Foreign Account Tax Compliance Act (FATCA): IRS Audits and Statute of Limitations
I. Pre-FATCA
1. Three year statute of limitations for the IRS to propose assessments after a tax return was filed.
2. Six year statute of limitations if 25% or greater omission from gross income.
3. Civil fraud unlimited statute of limitations.
4. Undisclosed foreign transactions (e.g., failure to file Forms 5471, 8865, disclose 10% or more interest in a controlled foreign corporation or foreign partnership) suspend 3 year statute of limitations until the foreign information is provided to the IRS.
II. FATCA (Effective 3/18/10)
As of 2010, six year statute of limitations on omission of more than $5,000 of unreported income from undisclosed foreign bank account.
Suspension of three year statute of limitations across the entire tax return, all items, not just undisclosed foreign accounts for failure to file:
a. Reports of foreign financial assets (i.e., assets over $50,000) new form 2010 attached to amended part of Form 1040 tax return.
b. Annual reports required to be filed by a passive foreign investment company.
c. Election of Passive Foreign Investment Company (PFIC) shareholder to have the PFIC treated as a Qualified Electing Fund.
In 2010, under FATCA, the IRS may aggressively pursue audits by a statute of limitations which remains open for six years or is suspended indefinitely for undisclosed foreign transaction.
