Overview of Undisclosed Foreign Assets Statute of Limitations

Overview of Undisclosed Foreign Asset Statute of Limitations

Undisclosed Foreign Asset Statute of Limitations

The United States tax rules can be very complicated, especially for U.S. Taxpayers who have foreign income, assets, or investments. That is because the United States taxes individuals on their worldwide income. Technically, this is referred to as Citizenship-Based Taxation, but not only does it apply to U.S. citizens but it also applies to Lawful Permanent Residents and foreign nationals who meet the Substantial Presence Test. When a Taxpayer has not properly reported their foreign income and assets, they may be subject to penalties, audit, or examination by the IRS — but the IRS does not have unlimited time to go after the Taxpayer. 99% of the time the issue is going to be a civil issue and not a criminal issue (beware of tax attorneys who are trying to fear-monger you into believing that simply failing to include foreign income is going to turn into a criminal matter). There are several different statutes of limitations that the IRS can rely on to go after the Taxpayer (which is distinct from how much time the IRS has to collect after taxes or penalties have been assessed). Let’s look at some of the statutes of limitation for foreign income and assets.

First, Were the IRS Tax Forms Filed?

A key issue is whether tax returns and foreign tax forms (aka international information reporting forms) had been filed. If the Taxpayer files the Form, then the IRS usually has three (3) years to go after the Taxpayer. If the Taxpayer did not file the form, the rules are different. If a Taxpayer has not filed a form, then generally the IRS gets three years to audit the Taxpayer from the time the form is filed. In other words, just because the Taxpayer does not file the form does not mean the Statute of Limitations expires. To begin the statute of limitations, the form has to be filed (subject to FBAR rules explained below). So before determining what the statute of limitations is, and when it will end, it is important to determine whether or not the forms were filed — and if so, when was the form filed.

3-Year Statute of Limitations

In general, the IRS has three years to go after the Taxpayer from when the form was filed. For example, if the Taxpayer filed their forms timely on April 15th, the IRS has three years from that date. If the Taxpayer filed the forms late, then the IRS would typically get three years from when the form was filed correctly and, if the forms are filed earlier before April 15^th, the IRS still gets the full three years from April 15^th. In other words, filing the forms before the actual tax due date does not reduce the amount of time the IRS has to go after the Taxpayer.

Some of the common international information reporting forms include:

• • • FBAR

    • Form 8938 (FATCA)

    • Form 3520

    • Form 3520-A, and

    • Form 5471

The FBAR is Not an IRS Form

The FBAR form is a bit different because it is not a tax form. Technically, the FBAR is a FinCEN form, and it’s handled under Title 31 instead of Title 26 — the latter being the Internal Revenue Code. In general, the IRS has six years to go after a Taxpayer for failing to file the FBAR or from when the FBAR is filed.

31 U.S.C. 5321

• • • (b)Time Limitations for Assessments and Commencement of Civil Actions.—

      • (1)Assessments.— The Secretary of the Treasury may assess a civil penalty under subsection

        • (a) at any time before the end of the 6-year period beginning on the date of the transaction with respect to which the penalty is assessed.

Oftentimes, the IRS will only realize near the termination of the statute that the Taxpayer is out of compliance with FBAR and may seek to consent to extend the statute of limitations for FBAR – agreeing to do so comes with its own set of pros and cons.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.