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Friday, April 03, 2015

Can A Form 1040 Income Tax Return Omission Lead to an Extended Statute of Limitations for an Estate Tax Return (Form 706) or Estate Income Tax Return (Form 1041)?

Surprisingly, yes! At least according to the IRS. How so? Here’s at least one scenario where it is possible:

   1. An executor for a decedent’s estate files a final Form 1040 for the decedent. The executor does not report a foreign financial asset of the decedent, which Code Section 6038D requires should be reported on Form 8938 to be filed with the Form 1040.

   2. The executor also did not report income from such foreign financial asset on the estate’s Form 1041, and did not report it on the estate Form 706 which the estate was obligated to file. The three year statute of limitations for both the Form 1041 and Form 706 have expired.

   3. Code Section 6501(c)(8) provides “[i]n the case of any information which is required to be reported to the Secretary … under section … 6038D …, 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.”

   4. One would rightly expect that the statute of limitations for the Form 1040 remains open under the above provision due to the omission. In this situation, however, since the omitted foreign items “relate” to other tax returns such as the Form 1041 and Form 706, IRS Program Technical Advice asserts that the statute of limitations on those returns stays open until 3 years after the subject foreign financial asset items are reported. This is allowable since Code Section 6501(c)(8) refers to Title 26, which includes taxes other than individual income taxes.

Note that Section 6501(c)(8) does not leave the statute open only as to the missing foreign financial asset items, but keeps the statute open for all items under the subject return. However, if the failure to report was due to reasonable cause and not willful neglect, under Section 6501(c)(8)(B) the statute stays open only as to items relating to the missing foreign financial asset.

Does the Form 8938 omission really “relate” to the Form 1041 and Form 706? The Technical Advice says “yes” because if the missing items had been on the Form 8938 then the IRS would have known to look for them on the Form 1041 and Form 706. I don’t know if I accept that – reasonable minds may differ. The counter-argument is that the Form 8938 reporting is required so that the IRS is alerted to tax consequences relating to income taxes for the tax year of reporting – not reporting in later years. However, the use of the word “title” in Code Section 6501(c)(8) does lend support to the IRS’ position.

Program Manager Technical Advice 2014-018

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