Tax Court Says Failure to File Form 3520 Keeps Statute Open For Individual’s Form 1040

According to Law360, in the case of Leigh C. and Barbara J. Fairbank, docket number 13400-18, in the U.S. Tax Court, the Internal Revenue Service sent a notice laying out tax deficiencies owed by a now-divorced couple on time, the U.S. Tax Court said on Thursday, February 23, 2023, finding the deadline for issuing such a notice was extended due to their failure to disclose foreign transactions.

Missing foreign filings may subject to entire tax return to extend statue of limitations. These exceptions essentially give the IRS the ability to audit a tax return outside of the normal statute of limitations if the return is missing any of the specified foreign reporting forms.

Taxes are generally required to be assessed by the IRS within three years after a taxpayer’s return is filed, Code §6501(a). In the case of a false or fraudulent return filed with the intent to evade tax, or if the taxpayer fails to file a required return, the tax may be assessed at any time, Code §6501(c)(1), (2), and (3).

Code §6501(C)(8) Provides An Exception To The Three-Year Period Of Limitations Due To Failures To Provide Information About Cross-Border Transactions Or Foreign Assets.

Under this exception, the statute of limitations period for possible assessment of additional taxes and penalties related to the taxpayer’s income taxes remains open indefinitely and it is applicable to the entire income tax return, not just the tax consequences related to the information required under the relevant foreign information reporting provision. If the failure to file the information return is due to reasonable cause, the extended limitations period applies only to items on or items related to the late filed information return.

The disclosure forms relevant to Code §6501(c)(8) include:

• Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
• Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations
• Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships
• Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities
• Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

• Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation

• Form 8938, Statement of Foreign Financial Assets
• Form 3520, Annual Return To Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner

The Tax Court held that the IRS timely sent the notice of deficiency detailing the roughly $109,000 in taxes and nearly $22,000 in penalties owed by Leigh C. and Barbara J. Fairbank, the Tax Court said in a memorandum opinion. 

The Typical Three-Year Statute Of Limitations Under Internal Revenue Code Section 6501(A) Hadn't Run Out Because The Couple Failed To Disclose Foreign Transactions Involving
UBS And An Entity Founded In Liechtenstein,
According To The Opinion.

The agency's tax adjustments largely stemmed from undisclosed income in a UBS account, according to the opinion. 

Need to Contest Failure to File an
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