A recent court decision may provide taxpayers relief and protection from IRS collection of FBAR penalties based upon a 3 year statute of limitations. The US Tax Court has issued its first decision of 2018 which considered whether FBAR related collections by the IRS could go back six years. The Court found the IRS could not go into the past beyond the general three year statute of limitations established by US tax law.
This is a profound decision which may face future challenges, but it offers an interesting insight into the IRS enforcement of FBAR penalty assessments and collection efforts. In the specific case, the taxpayer filed their tax returns on time for 2006 to 2008, but failed to report a foreign bank account on an IRS FBAR (or the FinCen form of that time period). The taxpayer’s account information was obtained by the IRS in a “John Doe” summons in 2010, and in 2014 the IRS issued a notice of deficiency and FBAR related penalties for tax years 2006 to 2008.
The IRS conceded in the case that the notice of deficiency was after the expiration of the three year statute of limitations for each year of the tax years in question, as well as the final resolution of the John Doe summons. Generally speaking, the IRS must assess taxes within three years of the date the return was due or the date the taxpayer actually filed their return, whichever is later. While there is a section of Code Section 6038(D) (enacted in 2010) which provides a six year statute of limitations if the taxpayer omits gross income attributable to one or more assets (such as offshore bank or investment accounts).
The Tax Court rejected the IRS’ assertion that the six year statute enacted in 6038(D) applied, and ultimately ruled the statute could not be used to assess additional taxes to non-compliant taxpayers with unreported foreign accounts in tax years prior to 2010. This decision may prevent the IRS from collecting millions of dollars from other US taxpayers in similar circumstances.
Allen Barron is uniquely positioned and skilled to answer questions relating to offshore bank accounts and income, international taxation and FBAR reporting requirements and compliance. We invite you to contact us or call 866-631-3470 for a free consultation with questions relating to FBAR reporting and IRS audits. This new case may offer some protection from IRS collection of FBAR penalties before 2010.