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New tax law: limited relief provided by recent tax law change.

The 2010 Education Jobs and Medicaid Assistance Act (the "Act"), signed into law Aug. 10, 2010 as P.L. 111-226, contains some favorable treatment regarding the extended statute of limitations.


Pre-Existing Law

Taxes generally must be assessed within three years after a return is filed. Returns filed before their clue date are deemed filed on that date.

IRC See. 6501(c)(8) provided an exception to this general three-year limitations period due to failures to provide information on cross-border transactions or foreign assets. Under this exception, as amended by the 2010 Hiring Incentives to Restore Employment Act (P.L. 111-147), the limitations period for tax assessments did not expire any earlier than three years after the required information regarding certain cross-border transactions or foreign assets was furnished to (he IRS by the person required to file the return. (See California CPA, August 2010, Page 14.)

The following information reporting is required:

IRS Form 926: For U.S. transfers of property to foreign corporations (IRC Sec. 6038B).

IRS Form 3520: For transactions with foreign trusts and receipt of certain foreign gifts (IRC Sec. 6048).

IRS Form 3520-A: For foreign trusts with U.S. owners (IRC Sec. 6048).

IRS Form 5471: For U.S. persons regarding certain foreign corporations (IRC Sees. 6038 and 6046).

IRS Form 5472: For 25 percent foreign-owned U.S. corporations or foreign corporations engaged in a U.S. business (IRC Sec. 6038A).

IRS Form 8621: For shareholders of passive foreign investment companies or qualified electing funds [IRC Sec. 1295(b)].

IRS Form 8858: For US. persons with foreign disregarded entities (IRC Sec. 6038).

IRS Form 8865: For U.S. persons with certain foreign partnerships (IRC Sees. 6038 and 6046A).

IRS form not yet issued: To disclose interest in "specified financial assets" (Recent IRC Sec. 6038D).

Generally, this information reporting is due with the taxpayer's return. Thus, the special three-year limitations period commences when a timely and complete return, including all information reporting is filed. Without the inclusion of the information reporting with the income tax return, the limitations period does not commence until the information reports are subsequently filed with the IRS, even though the return was already filed.

The taxes that could be assessed during this suspended/extended limitations period were not limited to taxes attributable to the adjustments to items related to the information required to be reported.

New Law

The Act modifies the scope of See. 6501(c)(8) if a failure to file information on cross-border transactions or foreign assets is shown to be due to reasonable cause and not to willful neglect.


In the absence of reasonable cause or the presence of willful neglect, the suspension of the general three-year limitations period and the subsequent special three-year period that begins after the required information is ultimately supplied applies to all issues with respect to the income tax return.

If a taxpayer establishes reasonable cause, the general three-year limitations period is suspended only for the item or items related to the failure to disclose.

To prove reasonable cause, it is anticipated that the taxpayer must establish that the failure was objectively reasonable i.e., the existence of adequate measures to ensure compliance with rules and regulations--and in good faith.

For example, the general limitations period for assessing taxes for a return filed March 15, 2011, ordinarily will expire March 15, 2014. To assess tax on any issue in the return thereafter, the IRS must establish that an exception applies.

If the taxpayer fails to attach to that return one of the multiple required information returns, the limitations period does not begin to run unless and until that missing information return is filed. If this return is filed Jan. 2, 2013, the limitations period for the entire return begins, and elapses not earlier than three years later, Jan. 2, 2016.

All items will be subject to adjustment during that time, unless the taxpayer can prove that reasonable cause existed for the failure to file the required information return.

If the taxpayer establishes this reasonable cause, the only tax adjustments permitted after March 15, 2014, will be related to the failure to file the required information return. For this purpose, related items include:

1. Adjustments made to the tax consequences claimed on the income tax return concerning the transaction that was the subject of the information return:

2. Adjustments to any item to the extent the item is affected by this transaction even if it is otherwise unrelated to the transaction; and

3. Interest and penalties that are related to the transaction or the adjustments made to the tax consequences.

Effective Date

This change applies to returns filed after March 18, 2010, and for other returns for which the Sec. 6501 assessment period had not yet expired as of that date.

Stuart R. Josephs, CPA has a San Diego-based Tax Assistance Practice that specializes in assisting practitioners in resolving their clients' tax questions and problems. Josephs, chair of the Federal Subcommittee of CalCPAs Committee on Taxation, can be reached at (619) 469-6999 or
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Title Annotation:FedTax
Author:Josephs, Stuart R.
Publication:California CPA
Geographic Code:1USA
Date:Oct 1, 2010
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