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The IRS Has a Time Limit to Track Down Unreported Offshore Income

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The IRS usually has 3 years to audit your tax return.  For FBARs – Foreign Bank Account Reports – the IRS has up to 6 years to audit.  This statute of limitations “extension” arises under 26 U.S. Code § 6501(e)(1)(A)(ii) for failure to include $5,000 or more of gross income that should have been reported under U.S. Code § 6038D, the code section that requires that taxpayers reveal their foreign financial interests.

In Mehrdad Rafizadeh v. Commissioner, 150 T.C. No. 1 (Tax Ct. 2018), the Tax Court addressed the issue of auditing returns older than 3 years for underpayment under the 6-year lookback for offshore accounts, and looked carefully at allegations of non-reporting on offshore accounts like these.

The IRS discovered Mehrdad Rafizadeh’s foreign account through a John Doe summons. The IRS came after him in late 2014, early 2015 and issued a notice of deficiency claiming he underpaid his 2006, 2007, 2008 and 2009 taxes, failing to include certain offshore income. Rafizadeh petitioned the Tax Court for a review of the assessment and the associated penalties, including accuracy-related penalties of 20% of the underpayment under Section 6662(a). He also disputed his non-reporting of the offshore accounts.

The Tax Court held that the IRS was time-barred from reassessing Mehrdad for the years 2006, 2007, 2008 and 2009. Moreover, since the FBAR reporting requirement (which came into effect in 2011) was not in effect during the years at issue, Rafizadeh’s tax returns for those years did not fail to report income from his overseas assets.

The court held that the 6-year statute of limitations was inapplicable and granted Rafizadeh’s motion of summary judgment on the basis that the IRS notice of deficiency was untimely.

If you have questions about FBARS, statutes of limitation or international tax audits or think that the IRS is coming after you with improper assessments that have been time-barred, give us a call at (201) 529-8024 or e-mail me at [email protected]

Category: Tax

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