Higher thresholds apply to married taxpayers
filing jointly, and U.S. persons
residing abroad. But the forms are nothing
to ignore. If you are required to file Form
8938 and skip it, the IRS clock never even
starts to run.
IRS Form 5471
If you own part of a foreign
corporation, it can trigger extra reporting,
including filing an IRS 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 whole tax return. That is harsh,
but the rule about the statute of limitations
is even harsher. If you fail to file a required
Form 5471, your entire tax return remains
open for audit indefinitely.
This override of the normal three-year
or six-year IRS statute of limitations is
sweeping. The IRS not only has an indefinite period to examine and assess taxes on
items relating to the missing Form 5471. In
addition, the IRS can make any adjustments
to the entire tax return, with no expiration
until the required Form 5471 is filed.
You can think of a Form 5471 a bit like
the signature on your tax return. Without
the form, it is almost as if you didn’t file 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 percent ownership in any foreign company. The harsh statute of limitation rule
for Form 5471 was enacted in 2010, part
of the same law that brought us FATCA.
No return or
What if you never file a return or file a fraudulent one? The IRS has
no time limit if you never file a
return, or if it can prove civil or
If you file a return, can the
IRS ever claim that your return
didn’t count, so that the statute
of limitations never starts to run?
Yes. If you don’t sign your return, the IRS does not consider
it a valid tax return. That means
the three years can never start to
Another big no-no is if you
alter the “penalties of perjury”
language at the bottom of the
return where you sign. If you
alter that language, it also can
mean that the tax return does
not count. Such a move may
sound like a tax-protester statement. However, some well-meaning taxpayers forget to sign, or may
unwittingly change the penalties
of perjury wording. Some other
taxpayers just miss a form, only
to end up in audit purgatory.
Taxpayers must abide by
time limits too. If you want to amend a tax
return, you must do it within three years
of the original filing date. You might think
that amending a tax return would restart the
IRS’s three-year audit statute, but it doesn’t.
However, where your amended tax return shows an increase in tax, and when you
submit the amended return within 60 days
before the three-year statute runs, the IRS
only has 60 days after it receives the amended return to make an assessment. This narrow window can present planning opportunities. In contrast, an amended return that
does not report a net increase in tax does
not trigger an extension of the statute.
Claiming a refund
The adage that possession is
nine-tenths of the law can apply to taxes in
some cases. Getting money back from the
IRS is hard. If you pay estimated taxes, or
have tax withholding on your paycheck but
fail to file a return, you generally have only
two years (not three) to try to get it back.
Suppose you make tax payments (by
withholding or estimated tax payments), but
you have not filed tax returns for five years.
When you file those long-past-due returns,
you may find that overpayments in one year
may not offset underpayments in another.
This is painful, resulting in lost tax money,
and it catches many taxpayers unaware.
The IRS must normally examine a tax return within three years, unless
one of the many exceptions discussed here
applies. But the IRS does track the three-year
statute as its main limitation. Frequently, the
IRS says that it needs more time to audit.
How Long Can the IRS Audit?
Getting money back
from the IRS is hard.
If you pay estimated
taxes, or have tax
withholding on your
paycheck but fail to
file a return, you
generally have only
two years (not three)
to try to get it back.