Chief Counsel Advice 201118020
In emailed Chief Counsel Advice (CCA), IRS has concluded that where a taxpayer initially omits over 25% of gross income on the original tax return, but files an amended return showing additional income within Code Sec. 6501(a)'s 3-year period, the filing of the amended return doesn't constitute "disclosure" of the omitted items and thus doesn't preclude IRS from applying Code Sec. 6501(e)'s 6-year assessment period. However, the CCA emphasized that IRS should make any assessments of additional tax or issue deficiency notices within the 3-year period whenever possible, even if it determines that Code Sec. 6501(e) applies.
Background. Under Code Sec. 6501(a), a valid assessment of income tax liability generally may not be made more than 3 years after the later of the date the tax return was filed or the due date of the tax return. However, under Code Sec. 6501(e), a 6-year limitations period applies when a taxpayer omits from gross income an amount that's greater than 25% of the amount of gross income stated in the return.
For purposes of Code Sec. 6501(e), a taxpayer who chooses to omit a questionable item from gross income can prevent the extension of the assessment period with respect to that item by disclosing the omission on the return or in an attached statement. Under Code Sec. 6501(e)(1)(B), if the disclosure adequately apprises IRS of the nature and amount of the item omitted, that item will not be taken into account in determining the amount omitted from gross income for purposes of the over 25%-of-gross-income omission.
Issue raised. The CCA considers whether an amended return filed by a taxpayer that shows additional gross income not reflected on his original return constitutes a disclosure of such income so as to preclude application of Code Sec. 6501(e)'s 6-year limitations period.
Case law controlling. In Badaracco v. Commissioner, (1984, S Ct) 53 AFTR 2d 84-446, the Supreme Court held that the a taxpayer who files a fraudulent return, then files an amended return, remains subject to Code Sec. 6501(c)(1)'s open-ended assessment period applicable to fraudulent returns. In reaching its decision, the Supreme Court found it telling that taxpayers who non-fraudulently omit 25% or more of gross income remain subject to the 6-year limitations period, even if they subsequently file an amended return. The Court concluded that Congress didn't intend to treat those who file fraudulent returns more favorably than those who non-fraudulently understate income. In a later case, the Tax Court held that the original return filed by the taxpayer governs for purposes of determining whether the taxpayer omitted over 25% of gross income for Code Sec. 6501(e) purposes, even if an amended return showing additional income is later filed. (See, e.g., Chin, TC Memo 2004-54)
Thus, the CCA concluded that the filing of an amended return showing additional income doesn't preclude it from applying Code Sec. 6501(e)'s 6-year period. Looking to Badaracco and other case law, IRS determined that the original return controls for purposes of determining the applicable limitations period, and that the amended return thus doesn't constitute a disclosure that would prevent it from applying Code Sec. 6501(e).
However, the CCA emphasized that IRS should nonetheless assess additional tax and issue deficiency notices within Code Sec. 6501(a)'s 3-year period whenever possible, even if it determines that the 6-year period applies.
References: For filing an amended return where the original omitted more than 25% of gross income, see FTC 2d/FIN ¶T-4209; United States Tax Reporter ¶65,014.04; TaxDesk ¶838,020; TG ¶70542.