Undeclared Income from FBAR or FATCA Assets – IRS 6 Year SOL
One of the biggest misconceptions involving the IRS, International Tax Law and the Statue of Limitations, is how much time the IRS has to go after a person who has international tax related issues.
- 1 International or Foreign Income Audit
- 2 What is a Statute of Limitations?
- 3 Six Year IRS Statute and International Tax
- 4 IRC Code Section 6501
- 5 Except As Otherwise Provided…
- 6 Foreign Income Exception
- 7 IRC 6038D – Foreign Financial Assets
- 8 What is a Specified Foreign Financial Asset?
- 9 IRS Specified Foreign Financial Assets
- 10 Conclusion
- 11 Golding & Golding, A PLC
International or Foreign Income Audit
Unfortunately, unlike domestic related issues in which the general rule is three (3) years, if foreign income is involved, typically the IRS has six (6) years instead of three years to audit you.
What is a Statute of Limitations?
The Statute of Limitations is essentially the amount of time the IRS has come after you an audit or examine you for your tax return. Under most circumstances, the IRS has three years.
For example, David filed tis 2014 tax return on April 10 2015. Under most circumstances that means that the IRS has three years to come after David to assess taxes. Statute of limitation runs from April 15 in 2015, for 3 years forward (even if the return was filed before April 15).
Therefore, if David filed his tax returns in February, the IRS would still have through April 15, 2018 to audit him. Likewise, if David did not file his return until October 1, 2015, the IRS would have to readers from that October date to audit David.
If David never filed the tax return, then the statute of limitations does not yet begin, and therefore the three-year clock does not begin ticking.
Six Year IRS Statute and International Tax
When a person has unreported foreign income, the statute of limitations may be expanded to six years even in minor situations. For example, if a person has more than $5,000.00 of unreported foreign income, the statue limitations may be expended to six years. Here is how it works:
IRC Code Section 6501
The applicable code section is the Internal Revenue Code section 6501. If you are conducting your own legal research, it is important to note that a person analyzes a statute from general to specific.
Therefore, the general proposition is as follows:
“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.”
Except As Otherwise Provided…
These 4 words can be dangerous.
While in this particular analysis, it means that under non-foreign income related issues, the general statute is three years, it a can be expanded – and it is commonly expanded in matters involving foreign income derived from a foreign asset/account.
Foreign Income Exception
“[S]uch amount— 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 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.
To better understand the statute, it is important to understand section 6038D.
IRC 6038D – Foreign Financial Assets
Section 6038D refers to “information with respect to foreign financial assets.”
Foreign financial assets are required to be reported and disclosed under a variety of certain circumstances. For example, if there are foreign bank accounts, foreign financial accounts, foreign investments, etc. there may be an IRS reporting requirement.
What is a Specified Foreign Financial Asset?
As provided by statute, “Any individual who, during any Taxable Year holds any interest in a specified foreign financial assets shall attach to such person’s return of tax imposed by subtitle A for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe).”
In order to best understand the reporting requirement, it is important to understand what is considered a specified foreign financial asset.
IRS Specified Foreign Financial Assets
As provided by the IRS, a Specified Foreign Financial Asset includes:
(1) any financial account (as defined in section 1471(d)(2)) maintained by a foreign financial institution (as defined in section 1471(d)(4)), and
(2) any of the following assets which are not held in an account maintained by a financial institution (as defined in section 1471(d)(5))—
(B) any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person, and
(C) any interest in a foreign entity (as defined in section 1473)
Section 1471(d)(2) – Financial Accounts
Section 1471 (d)(2) refers to Financial Accounts, and typically includes a depository account, a custodial account, and equity or debut interested.
Section 1471(d)(5) – Financial Accounts
This section is written as a double negative. In other words, what the code is saying is that if you hold any assets such as stock, security, any financial instrument held for investment or an interest in a foreign entity – even if it is not maintained in a financial institution – it still needs to be reported.
When it comes to earning foreign income, if you have more than $5000 of unreported foreign income which is being generated from one of the aforementioned assets or accounts, the IRS may have six years to go after you under the statute of limitations, instead of three years.
Golding & Golding, A PLC
We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.