The Scariest Tax Form? Scary Is in the Eye of the Beholder (3/3/14)

Robert Wood has a timely reminder that certain forms, if not filed or filed properly, can create major statute of limitations problems for U.S. taxpayers.  Robert W. Wood, Scariest Tax Form? Skip It, And IRS Can Audit Forever (Forbes 3/l3/14), here. The particular form he focuses on is the Form 5471.  The Form 5471 is here.  The instructions for the form are here (in pdf format) and here (in html format).  Here is the key excerpt:

The IRS normally gets three years to audit. Sometimes, say if you mess up with offshore account reporting, the IRS gets six. Having a foreign bank account and unreported income is tough to resolve. The safest approach is going into the IRS Offshore Voluntary Disclosure Program, although some clients opt for more aggressive approaches. 

What many people find surprising is that having a company that holds a foreign account is even more sensitive. Yes, we’re talking about controlled foreign corporations, also called CFCs. When a U.S. shareholderdholds more than 50 percent of the vote or value of a foreign corporation, the company is a controlled foreign corporation or CFC. A U.S. shareholder is a U.S. person who owns 10 percent or more of the foreign corporation’s total voting power. 

That triggers reporting, including filing an annual IRS Form 5471. It is an understatement to say this is an important form. Failing to file it means penalties, generally $10,000 per form. A separate penalty can apply to each Form 5471 filed late, and to each Form 5471 that is incomplete or inaccurate. 

What’s more, this penalty can apply even if no tax is due on the return. That seems harsh, but the next rule—about the statute of limitations—is even more surprising. If you have a CFC but fail to file a required Form 5471, your tax return remains open for audit indefinitely. Normally, the statute expires after three or six years, depending on the issue and its magnitude. 

This statutory override of the normal statute of limitations is sweeping. The IRS not only has an indefinite period to examine and assess taxes on items relating to the missing Form 5471. In fact, the IRS can make any adjustments to the entire tax return with no expiration until the required Form 5471 is filed. You might think of a Form 5471 like the signature on your return. Without it, it really isn’t a return.

This is scary.  But there are many returns and return filing obligations that are scary.  Picky and choosing is a matter of personal preference.  Mr. Woods is concerned about an unlimited civil statute of limitations -- or at least a civil statute suspension until the information is provided.  The criminal statute of limitations is not suspended.

Ed Robbin's Excellent Blog on Section 6501(c)(8) Extending the Statute of Limitations for Certain International Reporting (8/31/13)

I encourage readers to study Ed Robbins most recent contribution to the Tax Crimes / Tax Procedure literature.  Edward Robbins, You Should Worry About Section 6501(c)(8) (Tax Controversy (Civil & Criminal) Report 8/31/13), here.  The author, a prominent tax controversy practitioner, here, discusses Section 6501(c)(8)'s special statute of limitations for certain international reporting, including Forms 8938, 5471, etc..  Section 6501 may be reviewed here.  Section (c)(8) is:

(8) Failure to notify Secretary of certain foreign transfers
(A) In general
In the case of any information which is required to be reported to the Secretary pursuant to an election under section 1295 (b) or under section 1298 (f), 6038, 6038A, 6038B, 6038D, 6046, 6046A, or 6048, the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under such section.
(B) Application to failures due to reasonable cause
If the failure to furnish the information referred to in subparagraph (A) is due to reasonable cause and not willful neglect, subparagraph (A) shall apply only to the item or items related to such failure.

Note that the heading of the subsection does not indicate the sweep of the text of the provision.  To summarize the sweep of the provision, where the required information is not provided with the original return, the statute of limitations for the entire return stays open indefinitely until 3 years after the information is provided.  Ed's article is excellent.  Without taking away from the article, I just quote excerpts from the opening and the ending to encourage you to read the whole article (the bold face is mine):

Most tax practitioners understand the basic assessment statute of limitations rules in the Code: three years after the return is filed, six years after the return is filed for 25% omission of income, or forever in the case of fraud and/or failure to file. Practitioners may be less familiar with the raft of additional special assessment statutes of limitation rules found in the Code, but one of these additional rules demands special attention.  That rule is section 6501(c)(8) which provides that in the case of any information on foreign activities which is required under section 6038, 6038A, 6038B, 6046, 6046A, or 6048, the time for assessment of any tax shall not expire until three years after the date on which the IRS is furnished the information required to be reported.
Until recently, section 6501(c)(8) was  often overlooked both for assessment and financial statement tax provision purposes.  As stated above, section 6501(c)(8) set forth an exception to the general rule.  In March of 2010 the Hiring Incentives to Restore Employment Act (the “HIRE Act”), amended the section 6501(c)(8) exception to the general statute of limitations and it has been made applicable to the entire income tax return – not just the tax consequences related to the information required under the relevant foreign information reporting provision.  The new section 6501(c)(8) is applicable to any tax return filed after March 18, 2010 and any other return for which the assessment period specified in section 6501 had not yet expired as of that date.  As long as a failure to comply with one of the specified foreign information reporting requirements for a tax return exists, the limitations period for that tax return remains open indefinitely.  The statute will not commence to run until the time at which the information required under the reporting provision is filed with the IRS and will not expire before three years after the filing of the required information.