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When Are Your US Income Tax Returns Subject to IRS Audits Indefinitely?


Ines ZemelmanSep-10-2015

 

US Expats are required to file an annual tax return both with the United States and in their host country.  Generally speaking, the IRS has 3 years to audit your US expat tax return; but if you own a foreign company or your business maintains a foreign financial account, your tax returns are subject to audits indefinitely.

 

As a US Expat living and working overseas, you are required to file a tax return in your host country as well in the United States.  Many expats are concerned that a mistake will be made along the way and their US expat tax return will be subject to an IRS audit.

 

If you file your taxes as an individual (this also applies to married couples) and you are current on your FBAR (Foreign Bank Accounts Report) reporting requirements, the IRS has 3 years to audit your US expat tax returns.  If you are not caught up on your FBAR reporting requirements, the IRS can go as far back as 6 years for an audit.  If you have a foreign business, file a U.S. tax return, yet fail to provide business informational return, there may be no statute of limitations on IRS audits.

 

It’s important to understand that the IRS considers all types of foreign businesses when it comes to lifetime audit potential

 

You may be under the impression that your foreign business income is not incorporated and not required to be reported to the IRS.  This couldn’t be further from the truth.  The IRS takes into consideration all foreign businesses, including corporations, LLCs, and partnerships. Even disregarded entities (business entities without a separate tax ID that have income flowing directly to a personal tax return) require filing of informational returns. If not filed, this omission may open the gateway to the indefinite audit period.

 

If there was a failure to file certain information returns, one of which is Form 5471, the statute of limitations will not have begun to run.  With no statute of limitations in place, there is no limit for the period of assessing tax and applying penalties

 

If you own a foreign corporation entirely or if you are a shareholder of a foreign corporation with at least 10% of the stock, you will be required to file Form 5471 (Information Return of US Persons with Respect to Certain Foreign Corporations).  There are stiff penalties for failing to file or misfiling Form 5471, so it’s critical that this form is filed accurately and on time.  Aside from the penalties (which can be as high as $10K per form), there is no statute of limitations on IRS review. The mere fact of missing form 5471 invalidates the statute of limitations for the years that returns were filed yet form 5471 not submitted.

 

If you have failed to file or misfiled Form 5471, you may also have failed to file your FBAR accurately and/or on time.  FBAR penalties are just as steep as the penalties attached to Form 5471.  You could be charged as much as $10K for each year you failed to file your FBAR.

 

Form 5471 and FBAR came into effect (along with FATCA, or Foreign Account Tax Compliance Act) when the HIRE act of 2010 was passed.  Since these forms are associated with FATCA, it’s easy to see why the IRS takes great measures to ensure that all filing guidelines are met.

 

IRS  can propose adjustments to tax for a six-year period without either an agreement from the taxpayer or a statutory exception to the normal three-year statute of limitations for making those adjustments

 

Going back six years is part of the resolution offered by the IRS for resolving offshore voluntary disclosures.  The taxpayer must agree to assessment of the liabilities for those years in order to get the benefit of the reduced penalty framework.  If the taxpayer does not agree to the tax, interest and penalty proposed by the voluntary disclosure examiner, the case will be referred to the field for a complete examination.  In that examination, normal statute of limitations rules will apply.  If no exception to the normal three-year statute applies, the IRS will only be able to assess tax, penalty and interest for three years.  However, if the period of limitations was open because, for example, the IRS can prove a substantial omission of gross income, six years of liability may be assessed.  Similarly, if there was a failure to file certain information returns, such as Form 3520 or Form 5471, the statute of limitations will not have begun to run.  If the IRS can prove fraud, there is no statute of limitations for assessing tax.

 

IRS  can propose adjustments to tax for a six-year period without either an agreement from the taxpayer or a statutory exception to the normal three-year statute of limitations for making those adjustments

 

 

If you are not current on either your FBAR or Form 5471 (or both), it’s important for you to get caught up.  Take the time to identify the years in which your forms are delinquent.  Many US expats are more comfortable speaking with an American expat tax professional to avoid making mistakes trying to get caught up with the IRS.

 

There are currently two amnesty programs being offered by the IRS to help taxpayers become current on their filing and reporting obligations.  One is the Streamlined Filing Procedures, and the other is the Offshore Voluntary Disclosure Initiative.  Each of these has different guidelines, and it’s important for you to be aware of these guidelines so you choose the program that can provide you the most benefits.

 

 

Zemelman

 

I.J. Zemelman, EA is the founder of Taxes for Expats
She may be reached at: +1-646-397-2887
Email: questions@taxesforexpats.com
Web site: www.taxesforexpats.com