IRS Statute of Limitations on Foreign Sources of Income

by Darrin Mish, Tampa Tax Attorney
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Many people were rejoicing when the Supreme Court decided in favor of Home Concrete & Supply LLC in their dispute with the IRS over the statute of limitations on tax audits. In that landmark case, the highest court in the land judged that the IRS had up to 3 years to audit taxes, not 6 years as contended by the agency. But before you go throwing a celebration party, you should remember a few things.

Firstly, the statute of limitations is still 6 years under certain circumstances. If you under-declare your taxable income by 25% or more, the IRS has 6 years, not 3, to audit you. Furthermore, the civil statute of limitations on Report of Foreign Bank and Financial Accounts (FBAR) errors or misreports is 6 years plus all criminal cases carry a 6 year statute of limitations also.

In 2010, the tax code was amended so an omission of more than $5,000 in gross income from “specified foreign financial assets” extends the IRS time to 6 years. The law is clear that the 6 year statute applies even if you had filed and disclosed your foreign income sources under the Foreign Account Tax Compliance Act (FATCA). So to each case, the statute of limitations may still be 6 years instead of 3 depending on circumstances.

If you filed your 2006 taxes before the deadline of April 15 in 2007, for example, the IRS has 6 years to audit you because the 3 year statute of limitations had not expired on March 18, 2010 when FATCA was passed. This means the IRS has up to April 15, 2013 to audit you. But for your 2005 taxes that were filed before April 15, 2006 the IRS has 3 years (not 6) to audit you because it was longer than 3 years before March 18, 2010.

However, if you consent to extend the statute of limitations before the 3 years is up (i.e. before April 15, 2009) then the IRS gets 6 years since the extension was not expired yet when FATCA was passed on March 18, 2010.

Another circumstance is if you had submitted your taxes late. For example, if you submitted your 2005 taxes in 2007 instead of 2006 and let’s say the 3 year statute of limitation was still open on March 18, 2010 when FATCA was passed, then the IRS has 6 years to audit your taxes. But if you made a late submission and your submission date was longer than 3 years before March 18, 2010 then the 6 year time limit does not apply and the IRS only has 3 years to audit you unless some other exception to the 3 year statute applies.

Finally, let’s say you submitted your 2005 taxes on time but you under-declared your income by more than 25% and more than $5,000 of that came from a foreign source. This means the statute of limitation in this case is 6 years and the IRS has until April 15, 2012.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Darrin Mish, Tampa Tax Attorney, The Law Offices of Darrin Mish, P.A. | Attorney Advertising

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