In my blog post of August 10, 2015 (Statutes of Limitation and Streamlined Filings or File Forward Strategies) I discussed the impact of various statutes of limitations (SOLs) on Streamlined Filing decisions. It is important to remember that SOLs are a double-edged sword. They permit IRS to make assessments within the permissible periods be it the general-rule SOL of three-years, the extended SOL of six-years or the tolled SOL under various circumstances discussed in the earlier blog post. SOLs by the same token prohibit IRS from making an assessment after the running of the applicable SOL. Once the applicable SOL has tolled, IRS is out of luck, absent fraud.
Consider a U.S. resident taxpayer who failed to report income from an offshore account and likewise failed to file and FBAR for years 2011, 2012 and 2013. The taxpayer and his spouse had filed joint returns before April 15 for each of the three prior years but did not include the foreign bank account interest. The income not reported is less than 25% of the taxpayer’s gross income for 2011, 2012 and 2013. Assume that the taxpayer was negligent in failing to timely file but his conduct was not willful. No other foreign reporting forms were required to be filed as the highest value of the account was $100,000 and no PFICs, foreign gifts or nominee entities were involved.
The taxpayer has properly filed his 2014 FBAR and his 2014 Form 1040. The amount of income tax owed as indicated on the amended returns is as follows:
The amended returns are filed on August 26, 2015 along with the Streamlined Filing non-willful certification.
No Form 872 required
Note that the Streamlined Filing Compliance Procedures, unlike the OVDP, do not require that the taxpayer execute a Form 872 extending the time within which the IRS can assess additional tax. Since the three-year SOL applies under our assumptions stated above, the SOL on assessment with regard to the tax-year 2011 would have expired on April 15, 2015. Thus, the $5,000 stated to be due on the 2011 amended return is time-barred and cannot be collected by IRS.
Language in Streamlined Filing Compliance Procedures
Yet, the Streamlined Filing procedures instruct the taxpayer to remit payment for the amount shown on the tax returns for all three years, to wit:
Submit payment of all tax due as reflected on the tax returns (emphasis added) and all applicable statutory interest with respect to each of the late payment amounts. Your taxpayer identification number must be included on your check. You may receive a balance due notice or a refund if the tax or interest is not calculated correctly.
So, the dilemma: follow the procedure to the letter, which makes no sense; or, remit the tax due on returns not time barred with the cover letter explaining the omitted 2011 payment. The concern being that to do so might cause the Service robot-reviewers to knee-jerk reject the Streamlined Filing and process the return under the normal return processing procedures; and, issue a non-willful penalty notice for $10,000, instead of the $5,000 penalty (5%) under the Streamlined Process, which would then be appealed. The trouble is the taxpayer won’t know IRS has taken that action until he or she receives a penalty or audit notice down the road.
If payment is made for all years, IRS will automatically refund the payment for the time barred year since it cannot legally make the assessment. Thus, for small or nominal amounts it may be procedurally more expeditious to remit payment for all three years regardless of the SOL. I would note in the Streamlined Filing cover letter that payment is remitted pursuant to the Streamlined Filing Compliance Procedures, but that a refund is requested for the payment with respect to the year that is time-barred. For, larger amounts I would likely withhold payment and explain why payment has been withheld in the Streamlined Filing cover letter. But, such considerations follow no template and require case by case consideration.
Note that if Form 8938 or any of the required foreign reporting forms mentioned in my August 10 blog post were not filed, the above consideration is moot since the three-year SOL does not begin to run until the forms are filed. Also, if original timely filed returns were not filed, the statute of limitations on assessment for the delinquent filed returns does not begin to run until the returns are filed.
© 2015 by Robert S. Steinberg, Esquire
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