Rob Wagner

The Hiring Incentives to Restore Employment Act of 2010 (2010 HIRE Act) was signed into law March 18, 2010. This legislation amends the language in Internal Revenue Code (IRC) §6501(c)(8), which may have significant consequences to the statute of limitations for assessments in the case of incomplete foreign transaction reporting by taxpayers. Given the significance of this change, taxpayers should evaluate their compliance with foreign information reporting and the accuracy and completeness of their returns.

Pre-2010 HIRE Act Law

Taxes are generally required to be assessed within three years after a taxpayer's return was filed, whether or not it was timely filed. IRC §6501(c)(8) provides an exception to this general rule and is specifically targeted at the identification of and collection of information about cross-border transactions. This exception extended the limitation period for assessment of any tax imposed under the IRC with respect to any event or period related to required information about certain cross-border transactions until three years after the required information is actually provided to the U.S. Treasury Secretary.

In general, such information reporting is due with the taxpayer's return, so the three-year limitation period begins when the taxpayer files a timely and complete return (including all information reporting). If the taxpayer does not include the information reporting with the return, the limitation period does not begin until the taxpayer provides the information reports to the secretary, even though the return has been filed. In other words, the assessment statute of limitations is extended if a taxpayer fails to provide any information required on Forms 5471, 5472, 926, 8865 and 3520, and the three-year statute of limitations does not start until all required information is provided.

2010 HIRE Act

The 2010 HIRE Act amends the IRC §6501(c)(8) rule to say for any information required to be reported, the statute of limitations with respect to any “tax return, event, or period” to which that information relates will not expire before the date that is three years after the date the required information is furnished to IRS.¹ According to Congress, this change makes it clear the extension, i.e., the suspension of the limitations period, is not limited to adjustments to income related to the information required to be reported by one of the enumerated sections relating to foreign information items.

By adding the words “tax return” to the pre-2010 HIRE Act code language “event or period,” Congress intends that if the statute of limitations period is extended, all items on the return will be subject to examination even if they are unrelated to the items causing the extension. Therefore, if a taxpayer fails to provide any foreign information reporting required, i.e., Forms 5471, 5472, 926, 8865 and 3520, the statute of limitations for assessment will be extended and that extension will not be limited to adjustments to income related to the information reported on one of these forms, but rather the IRS can assess any additional tax due on any tax return. IRC §6501(c)(8), as amended, applies to assessment of taxes for which the period of limitations is open after March 18, 2010.

Impact of the 2010 HIRE Act Amendment on Prior Returns

The Joint Committee On Taxation’s technical explanation of the 2010 HIRE Act calls the language change in IRC §6501(c)(8) a clarification that keeps the entire tax return open for assessment. This contradicts the legislative history of allowing the extension to remain open only for the unreported foreign transactions required to be reported.² If the 2010 HIRE Act is interpreted as a clarification of IRC §6501(c)(8), it would affect tax items taxpayers and the government previously considered closed for assessment. Under this view, past tax returns that had not provided the required foreign financial information would be open in their entirety, regardless of whether any tax effect resulted from such failure.

If, however, the 2010 HIRE Act represents a change in law to IRC §6501(c)(8) rather than a clarification, past tax returns that had been closed as of March 18, 2010, would remain closed for all items other than the transactions requiring the information reporting.

Comments

Taxpayers should evaluate their potential exposure in light of the 2010 HIRE Act amendment to IRC §6501(c)(8). Until the government issues further guidance, taxpayers should make sure their tax returns are complete and accurate. BKD can assist with assessing the completeness and accuracy of the tax compliance and reporting process with respect to any foreign transaction reporting. We can help taxpayers identify any exposure and assist with any foreign reporting obligations. For further information and assistance with the changes to the statute of limitations under the 2010 HIRE Act, please contact your BKD advisor.