Omitted Subpart F income impacts entire return

The IRS recently released ILM 202142009, concluding that an omission of Subpart F income extends the assessment statute of limitations on a taxpayer’s whole return and is not just limited to the omitted Subpart F income item.

Additionally, the IRS concluded that an agreement to extend the assessment period does not subsequently extend the time limit for claiming a refund.

Generally, Section 6501 requires the IRS to assess a tax within three years after the filing of a return. There are some exceptions to the general rule. For example, Section 6501(e)(1)(c) applies a six-year limitations period if a taxpayer omits an amount that must be included in income under the Subpart F rules.

The taxpayer addressed by the legal memorandum filed three years of amended tax returns outside of the three-year period but within six years. The amended returns added previously unreported dividends subject to Subpart F and increased tax credit claims.

After reviewing case law and other corresponding legislative history concerning Section 6501, the IRS determined that the substantial omission exception should be applied to “any tax imposed by Subtitle A” and the six-year extended limitations period under Section 6501(e)(1)(c) should apply to the entire return.

Despite coming to an agreement on the assessment extension, the taxpayer was unable to benefit from the increased tax credit claims. The IRS noted that while the periods under Sections 6501 and 6511 are supposed to run concurrently, unless a Form 872 was signed within the credit or refund limitations period under Section 6511(a), the assessment period does not automatically extend a taxpayer’s time to claim a credit or refund.