Listed Transactions: Section 6707A Penalties and Assessment Limitations Period.

Section 6707A of the Internal Revenue Code imposes a substantial penalty on taxpayers who fail to disclose their participation in tax avoidance transactions when they file their return. Specifically, if the taxpayer fails to include “any information with respect to a reportable transaction” required to be disclosed under Section 6011 of the Code, then a penalty of 75% of the tax savings from the transactions applies, subject to statutory minimums of $5,000 for individuals and $10,000 for entities and maximums of up to $100,000 for individuals and $200,000 for entities. I.R.C. § 6707A(a), (b). Regulations issued under Section 6011 of the Code fill in the details; among the ways a taxpayer can incur the penalty is to fail to disclose participation in a “listed transaction,” which is a transaction that is identical or substantially similar to a transaction that the IRS has previously identified as a tax avoidance scheme in published guidance.… Read More

An Unpleasant Surprise: How an Accounting Change Can Open Closed Years.

Generally, the IRS has three years to assess additional tax due following the filing of a tax return. I.R.C. § 6501(a). There are exceptions explicitly set forth in the Code; for example, a false return, a willful attempt to evade tax or the failure to file a return mean there is no limitation on the power of the IRS to assess tax. I.R.C. § 6501(c)(1)-(3). A more limited exception exists where a return contains a substantial understatement of tax on a return, in which case there is a six year limitation period. I.R.C. § 6501(e).

Less well-known is the ability of the IRS to assess tax for years that appear to be beyond the limitations period if an accounting change is involved.… Read More

Mitigation Provisions: The IRS Can Offset Deficiencies and Overpayments Under A Closing Agreement.

Normally, each tax year is treated as a closed unit, and the IRS is not generally authorized to offset underpayments in one tax year against a refund due in another year without first issuing an assessment. Recently, the Fifth Circuit recognized an exception to this general principle where the IRS is acting pursuant to the mitigation provisions of Section 1314(b) of the Internal Revenue Code and a closing agreement. El Paso CGP Co., LLC v. United States, 2014 U.S. App. LEXIS 5090 (Mar. 18, 2014).

As a result of an audit, El Paso, in 2005, the taxpayer entered into a closing agreement with the IRS addressing the appropriate treatment of investment credits that it had claimed on its 1986 corporate tax return.Read More

Tread Carefully: Extension Agreements in Tiered Partnerships, Part II.

This post will continue my coverage of Candyce Martin 1999 Irrevocable Trust v. United States, 2014 U.S. App. LEXIS 605 (9th Cir. Jan. 13, 2014), which dealt with the scope of an extension agreement in the context of tiered partnerships.

The Ninth Circuit concluded that an agreement providing for a waiver of the assessment statute of limitations for “any adjustment directly or indirectly (through one or more intermediate entities) attributable to partnership flow-through items of First Ship” [the upper level partnership] and related penalties and additions to tax served to waive the limitations period where the adjustments to the upper tier partnership’s losses stemmed from adjustments made in a lower level partnership proceeding that declared it a sham and reduced First Ship’s outside basis in the lower level partnership.Read More

Fraud Is Not Enough: Intent to Evade Required to Extend Assessment Limitation Period for Partnership Items.

Generally, the IRS has three years to assess additional taxes after a return is filed under Section 6501 of the Internal Revenue Code. The Code provides an exception in the case of fraudulent return or where the taxpayer willfully attempts to evade tax liability. I.R.C. § 6501(c)(1), (2). For partnerships, there is a similar provision in Section 6229, which provides for an extension of the assessment period where “any partner has, with the intent to evade tax, signed or participated directly or indirectly in the preparation of a partnership return which includes a false or fraudulent item.” I.R.C. § 6229(c).

The Court of Federal Claims recently addressed the assessment limitation in an interesting context: an apparently innocent taxpayer who got mixed up in a bogus tax shelter structured by Jenkins & Gilchrist.Read More