In one of our most recent articles, we gave an overview of Form 3520-A. Associated with Form 3520-A is the is the Hiring Incentives to Restore Employment Act (the “HIRE Act”) signed by President Obama in March 2010. The HIRE ACT changes the statute of limitations for the assessment of tax which can be applied if a taxpayer fails to file or files a substantially incomplete form. Unfortunately for the taxpayer, this change is not limited to Form 3520A, but it also applies to the following information returns: Form 5471, Form 8865, Form 8858, Form 5472, Form 926, and Form 8621.
Now, why do we care so much about this? Well, the act is especially important because of the implications it has related to the exception to the general statute of limitations – it has been made applicable to the entire income tax return and not limited to the tax consequences related to the required information to be reported under the respective foreign information reporting provision. These new rules (under section 6501(c)(8)) apply to any tax return filed after the enactment of the act on March 18, 2010. In essence, if failure to comply with an information reporting requirement for a foreign tax return exists, the limitation period for that tax return will remain open indefinitely.
In general, under section 6501(a), any tax must be assessed by the IRS within three years of filing the return, whether filed on time or late. However, the three year limitation period does not begin if the return is not filed at all. Section 6501 contains exceptions to the general rule outlined in Section 6501, one of which is section 6501(c)(8). Under section 6501(c)(8), the period of limitations will not begin until the time at which the required information is filed with the IRS for specified foreign information reporting. It will not expire prior to three years after the filing of the information.
Even if the taxpayer had filed the applicable tax return that the foreign information was required to accompany, the exception still applies. It also applies in the case of any failure to report all of the required information or in filing inaccurate information under the enumerated reporting provisions which are as follows:
(i) Section 6038A – Form 5472: Certain foreign-owned U.S. corporations
(ii) Section 6038B- Forms 926 and 8865: Certain transfers to foreign persons
(iii) Section 6038 – Forms 5471, 8865, and 8858: Certain foreign corporations, partnerships, and foreign disregarded entities
(iv) Section 6046 – Form 5471: Organizations, reorganizations, and acquisitions of stock of foreign corporations
(v) Section 6046A – Form 8865: Changes in interest in certain foreign partnerships
(vi) Section 6048 – Form 3520-A: Certain foreign trusts
(vii) Section 1295 – Form 8621: Qualifying electing fund elections by PFICs (passive foreign investment companies)
(viii) Section 1298(f) – Information with respect to PFIC
(ix) Section 6038D – Information with respect to foreign financial assets
The last three sections listed above were added by the HIRE Act. In addition to expanding those requirements for information reporting required under Section 6501(c)(8), the scope of Section 6501(c)(8) is also expanded by the HIRE Act. Specifically, it added the term “tax return” to it, and by doing so, the exception to the three-year limitations period now applies to the entire tax return and not only the tax consequences associated with the failure to report the required information. Prior to the implementation of the HIRE Act in 2010, section 6501(c)(8) only applied to “any event or period to which such information relates”. This was interpreted to mean that as long as the extended period of limitations applied only to the tax consequences related to the information that is required to be reported under the reporting requirements and not to the tax return itself.
The effective date of the HIRE Act deserves some additional explanation. The HIRE Act is effective for all returns filed after March 18, 2010 (the date of enactment). However, it is also effective for returns filed on or before the date of enactment if the period of limitations has not expired under the enactment date (as determined under section 6501 without regard to the amendments). If the period of limitations has already passed, the amendment does not re-open the period of limitations if the period was closed as of the enactment date. Here is an example that may help clarify:
On September 15, 2007, Flowers Corporation filed its income tax return for the year ended December 31, 2006. During the year, Flowers Corporation owned all of the stock of Fiesta Corporation, a foreign corporation, but failed to file the required Form 5471 with its tax return. Under section 6501(a), the general period of limitations for tax assessed on 2006 ended on September 15, 2010, which was 3 years from the date the tax return was originally filed. However, under section 6501(c)(8), the extended period will actually apply to the entire tax return for 2006 since the period of limitations under section 6501 for the 2006 tax return was still open as of the enactment date. Consequently, the entire 2006 tax return is kept open until three years from the date the Form 5471 is filed due to the failure to comply with the section 6038 reporting requirement.
In summary, when the new section 6501(c)(8) applies, the limitation period for the entire tax return will be kept open until the information is filed with the IRS because of a missed foreign information filing. The tax return could also be kept open due to a failure to substantially comply with a specific information reporting requirement or filing inaccurate information. Not only do the rules and regulations sound complex, they are definitely are not easy to understand! TaxplannerCPA can help you ensure that your foreign information returns such as forms 3520-A and 5471 in addition to the many others listed above are filed properly and avoid the potential cost of a penalty assessed by the IRS.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.
In one of our most recent articles, we gave an overview of Form 3520-A. Associated with Form 3520-A is the is the Hiring Incentives to Restore Employment Act (the “HIRE Act”) signed by President Obama in March 2010. The HIRE ACT changes the statute of limitations for the assessment of tax which can be applied if a taxpayer fails to file or files a substantially incomplete form. Unfortunately for the taxpayer, this change is not limited to Form 3520A, but it also applies to the following information returns: Form 5471, Form 8865, Form 8858, Form 5472, Form 926, and Form 8621.
Now, why do we care so much about this? Well, the act is especially important because of the implications it has related to the exception to the general statute of limitations – it has been made applicable to the entire income tax return and not limited to the tax consequences related to the required information to be reported under the respective foreign information reporting provision. These new rules (under section 6501(c)(8)) apply to any tax return filed after the enactment of the act on March 18, 2010. In essence, if failure to comply with an information reporting requirement for a foreign tax return exists, the limitation period for that tax return will remain open indefinitely.
In general, under section 6501(a), any tax must be assessed by the IRS within three years of filing the return, whether filed on time or late. However, the three year limitation period does not begin if the return is not filed at all. Section 6501 contains exceptions to the general rule outlined in Section 6501, one of which is section 6501(c)(8). Under section 6501(c)(8), the period of limitations will not begin until the time at which the required information is filed with the IRS for specified foreign information reporting. It will not expire prior to three years after the filing of the information.
Even if the taxpayer had filed the applicable tax return that the foreign information was required to accompany, the exception still applies. It also applies in the case of any failure to report all of the required information or in filing inaccurate information under the enumerated reporting provisions which are as follows:
(i) Section 6038A – Form 5472: Certain foreign-owned U.S. corporations
(ii) Section 6038B- Forms 926 and 8865: Certain transfers to foreign persons
(iii) Section 6038 – Forms 5471, 8865, and 8858: Certain foreign corporations, partnerships, and foreign disregarded entities
(iv) Section 6046 – Form 5471: Organizations, reorganizations, and acquisitions of stock of foreign corporations
(v) Section 6046A – Form 8865: Changes in interest in certain foreign partnerships
(vi) Section 6048 – Form 3520-A: Certain foreign trusts
(vii) Section 1295 – Form 8621: Qualifying electing fund elections by PFICs (passive foreign investment companies)
(viii) Section 1298(f) – Information with respect to PFIC
(ix) Section 6038D – Information with respect to foreign financial assets
The last three sections listed above were added by the HIRE Act. In addition to expanding those requirements for information reporting required under Section 6501(c)(8), the scope of Section 6501(c)(8) is also expanded by the HIRE Act. Specifically, it added the term “tax return” to it, and by doing so, the exception to the three-year limitations period now applies to the entire tax return and not only the tax consequences associated with the failure to report the required information. Prior to the implementation of the HIRE Act in 2010, section 6501(c)(8) only applied to “any event or period to which such information relates”. This was interpreted to mean that as long as the extended period of limitations applied only to the tax consequences related to the information that is required to be reported under the reporting requirements and not to the tax return itself.
The effective date of the HIRE Act deserves some additional explanation. The HIRE Act is effective for all returns filed after March 18, 2010 (the date of enactment). However, it is also effective for returns filed on or before the date of enactment if the period of limitations has not expired under the enactment date (as determined under section 6501 without regard to the amendments). If the period of limitations has already passed, the amendment does not re-open the period of limitations if the period was closed as of the enactment date. Here is an example that may help clarify:
On September 15, 2007, Flowers Corporation filed its income tax return for the year ended December 31, 2006. During the year, Flowers Corporation owned all of the stock of Fiesta Corporation, a foreign corporation, but failed to file the required Form 5471 with its tax return. Under section 6501(a), the general period of limitations for tax assessed on 2006 ended on September 15, 2010, which was 3 years from the date the tax return was originally filed. However, under section 6501(c)(8), the extended period will actually apply to the entire tax return for 2006 since the period of limitations under section 6501 for the 2006 tax return was still open as of the enactment date. Consequently, the entire 2006 tax return is kept open until three years from the date the Form 5471 is filed due to the failure to comply with the section 6038 reporting requirement.
In summary, when the new section 6501(c)(8) applies, the limitation period for the entire tax return will be kept open until the information is filed with the IRS because of a missed foreign information filing. The tax return could also be kept open due to a failure to substantially comply with a specific information reporting requirement or filing inaccurate information. Not only do the rules and regulations sound complex, they are definitely are not easy to understand! TaxplannerCPA can help you ensure that your foreign information returns such as forms 3520-A and 5471 in addition to the many others listed above are filed properly and avoid the potential cost of a penalty assessed by the IRS.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.
