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What is the IRS statute of limitations on foreign income?

by: Anthony Parent   2015-05-12

Maybe you have some unreported income earned overseas. Maybe you have some foreign bank accounts overseas that you never knew you had to report to the US Treasury. Or maybe you are just doing a favor for "your friend," doing some research to see if "your friend" really has to report their foreign income, file FBARs, or enter into an Offshore Voluntary Disclosure Program (OVDP). Because, maybe, they can wait out this entire foreign tax compliance push by laying low and letting the statute of limitations expire and avoid a big mess. It's a question worth asking, right?

 

The standard rules on the IRS statute of limitations on assessment of additional taxes

If you file a tax return, typically the IRS has 3 years (or in limited circumstances, 6 years where the IRS can prove "substantial omission") to audit you and assess you an additional tax. These rules go out the door if you engaged in rather fraudulent tax evasion. Then the IRS can assess you whenever they want. (NOTE: This is not for tax crimes, but rather civil assessment of tax bills).

 

Likewise, if you don't file a tax return at all, the IRS has forever to assess a tax bill, again, civilly. Yet, most of the time, we are looking at a 3-year rule in audit situations simply because it is an easy procedural threshold for the IRS to meet, and documents are easier to come by.

 

Why the three-year statute of limitations on assessing taxes on foreign income may not apply

If the IRS can prove a substantial omission of gross income, six years of liability may be assessed. Or in the case of fraud, forever. But the twist -- there are additional rules that really help the IRS keep the statute of limitations open forever: foreign informational reporting forms.

 

If there was a failure to file certain information returns, such as Form 3520 (foreign trusts), Form 5471 (foreign corporations), or Form 8938 (foreign partnerships), the statute of limitations will not begin to run --- ever! Because so many foreign banks are spilling the beans on its customers and handing the IRS incriminating documents, the IRS may not be interested in sticking with just that three-year period.

 

What is the Statute of Limitations on FBAR Penalties?

The statute of limitations for assessing FBAR penalties is six years from the date of the violation, which would be the date that an unfiled FBAR (now Fin CEN Form 114) was due to have been filed.

 

The FBAR is due when your tax return is due. 

 

What is the IRS Statute of Limitations on Collecting tax debts if you are overseas?

One final idea "your friend" may have is to simply go into hiding somewhere overseas and "wait-out" any tax bill assessed. While that may sound like a possibility, get this -- the IRS already thought about that move. If you are not in the US, the normal 10-year statute of limitations on collections stops. Meaning that for all the time you are overseas, the clock should stop (Note: the IRS doesn't always code cases correctly, so there is a chance your statute on collections will run, even when it shouldn't).

 

Maybe "your friend" wants to look into one of the IRS Offshore Disclosure Programs?

With all the rules apparently in the IRS' favor, maybe a second look at compliance is warranted?  If you need assistance, contact us. We can help you decide if you should get into a disclosure program, and if so, which would be best for you.


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