporting, the general rule is that the Internal Revenue Service has three years to audit a Taxpayer. On the international tax front, the three (3) year rule is expanded to six (6) years in any situation in which there is more than $5,000 of gross income attributable to specified foreign financial assets — such as a FATCA asset. Worse yet, is that the statute of limitation for assessment and collection may not even begin to run in a situation in which a taxpayer had a requirement to report certain transfers, such as foreign gifts, but failed to file the forms. Just as when a Taxpayer fails to file a tax return –– which leads to the tax return statute of limitations remaining open indefinitely – if a foreign reporting form is not filed, the statute to audit (and penalize) may also remain open as well. This type of situation can get even more complicated when the tax return was timely filed and more than three years have expired — the taxpayers did not properly report international information reporting forms. This was also one of the key issues in the recent tax court case of Fairbank, so let’s take a brief look at the analysis.

Section 6501(c)(8)

(8) Failure to notify Secretary of certain foreign transfers

• (A) In general

  • In the case of any information which is required to be reported to the Secretary pursuant to an election under section 1295(b) or under section 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A, or 6048, 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.

• (B)Application to failures due to reasonable cause

  • If the failure to furnish the information referred to in subparagraph (A) is due to reasonable cause and not willful neglect, subparagraph (A) shall apply only to the item or items related to such failure.

Key International Provisions

Let’s take a look at what these provisions refer to:

• • • 6038: Form 5471

    • 6038A: Form 5472

    • 6038B: Form 926

    • 6038D: Form 8938 (FATCA)

    • 6046: Form 5471

    • 6046A: Form 8865

    • 6048: Form 3520-A

Be Careful of International Statutes of Limitations

Regarding the code sections and IRS forms identified above, if the taxpayer does not file the form, the three-year statute of limitations does not begin to run. This may result in a Taxpayer being severely penalized several years after the statute limitations would have already expired for a timely filed return – if the return had been filed by the taxpayer. Noting, if the taxpayers are able to show reasonable cause and not willful neglect, they may be able to avoid penalties.

Fairbank Case

In the recent tax court case of Fairbank, Section 6501(c)(8) was front and center on the issue of the statute of limitations for filing Form 3520/3520-A for an entity in which another international reporting form was already filed.

Let’s take a look at how the court ruled:

• • • “Now we turn to section 6048(b) and (c) to determine the statutory reporting obligations of Mrs. Fairbank as the United States owner and beneficiary of Xavana Establishment and whether petitioners have furnished the information required to be reported under that section. Section 6048(b), entitled “United States Owner of foreign trust,” provides that each United States person treated as the owner of any portion of a foreign trust shall be responsible to ensure that (A) the trust makes a return for the year which sets forth a full and complete accounting of all trust activities and operations for the year, the name of the United States agent for such trust, and such other information as the Secretary may prescribe and (B) the trust furnishes such information as the Secretary may prescribe to each United States person (i) who is treated as the owner of any portion of the trust or (ii) who [*23] 24 [*24] receives (directly or indirectly) any distribution from the trust. I.R.C. § 6048(b)(1).

    • Section 6048(c), entitled “Reporting by United States beneficiaries of foreign trusts,” provides that any United States person who receives (directly or indirectly) during any taxable year of the person any distribution from a foreign trust shall make a return with respect to that trust for the year which includes (A) the name of the trust, (B) the aggregate amount of the distributions so received from the trust during the taxable year, and (C) the other information as the Secretary may prescribe. I.R.C. § 6048(c)(1). Petitioners’ citation of section 6501(c)(8) and their argument on brief that the period of limitations has run is incomplete.31 Section 6501(c)(8) refers the reader to the requirements under section 6048; therefore, a detailed analysis of a taxpayer’s statutory obligations under section 6048 is necessary.

    • We conclude that Mrs. Fairbank, as the deemed U.S. owner of Xavana Establishment, has failed to provide any written return to respondent setting forth a full and complete accounting of Xavana Establishment’s activities for the years at issue. See I.R.C. § 6048(b)(1). Similarly, we conclude that Mrs. Fairbank, as Xavana Establishment’s U.S. beneficiary, has failed to make any return that includes the name Xavana Establishment and which outlines the aggregate amount of distributions she received during each of the tax years at issue from Xavana Establishment. See I.R.C. § 6048(c)(1).

    • Finding that petitioners have not complied with section 6048(b) and (c), we similarly find that the period of limitations has not expired under section 6501(c)(8). Our conclusion is consistent with those of other courts that have considered this issue. See Rost, 44 F.4th at 298; Wilson, 6 F.4th at 434. Accordingly, we are constrained to conclude that the period of limitations has not expired for the tax years at issue since petitioners neither filed IRS Form 3520–A or Form 3520 nor satisfied their reporting obligations under section 6048, assuming those obligations could be satisfied without the filing of the forms prescribed by the IRS.32 Consequently, we find respondent’s notice of deficiency in this case was timely issued.”

Always Try to Show Reasonable Cause

Practitioners should keep in mind that the court made a specific note that taxpayers did not make a sufficient claim for reasonable cause. Thus, Taxpayers may have been able to avoid the penalties if they could show reasonable cause:

• • • “In a 2010 amendment to section 6501(c)(8), Congress added a reasonable cause exception for failure to furnish the information required under this section, effective for returns filed after March 18, 2010. Petitioners did not adequately raise the issue of reasonable cause for their failure to comply with the reporting obligations under section 6048.”

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.