Discussion:6 Yr Statute of Limitations -- What constitutes "omitting gross income"?

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Discussion Forum Index --> Basic Tax Questions --> 6 Yr Statute of Limitations -- What constitutes "omitting gross income"?

Discussion Forum Index --> Tax Questions --> 6 Yr Statute of Limitations -- What constitutes "omitting gross income"?

Illini (talk|edits) said:

19 May 2011
Under section 6501(e) of the Tax Code and section 301.6501(e)-1 of the Tax Regulations the statute of limitations is 6 years if the taxpayer omits additional gross income in excess of 25% of the amount of gross income stated in the tax return filed with the IRS.

In 2007, Harry, a non-resident alien, filed a U.S. Form 1040NR tax return using a tax professional on 4-10-2008. It is now 5-19-2011 and Harry has discovered that his preparer incorrectly filed 1040NR and claimed that $45,000 of W-2 income was exempt due to Tax Treaty with a foreign country. This amount was very clearly stated on line 22 of the return but constitutes over 25% of the gross income on the return. Is this an "omission of the gross income", or does the 3 year statute of limitations come into play for this situation?

Tax Writer (talk|edits) said:

19 May 2011
The burden of proof switches to the IRS after the 3-year mark. As long is there is no attempt to defraud (doesn't sound like it, since the T/P used a tax pro), then I think the T/P is okay. Maybe Steve or IRSFixer can weigh in on this, they are very good in these technical areas.

Has the return been selected for examination, or is the client worried that it might be?

LH2004 (talk|edits) said:

May 19, 2011
Omission of income isn't the same as intent to defraud, but, generally, as long as the existence of the income was clearly disclosed on the return, there shouldn't be an omission despite mis-categorization like this.

Illini (talk|edits) said:

19 May 2011
2008 was put under examination and we have remedied it. 2009 we voluntarily amended to correct. 2010 was prepared by me and filed correctly.

DaveFogel (talk|edits) said:

19 May 2011
It sounds like the income that was reported as exempt under the tax treaty was adequately disclosed on the return. For purposes of the 6-year statute of limitations for a 25% omission of income, IRC ยง6501(e)(1)(B)(ii) states:

(ii) In determining the amount omitted from gross income, there shall not be taken into account any amount which is omitted from gross income stated in the return if such amount is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature and amount of such item.

Illini (talk|edits) said:

19 May 2011
Thank you Dave -- that makes perfect sense to me.

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