IRS Statute of Limitations Instructions & Examples – Who Gets Audited?
IRS Statute of Limitations: With respect to the IRS, a statute of limitations is essentially the time the IRS has to examine you about certain issues involving certain tax related matters. For most clients, they are concerned about how long the IRS can audit them, what powers the IRS has to extend the statute, and if there are any ways to avoid an IRS audit or examination.
Common IRS Statute of Limitations Questions
- How Far Can the IRS Audit?
- When does the IRS Statute of Limitations Begin?
- When does the IRS Statute of Limitations End
- What are IRS Audit Penalties?
- Will the IRS Lien my House?
- Will the IRS Levy my Bank Account?
- How can I avoid or reduce IRS Penalties?
IRS Statute of Limitations
It depends. The three main statute of limitations are:
- 3-Year Statute of Limitations
- 6-Year Statute of Limitations
- Non-expired Statute of Limitations
The IRS Statute of Limitations rules are complex. The IRS can be tough, and dealing with the IRS Statute of Limitations can be daunting.
IRS Enforcement May Vary
They typically will vary based on the person’s facts and circumstances. In fact, just a mere changing of one fact to another can change the entire dynamic of the IRS enforcement procedures.
IRS Statute of limitations vary as to each person’s set of facts. Namely, the key issues (unless it includes income generated from specific foreign accounts or assets) usually involve:
- What percentage of income was underreported?
- What percentage of the deductions were overstated?
- Is there unreported foreign Income?
- How was foreign income generated?
- Is the taxpayer claiming a refund?
Depending on the facts and circumstances of your situation, the Internal Revenue Service may have an extended period of time to audit you. Moreover, if you acted fraudulently and/or never filed your tax returns, the Statute may extended forever (or not begin running until you file your returns)
Not All IRS Statutes of Limitations are the Same
The Statute of Limitations for IRS matters vary based on whether the income and money is domestic or Offshore (Foreign or Abroad). In addition, Statute of Limitations vary based on whether there is any Fraud related crime.
*At Golding & Golding, we focus exclusively on International Tax Law. Oftentimes, a person with unreported foreign income may have their IRS Statute of Limitations extended to 6-years without them even realizing it.
Statute of Limitations IRS – Basics
The general Statute of Limitations are as follows:
3-Year Statute of Limitation
Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on which any part of such tax was paid, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period.
Conclusion: The IRS has 3 years to audit you from the time you file the return. If you file the return late, the IRS Statute does not begin until the return was filed. If it was not filed, the Statute of Limitations does not begin to run.
6-Year Statute of Limitations
Substantial omission of items
Except as otherwise provided in subsection (c)—
(1) Income taxes: In the case of any tax imposed by subtitle A—
(A)General rule: If the taxpayer omits from gross income an amount properly includible therein and—
- 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, or a proceeding in court for collection of such tax may be begun without assessment, at any time within 6 years after the return was filed.
6 Year Statute is More Complex
There are two main scenarios in which the IRS can go after you for 6 years:
-You underreported your income by more than 25% (It may be from underreporting income or over-reporting deductions which artificially reduced your income by more than 25%).
-You have foreign income or assets that generate income, and the income generated is in excess of $5,000. As you can see, the IRS is really gunning after individuals with unreported Foreign Income, so if you have unreported foreign income of more than $5,000, you must presume you may be audited for up to 6 years.
It can also lead to additional penalties not covered under the Streamlined Program.
How Will the IRS Find Out?
Relatively easily. Why? Because part of the streamlined program a person has to file or amend FBARs for 6 years. Using the same example from above, Michelle would have had to file FBARs for 2011 through 2016 — even though the IRS Streamlined Disclosure Program only requires tax returns to be amended from 2014 through 2016 in her specific case.
Thus, it would not be a stretch for the IRS to audit you for the 3 prior years to see if your Tax Returns included Form 8938 (if required during the prior years)
FATCA Form 8938 (Prior 3 Years)
When a person submits to the IRS streamlined program, they have to go back and amend the returns for three years. A typical example would be Michelle, who filed incorrect tax returns for 2014 through 2016. Therefore, when Michelle enters the streamlined program, she will have to amend her tax returns for 2014, 2015, in 2016.
Here’s the problem: Michelle also did not file form 8938 for 2011, 2012 and 2013. Therefore, if during the audit the IRS agent has any inclination that Michelle may have had a reporting requirement to disclose foreign money in these three prior years, but did not do so, she could be subject to extremely high fines and penalties the prior years. The penalties for 8938 can reach upwards of $60,000.
No Statute of Limitations
There are 3 main instances in which the IRS statute of limitations may have no limitation:
Willful Attempt to Evade Tax
In case of a willful attempt in any manner to defeat or evade tax imposed by this title (other than tax imposed by subtitle A or B), the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.
In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.
Unreported Foreign or Offshore Income
At Golding & Golding, we limit representation to International Tax Law issues.IRS Audits
Depending on the facts and circumstances of your case, IRS Audits can time-consuming, costly and dangerous. The best way to avoid an Audit is usually to submit to one of the IRS Voluntary Disclosure Programs before you are audited or examined.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure and avoid or reduce chances of an IRS Audit.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.” It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
Are You Already Under IRS Investigation
We have represented numerous clients who have come to us at various stages of an IRS Criminal Investigation.
Sometimes, the client contacts us once the IRS Special Agents (they travel in pairs) have already descended upon them, and other times…it’s just a hunch that they are under investigation.
Your hunch may be right; here are 5 Common IRS Criminal Investigation Tactics.
IRS Criminal Investigation Basics
It is becoming more and more clear that the IRS, Department of Justice and the U.S. Government as a whole have made Federal Tax Crimes involving Tax Evasion and Tax Fraud that involve Foreign Income and Offshore Accounts a key enforcement priority.
Typical IRS Criminal Tax Investigations include:
- Offshore Tax Evasion
- Offshore Tax Fraud
- Offshore Money Laundering
- Offshore Structuring
If you committed one of these types of Offshore Tax Crimes and are audited by the IRS, you have to be very careful. That is because you may not know the extent of the information the IRS already has against you, which may lead to a referral to the Criminal Investigation Division (CID) of the IRS.
Moreover, when an IRS Audit ends and depending on the strategies or tactics used by the specific agent who examined you,an IRS Investigation or inquiry by the IRS Fraud Division may start before you even know it.
The following is a brief summary of the common key tactics the IRS may use in trying to build a case against you, and/or moving your civil audit to a criminal investigation.
Contacting Your Bank Manager
It is safe to say the IRS would have no legitimate reason for speaking with the manager at the bank that you currently use, unless the IRS is trying to build a case against you.
Otherwise, why would the Internal Revenue Service take the time to go visit your bank manager? Oftentimes, when the IRS agent visits your bank manager, it is to begin comprehensive research on issues such as transfers, moving money offshore, and other matters related to your bank account.
They may want to know how often you come to the bank, and how often you request cash as opposed to other transfers. They may also want to know if there any other non-primary individuals on the account, accessing your information and if there are other accounts that the IRS may not know about yet.
Showing up at Your Home, Unannounced
When a person is not cooperating with the IRS, or consistently avoids appearing before the IRS, the IRS can get frustrated. One way the IRS relieves its frustration is by visiting by a person’s residence to try to put pressure on them.
This can be done for two main reasons: The first reason is to put some pressure on the individual to let them know that the IRS is aware of where person lives and that the situation is not going away so quickly. Second, is so the IRS can monitor how the person reacts after the IRS appears at their home. For example, as a result of the IRS visiting their home unannounced, in a person begins making significant transitions or transfers of money from one location or account to another – it may help the IRS pursue a criminal investigation.
Showing up at your Employment or Place of Business
This is a little more intense, and is usually not protocol unless a person owns their own business. We have had many clients tell us, in the pre-criminal investigation phase that the IRS showed up at their place of business to ask themselves – and other employees – various questions.
Of course, other individuals at the place of employment not required to speak to the IRS if they are not under subpoena or summons. Nevertheless, oftentimes people are so scared that when the IRS approaches, that they feel like they have to answer the question — and do. The employees mistakenly believe that by simply answering the questions it will make it go away – usually, the reverse happens and it just gives the IRS more ammunition to go after you.
Sudden Stopping of Communication From the IRS
If you are ever in an audit and the audit ends, but you are unable to obtain a closing letter or any other documentation from the IRS it may be cause for concern. That is because when a civil audit is stopped either abruptly (or with a little more tact), before it seems like the audit is complete, it is because the IRS agent believes there is a criminal issues
In a civil situation, the IRS is absolutely prohibited from asking further questions. That is because in a criminal setting, a person has a right against self-incrimination. A civil audit is not a criminal investigation, and therefore the agent does not have the right to ask criminal type questions.
Interviewing your CPA
If the IRS believes the CPA has information regarding a potential criminal tax matter, the IRS will send them a summons and bring their own “court reporter” with them to a question-and-answer session.
While the CPA has the right to counsel, it is important to understand that if the IRS is taking these types of actions against people on your behalf, then chances are the IRS is at least trying to put together all the evidence he can to determine whether there may be a criminal issue at play.
Danger of Non-Compliance
When a person receives an audit notice, they are not required to appear at the audit. In other words, Counsel may represent them at the audit. Oftentimes, this may be a good idea but it is important to be using counsel who fully understands the complexities of not bringing the client to the audit, but still providing sufficient information to the auditor to appease the auditor.
Oftentimes, the IRS agent wants to see the individual in-person. This does not mean the person should appear, but counsel should at least have the following in preparation for the hearing:
- A Full understanding of the case
- A Knowledge of the underlying facts
- All the necessary documentation
- A multi-step plan to facilitate compliance without the client getting in harms way
Avoid these Issues with IRS Offshore Disclosure
If you have come to the realization that you have undisclosed unreported foreign accounts-either because you acted willfully or non-willfully, there are options available to you to get into compliance.
Some people will believe that they would just wait until they are contacted by the IRS before making any representation to the IRS regarding the foreign accounts. This is a bad idea for many reasons, with the primary reason being following: if you wait until the IRS contacts you regarding undisclosed foreign accounts you will be on defense.
Sure, you know you are non-willful, but why would the IRS agent believe you or even if they do, they will take you to task typically require much more paperwork than would otherwise be required if you made a proactive representation to the IRS.
Moreover, the penalties may be a lot worse in an audit then an offshore disclosure situation.
We Specialize in IRS Voluntary Disclosure
We have successfully handled a diverse range of IRS Voluntary Disclosure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
Unlike other attorneys who call themselves specialists but handle 10 different areas of tax law, purchase multiple domain names, and even practice outside of tax, we are absolutely dedicated to IRS Voluntary Disclosure.
No Case is Too Big; No Case is Too Small.
We represent all different types of clients. High net-worth investors (over $40 million), smaller cases ($100,000) and everything in-between.
We represent clients in over 60 countries and nationwide, with all different types of assets, including (each link takes you to a Golding & Golding free summary):
- Foreign Mutual Funds
- Foreign Life Insurance
- Fixing Quiet Disclosure
- Foreign Real Estate Income
- Foreign Real Estate Sales
- Foreign Earned Income Exclusion
- Subpart F Income
- Foreign Inheritance
- Foreign Pension
- Form 3520
- Form 5471
- Form 8621
- Form 8865
- Form 8938 (FATCA)
Who Decides to Submit to IRS Voluntary Disclosure?
All different types of people submit to OVDP. We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
…We even represent IRS Staff with getting into compliance.
Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist
Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure and closely related matters.
In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS.)
He is frequently called upon to lecture and write on issues involving IRS Offshore Voluntary Disclosure.
Less than 1% of Tax Attorneys Nationwide
Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.
The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.
Our International Tax Lawyers represent hundreds of taxpayers annually in over 60 countries.
If you are found to be willful and intentionally misrepresented your case to the IRS, you may be subject to extremely high fines and penalties beyond what you may have already paid.
The following is a summary of penalties as published by the IRS on their own website:
A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Underpayment & Fraud Penalties
Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An accuracy-related penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
Even Criminal Charges are Possible…
Possible criminal charges related to tax matters include tax evasion (IRC § 7201), filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.