PMTA 2014-018 (Oct. 3, 2014)
We've been discussing various tax issues at our tax seminars in recent years involving taxpayers that have financial accounts in foreign countries. It's a big issue for many tax practitioners. We will address significant issues involving these clients at our summer seminars this year, particularly at the Lake Tahoe seminar in late July which will also be simulcast over the internet. Under the Foreign Account Tax Compliance Act (FATCA) which became law in 2010, certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 are required to report information about those assets on IRS Form 8938, which must be attached to the taxpayer’s annual income tax return. Higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad. Form 8938 reporting applies for specified foreign financial assets in which the taxpayer has an interest in taxable years starting after March 18, 2010. For most individual taxpayers, this means that they started filing Form 8938 with their 2011 income tax return. If the required information isn't furnished to the IRS, penalties can apply and the statute of limitations for IRS to assess tax can be extended. In a recent Program Manager Technical Advice (PMTA), the IRS said that the omission of required information with Form 8938 operated to extend the statute of limitations with respect not only to the taxpayer's Form 1040, but also an associated Form 706 (estate tax return) and an associated Form 1041 (income tax return for an estate).
The Statutory Provisions
The normal statute of limitations that applies for IRS to review a return and assess additional tax is three years. That is the result reached when examining how I.R.C. §§6501(c)(8) and 6038D work together. Under I.R.C. §6038D(a), if a taxpayer has an interest in a "specified foreign financial asset" during the tax year, the taxpayer has to make a disclosure to the IRS by attaching a statement to the return if the aggregate value of all such assets exceeds $50,000. A "specified foreign financial asset" is any depository or custodial accounts at foreign financial institutions, or other assets such as stocks or securities issued by foreign persons that are not held in a financial institution, or any other financial instrument or contract held for investment that is issued by a non-U.S. person or has a counterparty involved that is not a U.S. person. Also, the term includes any interest in a foreign (non-U.S.) entity. I.R.C. §6038D(b). If these requirements are met and the Form 8938 is not filed to disclose the interest(s), the taxpayer is subject to a $10,000 penalty. The penalty gets bigger if the taxpayer doesn't provide the required information after getting notified by IRS of the failure to initially provide it. But, the additional penalty applies if the failure to provide the information was due to reasonable cause and not willful neglect. I.R.C. §6038D(d).
Facts of the PMTA
Under the facts of the PMTA, a taxpayer owned various interests in financial assets that satisfied the definition of "specified foreign financial asset" under I.R.C. §6038D. Thus, a Form 8938 needed to be filed with the taxpayer's return for the year which disclosed the taxpayer's interests. Complicating matters was that the taxpayer died during the tax year with an estate large enough to require the filing of an estate tax return.
Note: The PMTA doesn't say what the year of death was, but since the FATCA requirement didn't begin until 2011, portability of the deceased spouse's unused exemption amount (DSUEA) was in play which essentially means that virtually all estates will file Form 706 if only to elect portability of the DSUEA.
The estate executor Filed Form 706 and Form 1041 for the estate. However, no Form 8938 was attached to the taxpayer's final Form 1040 as I.R.C. Sec. 6038D required. Additional problems were that the income from the foreign assets was not included on the estate's Form 1041 and the value of the foreign assets was not included on Form 706. What was particularly important was that the normal three-year statute of limitations had closed with respect to the Form 1041 and Form 706. That meant that the IRS would normally be barred from assessing additional tax.
The IRS noted that I.R.C. §§6038D and 6501(c)(8) work together with the result that the statute of limitations is suspended on "any tax imposed by this title with respect to any return...to which such information relates." Thus, IRS concluded that the statute of limitations was suspended for any tax reportable on the taxpayer's 1040, or the taxpayer's (now decedent's) Form 1041 and Form 706. That is the result, IRS determined, whenever a Form 8938 filing is triggered and the required information is not provided. The IRS also noted that the suspension of the statute of limitations, when it involves unfurnished information, applied if the information not supplied related to the return with respect to which the tax at issue will be assessed. That means that that issue is dependent on the facts of each situation. But, in reality, when a decedent dies, the failure to report foreign financial assets when there is a Form 8938 filing requirement, will probably automatically apply to the Forms 1040, 1041 and 706. Under the facts of the PMTA, that's what the IRS concluded. The information that wasn't supplied related to each of the returns at issue because it involved tax information that would have been reported on Form 1040 and Form 1041 and its value would have been in the decedent's gross estate and reported on Form 706.
Note: Under I.R.C. §6051(c)(8), the statute of limitations is not left open just with respect to the omitted foreign financial assets. Instead, it remains open for all items on the particular return. The only restriction on this is if the failure to report was due to reasonable cause and there was no willful neglect. In that case, the statute remains open only as to the items on the return that are associated with the omitted foreign financial assets.
The PMTA indicates that the Form 8938 filing is a big issue. Practitioners must be alert to the situations that can give rise to the need to file Form 8938. Failure to do so can lead to penalties, and extend the statute of limitation for assessment on associated returns. The PMTA illustrates that matters can get complicated in the year of death. A significant number of clients have assets abroad (and Canada and Mexico counts as "foreign").
Is FATCA really about cracking down on off-shore tax evasion? That's how it was "sold" back in 2010. That's probably a questionable rationale. But, that's another article for another day. For now, practitioners have to watch for FATCA's requirements applying to clients. This recent PMTA is an illustration of just how long FATCA's tentacles can be.
keywords: foreign account tax compliance act, FATCA, form 8938, program manager technical advice, PMTA, form 1040, form 706, form 1041, i.r.c. §6501(c)(8), 6083D, §6038D(a), §6083D9b), §6038D(d)