Table of contents
- What is the statute of limitations on an IRS tax audit?
- In what situations is there no statute of limitations for a US citizen or green card holder abroad?
- What happens to the statute of limitations if you do not file a US income tax return?
- How does tax fraud affect the statute of limitations?
- What happens if you fail to report certain foreign transactions?
- Why file a complete and accurate return even when no tax is owed?
- Where can you read more about international tax statute of limitations issues?
What is the statute of limitations on an IRS tax audit?
The statute of limitations is the time frame in which the government has to conduct an audit against a US taxpayer. Once that time frame lapses, the IRS cannot commence tax audits or assess taxes or tax penalties against a US citizen (USC) or lawful permanent resident (LPR, a green card holder) living overseas. In other words, the limitations period sets a fixed window, and after it closes the taxpayer generally has protection from new audits and assessments for that year.
In what situations is there no statute of limitations for a US citizen or green card holder abroad?
There are basically three ways a US citizen or green card holder living outside the US will have no protection of a statute of limitations against the IRS. In these scenarios the limitations period stays open, so there is no closing date on the government’s ability to audit or assess. The three basic scenarios are:
- The USC or LPR does not file a US income tax return (IRC Section 6501(c)(3)).
- There is fraud on the part of the taxpayer (IRC Sections 6501(c)(1), (c)(2)).
- The USC or LPR fails to report certain foreign transactions (IRC Section 6501(c)(8)).
What happens to the statute of limitations if you do not file a US income tax return?
If a US citizen or green card holder does not file a US income tax return, there is no statute of limitations for that year under IRC Section 6501(c)(3). Because the limitations clock generally starts when a return is filed, no return means the period never begins to run. The IRS may therefore audit or assess for that year without a fixed cutoff.
How does tax fraud affect the statute of limitations?
Where there is fraud on the part of the taxpayer, there is no statute of limitations under IRC Sections 6501(c)(1) and (c)(2). An example is a taxpayer who intentionally does not report income. In that situation the limitations period stays open, so the IRS may pursue an audit or assessment for that year without a closing date.
What happens if you fail to report certain foreign transactions?
If a US citizen or green card holder fails to report certain foreign transactions, there is no statute of limitations under IRC Section 6501(c)(8). This rule was only recently adopted as part of the “HIRE Act,” the same law that created FATCA (the Foreign Account Tax Compliance Act). The limitations period for the year can remain open until the required foreign-transaction reporting is made.
Why file a complete and accurate return even when no tax is owed?
One basic point from the law is that a US citizen or green card holder is almost always better off filing tax returns that are complete and accurate, even when no tax is owing. Filing this way helps assure a fixed time frame during which the US federal government can conduct tax audits and other related tax investigations. Without that fixed window, the limitations period may stay open. Anyone weighing their own situation may want to consult an experienced tax attorney.
Where can you read more about international tax statute of limitations issues?
For an overview of the statute of limitations periods, see the presentation “Starting the Race Against the Tax Authority in the International Tax World – Statute of Limitations & Lack of Filings” by John C. McDougal, Special Trial Attorney at the IRS, and Jon P. Schimmer and Eric D. Swenson of Procopio.