CCH Tax News Headlines - July 6, 2011

The article states (second paragraph): "The government's proposed assessments were not barred by the statute of limitations. Because the taxpayers failed to file Forms 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, the form on which the Code Sec. 4973 excise tax is computed and disclosed, the assessment could be made at any time under Code Sec. 6501(c)(3). Although the taxpayers timely filed Forms 1040 for all of the years at issue, the Forms 1040 did not give any indication of the amount of the excess contributions or enable the IRS to determine that the taxpayers were potentially liable for the Code Sec. 4973 tax. Therefore, the filing of the Forms 1040 did not start the running of the statute of limitations for purposes of the Code Sec. 4973 excise tax in the absence of accompanying Forms 5329." - Citation: R.K. Paschall, 137 TC --, No. 2, Dec. 58,686.

WTF? Does this mean that for EVERY 1040 series return where we determine that there is no such applicable tax, we now must file a Form 5329 so as to start the period of limitations for that tax even when self-assessment indicates that the tax should be zero?

Apparently. I suppose the same thing would apply to people working under the table who file a 1040 but not a Schedule C.

Not necessarily. The court ruled that the taxpayer having failed to report the excess contributions on either a 5329 or enter an amount on the 1040 that would allow the IRS to discern that a penalty may be due, did not start the clock on the 3 year statute of limitation for the 6% excise tax on excess contributions because no return was filed. The court cited an old USSC case:

If you find that there may be an issue with a contribution to any one of the plans on page 2 of the 5329 that could lead to an excess contribution subject to the 6% penalty, then you should file the 5329 to start the clock. I see no reason why one should be filing 5329s on all the routine returns where there is no excess amount.

Page 2 of the 5329 also has the 50% excise tax for excess accumulations in retirement plans. I would assume that this tax also falls under the ruling. However, it really shouldn't be an issue as you would know the age of your client and whether the RMD was taken.

No, on the Schedule C. That and other income understatements relative to the "income tax" has been adjudicated. The referenced case deals with an excise tax that required the filing of an excise tax return... the 5329. If you file a 1040 and exclude your business income, you have started the SOL clock.

What would you consider a "routine" return?

What about a case like this -- taxpayer has a MAGI such that he's in the Roth IRA contribution phaseout zone. He makes a Roth IRA contribution equal to what he's allowed to make. So he doesn't bother to file a 5329 because there's no excess amount.

However, it turns out he unintentionally failed to report $3000 in interest income from a loan to a friend (friend forgot to 1099-INT him).

Five years go by and an audit of the friend causes the IRS to realize taxpayer didn't report that $3000. The filing of the 1040 started the SOL clock and the IRS is out of luck on the income tax. However, that increase in MAGI reduced the allowable Roth contribution, creating an excess contribution. Presumably under this ruling the IRS can come after taxpayer for the 5 years of excess contribution penalties.

If being in the contribution phaseout zone isn't routine, You could change the scenario slightly and have the taxpayer be a bit below the phaseout zone initially. Say he was $1000 below the beginning of the phaseout zone. Is that routine enough to not bother filing a 5329? But he'd still get bit in this scenario.

He may be able to do a chain of re-characterizations so that it's not really 5 years of penalties. If one always makes one's qualified plan contributions between April 1 and April 15, there can potentially be zero impact from a re-characterization.

Of course this is scenario-dependent.

Steve

Why is form 5329 treated differently from Schedule C. It is just the supporting detail for form line 58 of 1040. Besides Rich gave a good counter-example of how 5329 can become necessary if other details in

Additional

accompanying

I don't understand your reply. You start by saying "no" (actually, "not necessarily") then agree with me that no SOL clock starts without the form. Therefore, why shouldn't he/she/they file the form to get that SOL clock running even when they don't owe the tax? Only the inclusion of the form starts that SOL running, so for most average taxpayers who don't need that form, not filing it leaves them exposed to the excise tax even after the income tax SOL has expired.

Is a form 5239 really a "different return?" If attached to form 1040, its total is copied to the 1040's line 58. Therefore, it's included. I agree that it's a different tax. Perhaps the Tax Court got it wrong again....

Time to find out if the taxpayer left that line blank or explicitly filled it in with zero. Maybe that makes a difference?

I don't know the answer to your exact question, but I once asked an IRS auditor whose entire job is auditing qualified plans what would happen if the results of a Schedule C audit were such that the plan contribution amounts were, in retrospect, inappropriate. They thought about it and said they didn't really know, that it is not something they specifically look at but it was "an interesting question".

S.

Because the Tax Court (a national court that affects all taxpayers) has said that if you file an income tax return and exclude an excise tax (not an income tax) the filing of the 1040 with no information about that excise tax does not start the SOL for the excise tax. You may choose to disagree. However, until an appeals court overturns the decision or the Tax Court rethinks the judges decision, it is law.

It is just the

Just to be clear, which tax (or aspect of a tax) counts as an "excise tax" in this scenario?

Steve

I think they did. As I said in my other reply, we're stuck with the decision until the court either rethinks it or an appeals court overturns it.

I've rethought my other comment that used the word "routine." I read the whole decision. One can interpret the decision to mean that:

1. Relative to the excise tax, Form 5329 is a tax return under Sec. 6011.
2. If the line on the 1040 that identifies the excise tax is left blank or contains a zero and a 5329 tax return is not filed, then the SOL has not started to run on the excise tax.
3. As there are various reasons why one might be subject to the penalty for Roth IRAs, one should file the 5329 with a bunch of zeroes in Part IV.
4. As there are other plans that can also trigger the excise tax, the same logic would hold for those plans (IRAs, CESAs, Archer MSAs and HSAs).
5. Lastly, the 50% tax on excess accumulations is also an excise tax (Part VIII of the 5329). This certainly begs the question as to whether the same logic should hold for that tax as well. In other words, if you turned age 70 1/2 and did not take your RMD and you filed a 1040 and did not include the 5329 or any amount on the 1040 for an excise tax, the SOL on the excise tax has probably not started.

See my reply to D. Stussy, that I just sent.

great. now you have given them even more to look at.

self-assessment

accumulations

I disagree that "blank" vs. zero mean the same thing. Blank also means undetermined.