Aiming to reduce taxpayer uncertainty and strengthen economic development tax programs, the V.I. Government filed papers this week in a private case before U.S. Tax Court challenging Internal Revenue Service's refusal to recognize a statute of limitations for V.I. taxpayers.
In 2006, the IRS issued a notice saying, in part, that unlike the treatment accorded to U.S. residents who file with the IRS, where the statute of limitations starts automatically upon filing, certain bona fide residents of the U.S. Virgin Islands must take additional steps to start the statute of limitations.
The change had a chilling effect on the territory's Economic Development Commission tax benefit program, because many beneficiaries faced audits far outside of the normal three-year statute of limitations.
Gov. John deDeJongh Jr. and Delegate Donna Christensen lobbied Congress and the IRS to reverse the change.
In early 2007, the IRS issued rules clarifying that those earning under $75,000 would be covered under the usual federal statute of limitations, while those earning over that amount would not automatically be covered. That same year, the U.S. House of Representatives passed a bill setting the statute of limitations on audits to three years, backdated to 1986. But the Senate version of the bill has stalled.

In what Government House said could be the first and most important test case on the validity of the IRS position, deJongh authorized the V.I. Department of Justice to intervene in a taxpayer case where the taxpayer was contesting the assessment of U.S. tax for tax years outside of the three-year statute of limitations period. In that case, Appleton v. Commissioner of Internal Revenue, the commissioner of the IRS conceded that the taxpayer was a “bona fide resident of the Virgin Islands,” but challenged the amount of tax credits taken under the EDC tax benefit program, according to Government House.
“I have authorized this action by our Justice Department to protect the jurisdiction and integrity of Virgin Islands tax administration,” deJongh said. “Under our system of laws, the IRS has three years to audit and challenge a V.I. taxpayer’s income tax return. The IRS cannot ignore the law or manufacture an excuse to extend the statute of limitations indefinitely in violation of judicial precedent and the IRS’ own long-standing administrative practice.”
He said that while these actions are driven by the facts of this one case, the underlying principle is to protect all V.I. taxpayers irrespective of whether they are EDC beneficiaries. “We are asking for the same and equal status on all U.S. taxpayers,” deJongh said.
The judge in the Appleton case issued a recent order directing any party objecting to the U.S. Virgin Islands’ motion to file a formal objection by July 22. If the judge upholds the deJongh administration's motion to intervene and also rules in favor of the territory on the merits of the motion, the court might effectively undo the IRS ruling and put V.I. taxpayers back on a similar footing as their stateside counterparts.
To hear Gov. deJongh talk about the case, click here for Part1 or Part 2.