In its first decision of 2018, the Tax Court considered whether the six-year statute of limitations in Code Section 6501(e)(1)(A)(ii) applied to a taxpayer who failed to file Foreign Bank Account Reporting, or FBAR, forms from 2006 through 2008. The court held that the Internal Revenue Service could not go back beyond the general three-year limitations period.
FBAR requirements have been around since the 1970 Bank Secrecy Act, but it wasn’t until the UBS case in 2009 that they were seriously enforced.
In the current case, Mehrdad Rafizadeh timely filed his federal income tax returns for 2006 through 2008 but did not report income earned on a foreign account he held. The IRS served a John Doe summons seeking information relating to Rafizadeh’s account, among others. The IRS uses John Doe summons to obtain information about possible violations by individuals whose identity is unknown. On Nov. 16, 2010, the summons was finally resolved. On Dec. 8, 2014, the IRS issued a notice of deficiency determining deficiencies and accuracy-related penalties for the years 2006 through 2008.
In a motion for summary judgment proceeding, the IRS conceded that the notice of deficiency was issued after the expiration of the general three-year period of limitations for each year at issue and more than three years after the final resolution of the John Doe summons.
The IRS must generally assess a tax within three years of the date a tax return was due, without extensions, or the date the return was actually filed, whichever is later.
Code Section 6038(D), enacted on March 18, 2010, imposes new reporting requirements for certain specified foreign financial assets. Code section 6501€(1)(A)(ii), also enacted on March 10, 2010, provides a six-year period of limitations if the taxpayer omits from gross income amounts attributable to one or more assets with respect to which information is required to be reported under section 6038(D).
Despite the IRS attempt to draw parallels between Code Section 6038(D) and previously enacted statutes, the Tax Court ultimately determined that the statute being used to assess additional taxes from non-compliant taxpayers with foreign accounts could not be used for tax years prior to 2010 because there was no Code Section 6038(D) filing requirement prior to that year.
As a result of this ruling, the taxpayer ended up owing no additional taxes. Additionally, the decision could potentially prevent the IRS from collecting millions of dollars from other taxpayers in similar situations, according to Jeffrey Pittard, who with co-counsel Harvey Poe represented the taxpayer. Both are counsel at New Jersey law firm Scarinci Hollenbeck.
“Basically, the IRS was using the statute to say, ‘If you have unreported foreign income, we have six years to assess you,’” said Pittard. “Now they will have to show some other justification for extending the statute beyond the initial three years, such as fraud, a substantial understatement, or failure to file a return in the first place. If the only thing you did wrong was have a foreign account and not report it, they will have to work a little harder to go back beyond the three years.”
“This was a classic case of two sides [the taxpayer and the IRS] arguing over the wording of the statute,” he said. “Each side said it was perfectly clear but we each had a completely different interpretation of it.”
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