Congress has effectively overruled the Supreme Court in extending the statute of limitations for auditing certain types of tax returns.
Tax preparers are generally familiar with the three-year statute of limitations, under which the IRS has three years to assess income, employment, or estate or gift tax due after a return is filed. And they know that the three years can be doubled to six years if the amount that is omitted from gross income is more than 25% of gross income stated in the return.
In the 2012 Home Concrete case, the Supreme Court addressed the IRSs interpretation of the extended limitations period. The IRS had ruled that a taxpayer that overstated basis, which resulted in understating gain from a sale, resulted in omitting gross income from the return. In the taxpayers case, this constituted more than 25% of the gross income stated on the return, thus triggering the six-year limitations period. The Supreme Court disagreed, saying this was not an omission of gross income and therefore the three-year, not the six-year, period applied.
Congress has just, in effect, overruled the Supreme Court by the insertion of a provision in the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, signed by President Obama last Friday. Section 2005 of the Act, Clarification of 6-year statute of limitations in case of overstatement of basis, inserts this additional clause: An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.
The provision is effective for returns filed after July 31, 2015, as well as returns filed prior to that date that are still open.
The same legislation also changes the due dates for filing partnership and C corporation tax returns, as well as foreign bank account reports, or FBARs, on FinCEN Form 114 (see Congress Changes Business Tax-Filing Due Dates).
Roger Russell is the senior editor of Accounting Today.
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