Tax Court to IRS: You’re Too Late Baby! by Robert S. Horwitz
As part of its crackdown on taxpayers who were not reporting income from overseas assets, in 2010 Congress enacted Internal Revenue Code sec. 6038D. That section requires a taxpayer to provide information about “specified foreign financial assets.” It applies to tax years beginning after March 18, 2010. The IRS developed Form 8938, Statement of Specified Foreign Financial Assets, for taxpayers to comply with sec. 6038D.
To show it means business, Congress included penalties for failure to provide the required information: a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets. That’s not what this blog is about. Congress also extended the statute of limitations on assessment to six years for taxpayers who fail to include over $5,000 of gross income attributable to one or more assets required to be reported under sec. 6038D.
The six-year statute of limitations is contained in Internal Revenue Code sec. 6501(e)(1)(A)(ii). It provides that the IRS has six years within which to assess tax if a taxpayer omits gross income and
(ii) such amount—
(I) is attributable to one or more assets with respect to which information is required to be reported under section 6038D (or would be so required if such section were applied without regard to the dollar threshold specified in subsection (a) thereof and without regard to any exceptions provided pursuant to subsection (h)(1) thereof), and
(II) is in excess of $5,000…
This provision was enacted in 2010 and applies to returns filed after March 18, 2010, and to returns for which the normal statute of limitations had not expired. This is where Mehrdad Rafizadeh comes in. Rafizadeh v. Commissioner, 150 T.C. No. 1 (January 2, 2018).
For tax years 2006, 2007, 2008 and 2009, Mr. Rafizadeh had income of more than $5000 from specified foreign financial assets. In March 2010, before the effective date of the statute, the IRS served a John Doe summons. The summons was resolved in November 2010. Mr. Rafzideh was one of the taxpayers the IRS learned of as a result of the summons. In December 2014, the IRS issued a notice of deficiency asserting tax and penalties:
Year 2006 2007 2008 2009
Deficiency $9,045 $10,934 $4,117 $1,619
Penalty $1,809 $2,187 $823 $324
Mr. Rafizadeh petitioned Tax Court and moved for summary judgment on the ground that the statute of limitations for assessment had run on the 2006, 2007, 2008 and 2009 tax years. He won.
The Tax Court looked to the rules of statutory construction, which requires a court to construe the language of a statute giving the words their ordinary meanings and so that no part of the statute is superfluous, void or insignificant. Section 6501(e)(1)(A)(ii) applies only if the unreported income is from assets for which information “is required to be reported under section 6038D.” Since there was no reporting requirement for specified foreign financial assets when the returns for 2006 through 2008 were filed, those returns did not fail to report income from such assets.
The Tax Court rejected the IRS’s argument its reading of the statute made the effective date a nullity. The Court pointed out that the provisions regarding effective date applies to all items on a return for which a specified reporting requirement, some of which predate the statute, is not complied with. Thus its reading of sec. 6501(e)(1)(A)(ii) did not render the effective date a nullity.