United States Tax Alert: Significant changes to statute of limitations under the HIRE Act

On 18 March 2010, President Obama signed the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act) into law. Without significant discussion or fanfare, this legislation added two words to Internal Revenue Code §6501(c)(8): "tax return." This addition may have significant consequences to the tolling of the assessment statute of limitations for tax years of companies engaged in the tax return reporting of international operations.


Section 6501(c)(8)

Section 6501(c)(8) provides an exception to the general rule that taxes are to be assessed within three years after a taxpayer's return is filed. Prior to its recent amendment, §6501(c)(8) extended the assessment statute if a taxpayer failed to provide information about certain crossborder transactions until three years after the required information is actually provided to the Secretary. More specifically, §6501(c)(8) stated that "[i]n the case of any information which is required to be reported to the Secretary under section 6038, 6038A, 6038B, 6046, 6046A, or 6048, the time for assessment of any tax imposed by this title with respect to any event or period to which such information relates shall not expire before the date which is three years after the date on which the Secretary is furnished the information required to be reported under such section." (Emphasis added). In other words, the assessment statute of limitations is extended if a taxpayer fails to provide any information required on Forms 5471, 5472, 926, 8621, 8865 and 3520, and the three-year statute of limitations does not start until all required information is provided.


Change to §6501(c)(8)

The HIRE Act added the words "tax return" such that the relevant portion of the provision now reads as follows: "…the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is three years after the date on which the Secretary is furnished the information required to be reported under such section." (Emphasis added).


What does this mean?

- The assessment statute of limitations is extended if a taxpayer fails to provide any information required on Forms 5471, 5472, 926, 8621, 8865, and 3520. The extension is not limited to adjustments to income related to the information required to be reported on one of these forms, but rather the Internal Revenue Service can assess any additional tax that may be due on any tax return (e.g. Form 1120 - U.S. Corporation Income Tax Return).

- This change to §6501(c)(8) is characterized in the Joint Committee's technical explanation of the HIRE Act as a clarification. This contradicts the preamble to regulations issued in 2000 under §6038 and §6038B, which stated that the extended statute of limitations provided by §6501(c)(8) remains open only with respect to "tax consequences related to the information required to be reported under the relevant reporting section and not to all transactions with the U.S. person's tax year at issue."

- Section 6501(c)(8), as amended, is effective for returns for which the assessment statute of limitations is open after 18 March 2010.


Why is this important?

- Previously unrecognized tax benefits related to uncertain tax positions are generally recognized when the jurisdiction is statutorily barred from denying that benefit (i.e. upon the closing of the statute of limitations for such tax year).

- Failure to satisfy the reporting requirements described above will result in tax years remaining open for a period of three years after the date the required information is satisfied. Thus, these reporting requirements must be considered when determining whether the statute of limitations has closed for years for which there are unrecognized tax benefits.


Who is impacted?

- U.S. taxpayers planning to recognize the benefit of a tax position because of the expiration of the statute of limitations for that position for any quarter ending after 18 March 2010 will want to analyze the impact of the change to §6501(c)(8) on such release.

- Internal tax departments responsible for ensuring tax compliance is complete and accurate must assess the completeness and accuracy of the tax compliance process with respect to the information required by §§1295(b), 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A or 6048. Failure to properly report this information could have financial statement ramifications.

- Individual taxpayers required to file one or more forms covered by §6501(c)(8).


Next steps

We have discussed this issue with government officials and we are in the process of arranging a meeting with officials from Treasury and the Internal Revenue Service to discuss the impact of the change on multinational corporations and their financial statements. This discussion should help us better understand how the government intends to administer this change. Given the significance of this change, we expect the government will provide guidance on the proper application of these rules. Until such guidance is available, companies should evaluate their compliance with these obligations prior to reporting and recognizing uncertain tax benefits on the basis of the closing of the statute of limitations.