Page 2 - Time will not Make this Problem Disappear: The Open-Ended Statute of Limitations for Taxpayers With Delinquent Foreign Information Returns

ABA TAX TIMES
Vol. 35 No. 2 | February 2016
limitations expired before March 18, 2010, the statute of limitations remains open with respect to any items related to the failure to furnish the required information.3 An example of an item related to the failure to le a foreign information return is subpart F income from a foreign corporation for which the taxpayer failed to le a required Form 5471.4
Accordingly, for taxpayers who have not led required
[F]or taxpayers who have not led required foreign information re- turns, the statute of limitations re- mains open at best only for items related to those forms and at worst, for all items on the return.
foreign information returns, the statute of limitations remains open at best only for items related to those forms and at worst, for all items on the return. If the
taxpayer les the foreign information returns, the statute of limitations begins to run and the Service has three years to assess additional tax, unless some other exception to the statute of limitations applies.
In Chief Counsel Advisory 200748006, the Service explained the standard for reasonable cause in the context of failure to le foreign information returns. The CCA speci cally addresses penalties for failure to le Form 5471, but the same rationale applies to the failure to le other foreign information returns and for determining reasonable cause under section 6501(c)(8). The CCA stated that the Service will apply the reasonable cause standard for failure to le income tax returns under section 6651, which requires taxpayers to exercise ordinary business care and prudence. The Service has de ned ordinary business care and prudence, as “making provisions for business obligations to be met when reasonably foreseeable events occur,” and “taking that degree of care that a reasonably prudent person would exercise.”5
In deciding whether the taxpayer has met this standard, the Service considers the explanations for the failure to le the foreign information return, the taxpayer’s compliance history, the length of time between the event cited as a reason for the noncompliance and the subsequent compliance, whether there were circumstances beyond the taxpayer’s control, and, in some cases, the taxpayer’s ignorance of the law or inability to get records. The Service has warned taxpayers with business and holdings offshore, however, that “[i]t is not reasonable or prudent for taxpayers to have no knowledge of, or to solely rely on others for, international transactions.”6
The inde nite and open-ended statute of limitations for assessment can be problematic. First, although there is a practical limit to how far back the Service is able to assess tax and penalties due to the dif culty of obtaining information with the passage of time, a taxpayer nonetheless remains vulnerable to audit and assessment of tax inde nitely, if the statute of limitations never closes. Second, a taxpayer’s ability to present a reasonable cause defense decreases over time, because there may no longer be evidence in the taxpayer’s possession to substantiate the claim and because the continuing failure to correct after learning about the error further weakens any reasonable cause defense.
3 Id.
4 See e.g., Chief Counsel Attorney Memorandum, AM 2014-002 (Mar. 7, 2014).
5 Internal Revenue Manual (IRM) 20.1.1.3.2.2 (Feb. 22, 2008).
6 IRM 20.1.9.1.1(4) (Mar. 21, 2013).
Published in ABA Tax Times, February 2016. © 2016 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied 2 or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. ISSN 2381-5868.