Foreign Account Keeps Three-Year Statute of Limitations Open
In Fairbank v. Commissioner, T.C. Memo 2023-19 (Feb. 23, 2023), the Tax Court ruled that the three-year statute of limitations did not bar assessment. On April 12, 2018, the IRS issued to Leigh and Barbara Fairbank a notice of deficiency for tax years 2003-2009. Because the Fairbanks timely filed their tax returns, they asserted that the three-year statute of limitations barred assessment. The case was determined based on an analysis of IRC Section 6501(c)(8). Section 6501(c)(8) provides that the statute of limitations shall not expire until three years after the date on which information is reported to the IRS for a foreign trust.
Barbara Fairbank was previously married to Mr. Hagaman, who was in the business of oil trading. He held financial accounts in Liechtenstein, New Zealand and Switzerland. Mr. Hagaman failed to file tax returns for years 1980-1982 and the IRS asserted he had a tax liability of $14.7 million. The IRS awarded Barbara innocent spouse relief.
In 1981, Barbara and Mr. Hagaman separated and a Final Judgment of Dissolution of Marriage was granted on May 21, 1982 by the Los Angeles County Superior Court. Pursuant to an Agreement of Interim and Partial Distribution of Community Property, Mr. Hagaman was to pay Barbara child support and certain lump sum payments. These payments were made to a UBS account in the name of Xavana Establishment, an entity formed in Switzerland or Liechtenstein.
In 2008, the IRS issued a “John Doe” summons to UBS requesting information relating to U.S. accountholders with undisclosed foreign accounts. In 2010, UBS advised Barbara that it provided information on Xavana Establishment to the IRS. Thereafter, the Fairbanks’ returns were selected for audit. On July 18, 2012, the Fairbanks provided the IRS revenue agent with all documents related to the UBS account for Xavana Establishment, including bank statements. The Fairbanks then filed FBARs to report the foreign account. However, the Fairbanks never filed Forms 3520 or 3520-A. Forms 3520 and 3520-A are required to be filed under Section 6048 for an owner of a foreign account (Form 3520-A) and recipient of foreign gifts (Form 3520).
The Fairbanks argued that the three-year statute of limitations started on July 18, 2012 when they provided all information on the UBS account to the IRS revenue agent. However, the Court ruled that the statute of limitations does not start until the IRS forms, Forms 3520 and 3520-A, are filed. The Court also ruled that because the Fairbanks never advised their CPA about the foreign account, they were not eligible for abatement of penalties due to reasonable cause.
In general, the three-year statute of limitations bars assessment, but the statute of limitations may be extended in certain circumstances including the failure to report a foreign account.
