IRS Form 8938 Statute of Limitations: 6-Year Audit Risk (6051)

IRS Form 8938 Statute of Limitations: 6-Year Audit Risk (6051)

Form 8938 Statute of Limitations 

Form 8938 Statute of Limitations: Under most circumstances, the IRS has three (3) years to initiate an audit against a taxpayer. In some circumstances the 3-year statute may extend to 6-years, and even beyond in civil fraud matters. When it comes to certain foreign assets, the 3-year statute is extended to 6-years, in accordance with IRC 6051.

Form 8938 is an IRS Form used to report specified foreign assets.

The IRS has taken a keen interest on matters involving foreign accounts compliance and unreported foreign income. And, since the Internal Revenue Service will usually have 6-years to start an audit, taxpayers who are out-of-compliance may want to consider getting into offshore compliance before it is too late.

Extended Time for IRS Audit

The IRS Statute of Limitations for Form 8938 is “Extended” (Read:The IRS has more time than usual to audit you)

As provided by the IRS:

8938 Statute of Limitations

If you fail to file Form 8938 or fail to report a specified foreign financial asset that you are required to report, the statute of limitations for the tax year may remain open for all or a part of your income tax return until 3 years after the date on which you file Form 8938.

Extended Statute of Limitations (8938)

If you do not include in your gross income an amount relating to one or more specified foreign financial assets, and the amount you omit is more than $5,000, any tax you owe for the tax year can be assessed at any time within 6 years after you filed your return.

For this purpose, specified foreign financial assets include any specified foreign financial assets in which you have an interest without regard to the reporting threshold that applies to you and regardless of any exception from reporting a specified foreign financial asset on Form 8938.

Internal Revenue Code (IRC) 6501

As provided by the Internal Revenue Code, IRC 6501

(A) General rule

If the taxpayer omits from gross income an amount properly includible therein and

— (i) such amount is in excess of 25 percent of the amount of gross income stated in the return, or (ii)

such amount

— (I) is attributable to one or more assets with respect to which information is required to be reported under section 6038D (or would be so required if such section were applied without regard to the dollar threshold specified in subsection (a) thereof and without regard to any exceptions provided pursuant to subsection (h)(1) thereof), and

(II) is in excess of $5,000, the tax may be assessed, any time within 6 years after the return was filed.

Additional Form 8938 Resources

There are many nuances and complexities to Form 8938. If you are interested, we have authored additional articles. Two important articles include:

Important Practice Pointer for Form 8983

Typically, the IRS does not start by going back six years. Rather, the IRS will audit you for three years and then depending on the facts and circumstances of your situation expand the audit another three years.

Therefore, if you happen to be out of compliance for prior years then — even if you decide not to go back and file returns in prior years — you should consider being in compliance for at least the three most current years with either the IRS Offshore Voluntary Disclosure Program or IRS Domestic Voluntary Disclosure Program.

Why? Because even if you are audited for three years and can pretty much show that you’ve done your best to be in compliance  for the last 3-years, the IRS agent may have no aforethought to believe he or she could go back another three years, because there would be no facts or circumstances in your current three-year audit that would lead the agent to believe they had reason to go back another three years (see Offshore Disclosure Options below).

5 Key Issues to Consider

The following are a list of Hidden Dangers regarding IRS Form 8938

Quiet Disclosure or Incomplete Disclosure

Many individuals who contact us have only recently learned about the Form 8938 filing requirements. In learning about the FATCA Form 8938, they realized that they missed the time to file the Form 8938, as well as the FBAR (Report of Foreign Bank and Financial Account) in current/prior years as well.

Instead of properly submitting to either the IRS Voluntary Disclosure Program or making a Reasonable Cause Submission – they go ahead and file the current year form 8938 properly — without prior year forms. This is a bad strategy because there are hidden dangers in form 8938. Moreover, by knowingly failing to report prior accounts, they have turned a non-willful situation into a Willful/Tax-Fraud scenario, which could land them in serious danger with the IRS, DOT, or DOJ.

Did you Open the Account “This Year”

In completing form 8938, the form requests that you mark the box if the account was opened in the current year. Let’s say the account was not opened in the current year, and therefore you do not mark the box. If you are audited in the future and did not meet the threshold for filing in prior years, then IRS inquiry would be no big deal on this issue.

BUT, if even though this is the first year you are reporting the account, you met the threshold requirement for reporting the account in prior years, then the IRS may further question you as to why you did not report the account in prior years on either a FATCA Form 8938 or FBAR (or submit to Voluntary Disclosure). 

If the IRS believes you were willful or reckless in failing to do so (and/or failed to get into compliance), then in a multi-year audit situation you may be subject to 100% penalty on the value of the accounts for willfully or recklessly failing to comply.

 Income Generated by 8938Assets

Form 8938 also asks you to complete how much Interest, Dividend, Capital Gain or Royalties you earned from these foreign accounts/assets. Most importantly is the Capital Gain issue. Specifically, if you had Capital Gain income in the current year, chances are you did not also purchase or acquire the asset in the current year.

If you did not purchase the asset in the current year, and you are audited, the IRS may inquire further…which can lead to questions as to why you did not report the asset in prior years and/or get into compliance properly. The same goes for Interest, Dividend, or Royalties; again, if you owned the asset(s) or account in prior years and therefore did not mark off that the accounts were opened or asset was acquired in the current year, it could lead to an IRS presumption that you were are also earning the same type of income in prior years only you did not report it — and subject you to extensive fines and penalties.

Did you File a Form 5471

Four 5471 is a reporting form used for individuals who have a certain interest or ownership in a foreign corporation. In any year in which you are required to file a form 5471, you are not required to file a form 8938 as well.

But, if you mark off in the current year that you are filing a form 5471, it may lead the IRS to look at the 5471 (which requires you to identify when you obtained your interest in the Foreign Corporation).  If the IRS audits or examines you and learns that you have had the ownership in years prior, the penalties can be severe and start a $10,000 per year, per required 5471 form.

Did You File a Form 8621

Form 8621 is used to report any interest you may have (even fractional interest) in a Passive Foreign Investment Company. Like the 5471, you are not required to file and 8938 for any asset in which the current year you are filing form 8621. The analysis of taxes and interest due under IRC 1291 et seq. and reported on Form 8621 are intense and beyond the scope of this article, but if you are curious or bored, you can find a complete analysis we prepared here.

Here’s where it gets tricky and VERY DANGEROUS: While there is no specific financial penalty for failing to file a form 8621 (although monetary penalties may be enforced through the language of 8938), by failing to file the form your tax return is not considered complete and the statute of limitations does not begin to run. Therefore, your prior tax return will remain open indefinitely if it turns out that the IRS realizes you should have been filing 8621 information returns in prior years.

Out of 8938 Compliance?

If you are already out of tax compliance with the IRS for prior years involving foreign and offshore accounts, assets, investments, income, etc., one of the best methods for safely getting into compliance is through the IRS offshore voluntary disclosure programs.

Golding & Golding: About Our International Tax Law Firm

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

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.

How to Hire Experienced Offshore Counsel

Generally, experienced attorneys in this field will have the following credentials/experience:

  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience
  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.