Scariest Tax Form? Omit It, And IRS Can Audit You Forever
Â Feb 8, 2016
you file your taxes, consider how long you must look over your
shoulder. In many cases, the IRS has three years to audit. The three
years is doubled to six if you omitted more than
25% of your income. Plus, theÂ IRS now has six years to auditÂ if
you overstate basis and it has
the effect of understating your income by more than 25%. The three
years isÂ also doubled if you omitted more than $5,000 of foreign income
(say,Â interest on an overseas account).
But the exceptions from the three year rule get even worse if you miss certain forms that apply to you. If they apply, donÃ¢ï¿½ï¿½tÂ omitÂ Form
3520Â for gifts or inheritance from foreign nationals,
orÂ Form 8938 for overseas
assets.Â If you donÃ¢ï¿½ï¿½t file, the IRS clock never starts to run. More generally, the IRS has no time limit if you never file a return. For unfiled tax returns, criminal violations or fraud, the IRS can take its time.Â In most criminal or civil tax cases, though, theÂ practicalÂ limit isÂ six years.Â
If you miss some tax forms, theÂ IRS can audit
forever,Â and occasionally they do try to reach
back 10 or more years.Â When a U.S. shareholder ownsÂ part of aÂ foreign
corporation, it canÂ trigger reporting, including filing an IRSÂ Form
5471. It is an understatement to say this form is important.
Failing to file it means penalties, generally $10,000 per form. A
separate penalty can apply to each Form 5471 filed late, incomplete or
inaccurate. This penalty can apply even if no tax
is due on the return. That isÂ harsh, but the rule about the statute of
limitations is even harsher.
If you fail to file a required Form 5471,Â your entire tax return remains open for audit indefinitely.
This override of the normal IRS statute of limitations is sweeping.Â The
IRS not only has an indefinite period to examine and assess taxes on
items relating to the missing Form 5471.Â In fact, the IRS can make any
adjustments to theÂ entireÂ tax
return with no expiration until the required Form 5471 is filed.
Think of a Form 5471 like the signature on your return. Without it, it really isnÃ¢ï¿½ï¿½t a return. Forms 5471 are not only required of U.S. shareholders in controlled foreign corporations. They are also required when a U.S. shareholder acquires stock resulting in 10% ownership in any foreign company. The harsh statute of limitation rule for Form 5471 wasÂ enacted in 2010, part ofÂ the same law that brought us FATCA, the Foreign Account Tax Compliance Act.
possibility that the IRS can audit forever is chilling. The potential
for large civil penalties and perhaps even criminal liability can be
real. Consider your audit exposure before
For example, if you donÃ¢ï¿½ï¿½t sign your return, the IRS does not consider it a valid tax return. That means the three years can never start to run. Another big no-no is if you alter the penalties of perjury language at the bottom before you sign. If you do so, it also can mean the tax return does not count.
These moves may sound like tax protester statements. However, some
well-meaning taxpayers forget to sign or may unwittingly change the
penalties of perjury wording. Some other taxpayers just miss a form to
end up in audit purgatory. An example of the latter
can arise if you have an offshore accounts held by a company. If you
miss one, the IRS can audit you forever.
If you fileÂ early, do you shorten the audit period? Normally no, the IRS audit clock starts running on theÂ laterÂ of
your actual filing or the due date. If you file in January and yourÂ return is due April 15th, the audit clock starts to tick on April 15th.Â The time periods can be downright frightening in some cases.
Tax lawyers and accountants are used toÂ monitoring the duration of their clientsÃ¢ï¿½ï¿½ audit exposure, and so should you. Watch the calendar until you are clear of audit. In most cases, that will be either three years or six years. But in some cases, even though you filed and thought everything was in order, the statute of limitationsÂ neverÂ runs.