Let's Talk About: US Tax
Can You Outrun the IRS? Statute of Limitations: US Tax Returns & FBARs
April 16, 2012
The tax laws contain what is known as a statute of limitations. The statute prescribes the length of time permitted to the IRS to enforce the tax rules. If the length of time runs out for a particular tax year, then the IRS is forever barred from claiming that you owe more tax in that year. It is important to understand how the tax statute of limitations works, because in certain cases, the statute of limitations will be longer than others or it will not start to run at all.
IRS has a Longer Time – Understatements of Income / Foreign Financial Assets
Once you file your income tax return, there are several possibilities with regard to the statute.
The general rule is that the IRS has three years after the later of the date the tax return was due or the date the return was filed, in order to assess tax. This rule applies if the tax return is timely filed or if it is filed late.
The statute can be extended to six years if there is a “substantial understatement” of income. This means the taxpayer omitted from gross income an amount properly includible in his income and that amount is more than 25% of the amount of gross income stated in the tax return.
Under a special rule added to the tax law in 2010, the statute can also be extended to six years if the taxpayer omits over $5,000 from gross income that is attributable to certain kinds of foreign financial assets.
File Your Income Tax Return to Get the Statute Running
Most important to remember is that the statute of limitations does not start to run unless you file your income tax return! Many Americans living and working overseas are under the mistaken assumption that they do not need to file tax returns if they earn less than the so-called “foreign earned income / housing exclusion” amounts. Tax returns must still be filed in order to claim the benefit of these exclusions. Delinquent filers should take prompt action for many reasons, including to start the statute running. http://dubai.angloinfo.com/countries/uae/ustax.asp See the sections titled: “Tax Information Reporting Requirements” and “Delinquent Tax Returns and FBARs”.
The Statute will Never Start to Run – Incomplete Foreign Reporting / Fraud
If there was a failure to file certain foreign-related information returns with one’s income tax return, such as Form 3520 or Form 5471, the statute of limitations did not begin to run because the return was treated as “incomplete”. The statute was suspended until the foreign information was provided to the IRS.
Under recently enacted tax rules (March 2010), the statute of limitations does not begin to run until the taxpayer has complied with all mandatory foreign reporting. This reporting can include information returns regarding ownership in foreign corporations, foreign partnerships, foreign trusts, information concerning “specified foreign financial assets” and many other transactions in the offshore context. Only when proper reporting is made will the statute of limitations begin. Furthermore, even though the statute starts to run, the entire tax return will remain open for IRS adjustments for a period of three years (rather than only for the portions of the return relating to the foreign reporting that had been missing).
Please see this link concerning “specified foreign financial assets” http://blogs.angloinfo.com/us-tax/2012/03/19/new-filing-requirements-for-2011-tax-returns/
The statute of limitations also does not start to run if a tax return is false or fraudulent or if there is a “willful” attempt to evade taxation. Please see this link to understand more about false returns and tax crimes involving “willfulness”. http://blogs.angloinfo.com/us-tax/2012/03/12/beware-of-filing-false-tax-returns/
Statute of Limitations for FBARs
The so-called FBAR is not a tax return. It takes its genesis not from the US income tax laws, but from the Bank Secrecy Act. The FBAR statute of limitations for civil penalties is six years from the date of the violation, which is generally June 30th of the year following the calendar year to which the FBAR relates (e.g., the FBAR covering the 2011 calendar year is due June 30, 2012 and if not received on such date, constitutes the date of violation). The FBAR statute of limitations for criminal violations is only 5 years. Significantly, unlike tax returns, the FBAR statute continues to run whether or not the FBAR was filed. So, for example, on June 30, 2012, the FBAR statute of limitations will bar enforcement by the IRS for civil violations with regard to FBARs covering the year 2005 (these were due June 30, 2006) and earlier.
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