In earlier blog posts I have discussed how Streamlined Filings differ from OVDP submissions. One major difference: unlike an OVDP submission, a taxpayer making a Streamlined Filing is not informed upfront whether his or her filing has been accepted as qualifying for the zero-penalty regime for those residing outside of the U.S. or 5% penalty for those residing in the U.S.
Rather, the streamlined filer must wait to learn whether IRS will audit the returns and conclude that the taxpayer’s conduct was willful or worse criminal either in failing to file on time, filing a false return, not reporting a foreign bank account, filing a false FBAR, or, filing a false non-willful certification.
How long a taxpayer must wait for a decent night’s sleep depends on what are called Statutes of Limitations (SOL). These statutes define the time period within which IRS or Department of Justice, as the case may require, is allowed to assess additional tax or penalty, collect a tax liability assessed or charge someone with a tax or FBAR related crime.
The limitations periods are also central to the strategy some have adopted or are considering, that is, to simply begin reporting their offshore bank accounts and offshore income prospectively and do nothing about part transgressions.
What are these statute of limitations periods?[i]
Civil income tax assessments:
Income tax Assessments
Generally IRS must assess additional tax within three years from the due date of the return or filling date, if the return is filed after the due date. (Sec. 6501 (a) and (b)).
This period, however, is extended to six years if unreported gross income exceeds more than 25% of total gross income (Sec. 6501(e) (1)). For this purpose overstating cost basis on the sale of an asset is now considered an understatement of gross income. Sec. 6501(e)(1)(B) as amended by a Highway Funding Bill, H.R. 3236, signed by President Obama on July 31, 2015 and effective for returns filed after July 31, 2015 and returns filed previously that are still open under Sec. 6501 (the three-year rule). This new code section overrides the contrary Supreme Court decision in US v. Home Concrete & Supply LLC. (566 U.S. ___ (2012), 634 F2d 249).
Special extended income tax limitations period if required foreign forms not filed
Section 6501 (c) (8) (A), however, allows the IRS to assess income tax on a return at any time within three years after the date on which the IRS is furnished the information required to be reported on certain foreign related forms including:
- Form 8621, Information Return by Shareholder of a Passive Foreign Investment Company (PFIC) or Qualified Electing Fund.
- Form 5471, Information Return of US. Persons with Respect to Certain Foreign Corporations.
- Form 5472, Information Return of a 25% Foreign-Owned US Corporation or a Foreign Corporation Engaged in a US Trade or Business.
- Form 8938, Statement of Specified Foreign Financial Assets.
- Form 8865, Return of US Person with Respect to Certain Foreign Partnerships.
- Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.
- 3520A, Annual Information Return of a US Trust with a Foreign Owner (Under Section 6048(b)).
If the taxpayer has a reasonable cause for failing to file the omitted report, the statute extension will apply only to the foreign items omitted and not to the entire return (Sec. 6501 (c) (8) (B)).
Substitute for return
Section 6501 (b) (3) makes the civil SOL period inapplicable to a return (called A Substitute for Return) filed by the IRS under Section 6020 for a taxpayer who has not filed a return.
False, fraudulent or unfiled returns
The civil SOL is also inapplicable to false or fraudulent returns, or, where there has been a willful attempt to evade tax. In these cases the tax may be assessed at any time as is the case with regard to any year for which no return has been filed. (Sec. 6501 (c)).
FBAR civil penalty assessments – 31 USC 5321 (b) (1)[ii] / IRM 184.108.40.206.1 11-3-(2014)
The FBAR civil penalty can be assessment for one or both of two omissions:
- Failing to file an FBAR, both willful and non-willful.
- The penalty can be assessed within 6 years following the due date of the FBAR (June 30). Thus, the penalty for failing to file the 2014 FBAR, due June 30, 2015, may be assessed before June 30, 2021.
- Failure to maintain required records.
- The penalty may be assessed within six years following the IRS first request for the records.
The civil FBAR penalty statute of limitations is absolute as there is no tolling exception to its running. And while the Title 26 SOL does not begin to run until a return is filed, the Bank Secrecy Act FBAR SOL starts to run on the due date of the FBAR whether or not falsely filed or not filed at all.
FBAR limitations period on collection:
It is important to note that the normal assessment and collection procedures under the Internal Revenue Code (Title 26 USC) do not apply to the civil FBAR penalty which is governed by Title 31 USC. When a civil FBAR penalty is assessed, the IRS cannot simply give notice and demand and then start to levy on bank account (subject to appeals and Tax Court review). IRS must commence a civil suit in the US. District Court to collect the FBAR penalty before the end of the two-year period beginning on the later of:
- The date the penalty was assessed (date that the IRS designated official stamps IRS Form 13448): or,
- The date any judgement becomes final in any criminal action in connection with the same omission on which the FBAR civil penalty was assessed. (31 USC Sec. 5321 (b) (2).
A monetary judgment obtained by the IRS in a suit to collect an FBAR penalty would then have the life of federal judgment (20 years / can be renewed for an additional 20 year term – 28 USC Sec. 3201. Appeals could toll the running of such SOL. So, the IRS could have many years to attempt to collect its judgment on the FBAR penalty.
Income tax SOL on IRS collection efforts
The general collection period of limitations on income tax assessments is ten years from the date of assessment subject to many tolling exceptions (e.g., Collection Due Process Hearing Request, Offer in Compromise submission), and the IRS right to commence suit in US District Court to reduce the tax lien to judgment. The federal tax lien under the IRC does not merge into the judgment. Thus, IRS can proceed to collect the tax under the IRC provisions or under the Federal Debt Collection Practices Act. (IRM 220.127.116.11 (12-07-2010)).
There is no tolling of the civil tax SOL on assessment when the taxpayer is outside the US. But the SOL on collection is suspended when the taxpayer has been outside of the U.S. for a continuous period of six months and the SOL will not expire until six months following his or her return to the U.S. (Sec. 6503 (c)).
Limitations periods for bringing some common criminal charges.
Title 26 income tax crimes
- Tax Evasion under Sec. 7201 – six years from commission of offense (usually due date or filing date of return) (Sec. 6531(2) but can be extended to the date of the last act of evasion. For example, see U.S. v. Irby, 703 F2d 380 (5th Cir. 2012) where the last act of evasion of payment was the use of nominee trusts to conceal assets in 2006 on an unfiled 2001 return year. (6501 (2)).
- Filing a false return under Sec. 7206 – six years from filing date (6531(5).
- Delivering a false document under Sec. 7207 – six years from date of delivery (6531(5)).
Note especially that the Statute of Limitations for Title 26 offenses and Klein conspiracies discussed below is tolled tor any period during which the taxpayer charged is outside of the U.S. regardless of the reason for being outside of the U.S. (Sec. 6531) or is a fugitive from justice (18 USC 3290). Obviously, this could impact a taxpayer with an offshore account who either lives abroad or spends considerable time overseas.
Title 18 crimes (Title 18 USC is the general federal criminal code)
- 18 USC 371 (called Klein conspiracy after case US. v. Klein) – six years from the last act in furtherance of the conspiracy.
- Sec. 6531 applies to Klein conspiracy offenses and thus, the statute of limitations period would be extended for the period of absence from the U.S.
- But, 18 USC 3290 provides: “No statute of limitations shall extend to any person fleeing from justice.” Whether someone is fleeing from justice is a question of fact. This section is also applicable to Title 26 offenses and applies to fleeing felons within or outside of the US.
- The SOL for Title 18 offenses is also suspended under 18 USC 3292 while a U.S. government request to a foreign government for evidence located in the foreign country is pending.
Title 31 (Bank Secrecy Act) crimes (FBAR criminal violations)
- Five years from the date the offense is committed (due date of FBAR or June 30) – 18 USC 3282.
- 18 USC 3290 discussed above could, in the opinion of some, apply to extend the SOL and whether one living outside of the US is a fleeing felon would be decided on the facts of each case. Physical presence outside of the U.S. alone should not be enough to toll the SOL when not outside the country as a fleeing felon. But, the application of 18 USC 3290 to FBAR violations is still an open question. It is more likely to be applicable, if at all, to fleeing felons where the government can prove that the person has been attempting to shield himself or herself from being apprehended. You would expect such person to have committed overt acts that show an intent to conceal that goes well beyond passively or benignly residing outside of the U.S.
The above summary is not all-inclusive of every SOL applicable to tax crimes and every tolling period. But, it should give pause to one who is thinking about riding out the storm regarding the past and simply starting to file going forward. The storm could turn out to be much longer than anticipated and the boat could get swamped.
Filing forward without addressing the past is a dangerous strategy but might be appropriate is some cases with exceptional facts, such as very small income in the non-compliant years or where the SOL is close to running and the taxpayer has not resided outside the U.S.. But, the safest path for most will usually be to come into compliance under one of the IRS sanctioned programs where the outcome is clearer.
Non-willful Streamlined filers, at least those properly characterized, are not tax criminals but may have large amounts of unreported income with little tax owed as a result of the foreign tax credit or foreign earned income exclusion. Thus, the six-year SOL could apply if they have large unearned income not previously reported in a return.
Expats who choose to file forward can be audited as far back as IRS wants to go since the civil SOL will not commence to run if no return has been filed. Those in high-tax jurisdictions, however, will in most cases owe little tax to the U.S. Treasury. Persons living in the US usually will have filed returns although I have come across many habitual non-filers who live in the U.S.
Those who unknowingly make a streamlined filing when tax crimes have been committed or worse who commit a crime by submitting a false non-willful certification are in a very exposed position. That is why it is imperative for a tax lawyer, experienced in these matters, to oversee the Streamlined Filing.
There are no general rules that can be applied to every case and no templates for safely navigating the treacherous waters of coming into compliance from offshore transgressions or omissions. Every case must be carefully evaluated to ascertain a course of action that will most likely lead to a safe landing.
© 2015 by Robert S. Steinberg, Esquire
All rights reserved
[i] Unless otherwise noted all section references are to the Internal Revenue Code of 1986, as amended, also sometimes referred to as Title 26 USC (United States Code).
[ii] Title 31 USC is the Bank Secrecy Act.