Statute of Limitations & Exceptions For IRS Audits Explained
July 26, 2021

Statute of Limitations & Exceptions for IRS Audits Explained


Navigating American tax codes can prove difficult for individuals and multinational corporations alike. When American taxpayers have income-generating assets on foreign soil or hold overseas accounts, annual reporting becomes a far more complicated process. Everyone makes mistakes, but if you omit information from your tax return, forget to report certain assets, or neglect filing a return altogether, you could trigger an Internal Revenue Service (IRS) audit.

Thoroughly understanding the intricacies of the statute of limitations and exceptions for IRS audits can help you side-step this complicated process. Whether you want to avoid the painful audit process altogether or need legal guidance as you navigate an IRS investigation, the seasoned international tax attorneys at Abajian Law stand ready to discuss your rights and provide proven legal recourse options.

26 U.S. Code § 6501 – Limitations on Assessment and Collection

The general rule states that the IRS has a three-year statute of limitations to assess a tax return starting from the date such a document is filed. Understanding the temporal parameters of these statutes (and their exceptions) can be of great benefit to those who face audits or owe back taxes to the IRS. A false return, willful attempt to evade taxes, or failure to submit a return can render the standard three-year assessment period obsolete and extend the statute of limitations.

This particular code of U.S. tax law is incredibly important for American taxpayers who have foreign income sources. A skilled tax attorney can walk you through the nuanced exceptions and design a legal recourse strategy tailored to your specific situation.

Why Does the IRS Perform Audits?

The IRS typically conducts audits to minimize the tax gap. This ‘gap’ refers to the difference between what the IRS is owed and what the department actually receives. Simple mathematical mistakes, hiding domestic or foreign income and assets, or overusing deductions can trigger an audit.

What Triggers an IRS Audit?

Occasionally, the Internal Revenue Service will perform randomized audits. Other times, these audits are based on suspicious activity. Even if you file your tax return with the best of intentions, this does not guarantee that you will successfully avoid an audit. Though you cannot predict whether you will be audited in any given year, there are steps you can take to minimize your risks. Additionally, it is important to note that the IRS is subject to a statute of limitations.

Typically, the IRS can audit tax returns filed within a three-year period starting from the tax return’s due date. If you receive an extension for filing your return, the three-year period begins on the new due date. If you do not use an extension but file late, the three-year limit starts on the date you file. This statute limits the number of years that can pass between filing a tax return and undergoing an audit. However, there are exceptions to the statute of limitations for IRS audits.

Exceptions to Statute of Limitations

There are a few exceptions to the federal three-year statute of limitations. The following situations could incite an IRS audit and therefore lead to an extension of the statute of limitations deadline.

What are the three exceptions to the IRS audit time limit?

  • If you understate your income by more than 25% of the amount reported on your federal tax return, the IRS has up to six years from the date you file a return to review it.
  • If you fail to report foreign financial assets of more than $5,000, the three-year statute of limitations is increased to a six-year period.
  • If you do not file a return, or, if the IRS can prove you committed fraud, the statute of limitations remains open for an indefinite period of time.

Simple mistakes or small missteps can have costly, life-changing repercussions for American taxpayers. At Abajian Law, our tax attorneys have the winning experience needed to successfully advocate for our clients and ensure governmental compliance with all tax obligations.

Can the IRS Audit You After 10 Years?

Generally speaking, the Internal Revenue Service has ten years from the date a tax liability is declared to collect the full amount of back taxes, penalties, and interest owed. However, the IRS and Department of Justice (DOJ) have become increasingly tough on tax evasion and tax fraud cases.

American taxpayers, like Lucia Andrea Gatta, have learned the hard way that failure to complete Reports of Foreign Bank and Financial Accounts (FBARs) can have serious financial and legal repercussions. According to the Department of Justice (Office of Public Affairs), Gatta was indicted on February 10, 2021 for tax evasion, failing to file Reports of Foreign Bank and Financial Accounts (FBARs), and other crimes. Gatta failed to disclose her interest in a foreign bank account between the tax years 2012 and 2014, evaded assessment of income taxes in those foreign accounts, and failed to file tax returns for the 2011 through 2014 tax years. Accordingly, if convicted, Gatta will face 5 years in prison for each count of failing to file an FBAR and tax evasion.

There are instances when the 10-year statute of limitations on collections may not apply. These exceptions include:

  • Situations where the IRS is reviewing an offer in compromise, installment agreement, or innocent spouse relief request.
  • The period in which a taxpayer is protected under an automatic bankruptcy stay plus an additional period of six months.
  • A time period in which a taxpayer lives outside of the U.S. for at least six months.

Under Section 6531(2) of the U.S. Tax Code, the IRS has a six-year window from the time the tax return is filed to bring forth criminal charges. While time is not always on your side when it comes to taking on the IRS, knowing the statute of limitations and the period in which you may need to prove your income and assets can offer some reassurance. The team at Abajian Law has successfully helped many satisfied clients with their tax-related legal concerns. We offer targeted legal guidance to help you navigate the nuanced process of IRS audits.

What Is the Purpose of Form 5471?

Information Return of US Persons with Respect to Certain Foreign Corporations, commonly referred to as Form 5471, is a required document for American citizens and resident aliens who are officers, directors, or shareholders in certain foreign corporations. Even if your foreign business is not labeled as a corporation in your resident country, the company could be classified as one in the eyes of the IRS. A skilled and experienced tax attorney can help you examine the liability of your foreign company to determine whether your business will be viewed as a corporation. This review process can save you and your business from the financial hardship of an IRS-led international income and asset audit.

Who Must File IRS Form 5471?

There are four types of U.S. persons who are required to file the Form 5471 document. These categories include U.S. citizens, partnerships, trusts, estates, and corporations who meet the following criteria:

  • A U.S. person who owns or acquires 10% or more of a foreign corporation’s stock
  • A person who becomes a U.S. person while owning at least 10% of a foreign corporation’s stock
  • A U.S. person who controls a foreign corporation for a period of at least 30 days
  • A U.S. shareholder who owns stock in a foreign corporation that is controlled by a foreign corporation for a consecutive 30-day period and who owned the stock on the last day of the year

Under Form 5471, the IRS classifies international business companies and foreign limited liability companies (LLCs) as corporations. If a company’s structure is set up for owners to have limited or no liability, the IRS typically views these foreign businesses as corporations. However, certain foreign companies may choose the “disregarded identity” status by filing Form 8832. This form must be filed within 75 days of the company’s creation in order to avoid the Form 5471 filing requirement.

The seasoned international tax attorneys at Abajian Law work with foreign business clients at every stage of the business development process. Our skilled team has a thorough understanding of American tax laws and the prowess to precisely apply statute of limitations and exceptions to your company’s unique case. In recent years, the Internal Revenue Service and the Department of Justice have taken a tough stance against foreign tax evasion. A skilled legal counsel can ensure your company is in compliance with the U.S. government’s tax laws or provide legal advocacy for clients who face federal tax evasion or fraud allegations.

Let Abajian Law Be Your Trusted Legal Advocate

The dedicated tax attorneys at Abajian Law have skillfully navigated countless and varied cases for our clients. From innocent oversights to willful violations, we defend every client with the tenacity and precision they deserve. Our history of client success reflects our commitment to each case and our dedication to guiding you or your company back to government compliance.

You do not have to take on the IRS alone. The knowledgeable legal team at Abajian Law stands ready to answer your questions, address your concerns, and develop a legal recourse strategy to help you achieve peace of mind over all your financial issues.

If you have questions or concerns about IRS audits, contact the experienced legal team you can trust. Call the skilled California tax attorneys at Abajian Law today at (818)-396-5059.

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