Expands Statute of Limitations of Foreign Information Returns
By Elizabeth Mullen, Partner, Tax & Business
On March 18, 2010, the HIRE Act (Hiring Incentives to Restore Employment Act) was signed into law, which included an important amendment to Section 6501, which pertains to the time period allowed for the IRS to assess taxes.
The statute of limitations is the time period that the IRS can issue an assessment and is normally three years from the date the return was filed, or the due date of the return, whichever is later. Returns that remain outstanding may be assessed a deficiency at any time. There are also several other exceptions to the three year rule as in the case of fraud or material omissions.
Another exception to the three year rule relates to taxpayers required to report certain foreign transactions and investments. Prior to a recent change within the HIRE Act, the foreign reporting forms (indicated below) were subject to a three year rule. However, the amendment included in the HIRE Act adds two words, “tax return” to Section 6501, and could potentially lead to suspension of the statute of limitations for the IRS to assess tax deficiencies on the tax return filings and not merely the omitted foreign forms.
The amendment targets international transaction and investment reporting by United States investors and related entities. Otherwise known as foreign information returns, the following forms will be the source of potential suspension of the statute for taxpayers:
- Form 926 – Return of a U.S. Transferor of Property to a Foreign Corporation
- Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations
- Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in U.S. Trade or Business
- Form 8865 – Return of U.S. Persons with Respect to Certain Foreign Partnerships
- Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities
- Form 3520 – Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
- Form 3520-A – Annual Information Return of a Foreign Trust With a U.S. Owner
Once any of the above forms are omitted or deemed by the IRS to be incomplete, the IRS will suspend the statute of limitations, and open up the taxpayer’s entire tax return for the relevant period. In other words, any other returns related to the relevant period that were filed or should have been filed by the taxpayer will be open for unlimited review and assessment of tax deficiencies by the IRS. For example, those taxpayers who have disregarded entities which may be associated with foreign filings must be considered more carefully now as the IRS may require foreign information forms to be filed on their behalf.
The Act applies to all returns filed after enactment (March 18, 2010), and those returns whose statute have not expired by the enactment date. The Act does in fact extend the statute, however it does not extend the period in which the taxpayer may file for a refund on such returns, nor does it extend the dates to timely file a return. Information related to the returns such as financial statements and tax positions taken have a much more significant risk as well.
The Act creates significant hurdles for those taxpayers that engage in international transactions and requires more extensive due diligence by both the taxpayer and tax preparers than ever before. It is now important to not only review and identify any potential incomplete or delinquent filings from prior year returns, in addition to ensuring that all filings are inclusive of any potentially required information from this year going forward.