We frequently represent taxpayers involved in IRS exams and IRS criminal tax cases in Hartford, Connecticut and elsewhere. The Internal Revenue Code limits the IRS to assessing additional taxes against a taxpayer to 3 years, unless the taxpayer omitted gross income from its tax return equal to or greater than 25% of the gross income stated on the tax return. In such a case of a 25% or more omission of gross income the statute of limitation to assess is expanded from the general 3 years to 6 years.
In the recent case of Home Concrete & Supply LLC, the 4th Circuit ruled against the IRS, concluding that the IRS could not use an extended six-year limitations period to assess a deficiency where a partnership allegedly overstated its basis on disposition of an asset, thereby lowering the amount of gross income reported in its return.
What the court concluded is that an overstatement of basis is not an omission of gross income for purposes of the 6-year rule, and therefore the IRS was time barred from assessing the additional tax.
The IRS argued that the holding in Colony, Inc., should be limited to the taxpayers in the trade or business of selling goods or services was rejected. Further, the IRS’s request to retroactively apply is regulation as a clarification of the rule established by Colony, Inc. was denied because the limitations period had expired before the regulation applied. The regulation, which purports to establish a rule contrary to Colony, would change the law governing the taxpayers’ tax returns and, thereby, subject them to a liability they would not have been subject to under pre-regulation law.
If you need any assistance with an IRS exam or a potential criminal tax issue please feel free to contact us.