Amounts on late-filed S corporation return were not disclosed on taxpayer’s return

For purposes of determining whether there had been a substantial understatement of gross income on a taxpayer’s return, the IRS Office of Chief Counsel determined that amounts on a Form 1120S, U.S. Income Tax Return for an S Corporation, filed after the three-year statute of limitation expired, were not considered to be disclosed on a taxpayer’s Form 1040, U.S. Individual Income Tax Return (Chief Counsel Advice 201333008). Therefore, the amounts on the S corporation’s return should be considered in calculating whether the extended Sec. 6501(e)(1)(A) six-year statute of limitation applied. The six-year period applies when there is a substantial omission of income equal to 25% or more of the gross income reported on the return.

The taxpayer filed Form 1040 and reported an amount as his distributive share of an S corporation’s income on his return. When the S corporation filed its return more than three years later, it revealed that the taxpayer’s distributive share of the S corporation’s income was actually more than 125% of the amount reported on the original Form 1040. That larger amount was enough to extend the statute of limitation from three years to six years unless the amount on the late-filed Form 1120S was considered to have been disclosed on the Form 1040 because the Form 1120S was referred to on the original form.

The IRS concluded that the amount had not been disclosed on the original return. When an individual’s return contains a reference to other documents or returns, it can, in some cases, serve as notice to the IRS sufficient to be a disclosure. However, before a Form 1120S can be incorporated by reference into a taxpayer’s return, the Form 1120S must exist and be in the IRS’s hands.

Here, the Form 1120S was not filed until long after the Form 1040, and therefore the IRS advised that it is treated the same as an amended return, which does not count as a disclosure for Sec. 6501(e) purposes. Under the normal return filing deadlines, the Form 1120S is due one month before Form 1040 is due, and the IRS would have received the S corporation return before it received the individual return. In that situation, it would have had notice of the contents of the S corporation’s return. (Of course, in that case, there would have been no need to extend the statute beyond three years.)

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.