Playing ‘Catch Me if You Can’ with the IRS, 7 Tax Examples

Playing ‘Catch Me if You Can’ with the IRS, 7 Examples

Playing ‘Catch Me If You Can’ with the IRS

Whether a taxpayer files incorrect tax returns by mistake or intentionally, one of the most common questions we receive is –

• How long does the IRS have to go after me for an incorrectly filed return?

While some U.S. taxpayers who are out of compliance will want to get into compliance as quickly as possible — for other taxpayers, it becomes a long, drawn-out version of catch me if you can, with the taxpayer doing everything they can to avoid being detected by the IRS for their prior year non-compliance — while also (usually) continuing to file tax returns. How much time the Internal Revenue Service has to go after taxpayers will depend on whether the incorrectly filed return(s) was due to a mistake or whether it was intentional (noting, that intentional or willful can also include reckless disregard and willful blindness). In some situations, the Internal Revenue Service only has a small window of opportunity to go after the taxpayer for any mistake they made in the tax return. However, in some situations, the IRS may have unlimited time to try to catch the taxpayer and levy fines and penalties against them. Let’s look at seven (7) examples of situations in which the taxpayer may have made a mistake or filed an inaccurate return and how much time the IRS has to go after them. It is also important to note, that these are just examples, and depending on the specific facts and circumstances the IRS may have more or less time to go after the taxpayer.

Simple Tax Filing Mistake 

Dean filed his tax return but inadvertently failed to include $2,000.00 of interest income. There are no other changes to Dean’s tax return. Therefore, since this was a simple mistake and only a small amount of income missing from the return (he earns 6 figures a year), generally the statute of limitations is three years from when Dean files the return. This presumes the tax return was filed timely in the year it was due. It should also be noted that even if Dean files the return before April 15th, the IRS still gets to begin counting from April 15^th. In other words, the IRS does not lose any time to pursue an exam just because the taxpayer files are returned before the April 15th due date.

Substantial Omission of Income

Scott filed his tax return timely, but it turns out that Scott failed to include a significant amount of income since he did not receive a 1099 and Scott forgot about the income during one of the busiest years of his life. There was no intent to avoid reporting the income, it is just that Scott recently moved in that year and has a new baby. In this type of situation, where the amount of omitted income exceeded 25% of the amount of the gross income that he identified in the return (which it did), the IRS then has six years instead of three years to audit the taxpayer.

6038D (FATCA) 

Michelle is a Lawful Permanent Resident who filed her tax return timely but was unaware that she was required to include certain income that was generated from assets that qualify as FATCA Form 8938 Assets. The amount of income that was omitted was more than $5,000 of interest income in this type of situation Michelle is also subject to a potential six-year exam period, instead of a three-year examination period. That is because the amount of income was more than $5000 and was generated from a 6038D asset — even though it did not comprise more than 25% of the total gross income that was reported.

No Tax Return Filed 

David failed to file tax returns for the past several years. Recently, David (who lives overseas) became very concerned that when he goes back to renew his passport, it might get declined or rejected. Therefore, David went back and filed several years of prior tax returns. Even though these returns were due between 10 and 15 years ago and would otherwise have a closed statute of limitations if they were filed timely — meaning the IRS would not be able to audit the returns — since the returns were only just filed, the IRS has three years to audit the returns (although it could be more if it falls into any of the categories identified above or below).

Unfiled Form 8938, 8621, 5471, and 3520

Renee has various foreign accounts, assets, or investments, and is required to file several international information reporting forms each year, such as Form 3520, Form 5471, Form 8938, and Form 8621. Renee has been required to file tax and foreign reporting returns for the past seven years. Even though there was no unreported income in any of these years, Renee’s tax returns may still be subject to audit or examination because she did not file these forms — and since she did not file these forms, the tax return does not technically ‘close’ — leaving her subject to potential audits and examination. It is unclear whether the IRS can audit the entire return or just the portions dealing with the unreported forms, but presumably, the IRS will audit the full return and make the taxpayer challenge them to try to limit the audit.

Civil Tax Fraud

Barry is a U.S. citizen who has foreign income that he intentionally did not report on his tax return. Depending on the specific facts and circumstances surrounding Barry’s non-compliance there may be both civil and criminal tax implications. If the IRS believes that Barry committed civil tax fraud, it is important to note that there is no statute of limitations so feasibly the IRS could go back 10 or 20 years to audit the past returns to investigate the fraud. This rule only applies to civil tax fraud and not criminal tax fraud which has a separate statute of limitations.

Civil FBAR Violations

Maria never failed her FBAR for several years to report her foreign bank accounts and investment accounts. The FBAR (FinCEN Form 114) is not an IRS form although the IRS is tasked with enforcement. Typically, the IRS has six years to audit a taxpayer who failed to file the FBAR.

Criminal Tax

Peter intentionally omitted income from his tax return in some years and then in other years, he did not file a tax return because he did not want to pay tax on foreign income he received his cash — in which he believed that the IRS could not find him – but he was wrong and now Peter is under investigation. He may potentially be subject to various criminal tax implications as well as other types of crimes such as money laundering and structuring. Depending on which type of crime the IRS wants to investigate Peter for, the statute of limitations will vary and typically range from three to five years. One key fact to remember is that oftentimes the statute will not begin until the IRS discovered or should have discovered the crime, which sometimes means the statute of limitations is much longer than it may appear on paper because the IRS may not have been able to discover the crime until years after it occurred.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

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

Contact our firm today for assistance.