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Foreign Reporting Requirements & the Impact on IRS Statute of Limitations

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Generally, the IRS has three years to audit and assess taxes on a previously filed tax return. The standard three year IRS statute of limitations grows to six years if you omit more than 25 percent of your income or if you omit more than $5,000 of foreign income. What many individuals don’t know however, is that the three-year statute of limitations becomes indefinite if a US taxpayer fails to file certain forms relating to foreign transfers, ownership or transactions. That’s right, forgetting to file a single form with your return – or even filing it inaccurately – can give the IRS the potential  power to audit the entire tax return indefinitely.  Let’s also not forget the additional $10,000 penalty per form that accompanies the failure to file of specific foreign reporting tax forms regardless of whether there is any tax due. The formation of this perfect storm arising from a foreign reporting compliance mistake should be avoided, but to ensure compliance, you have to know which foreign reporting forms apply to you, and which forms can impact the statute of limitations.

What is Form 5471 and Why Does it Matter?

Form 5471 is a foreign reporting requirement for US citizens and residents who are officers, directors, or shareholders in controlled foreign corporations holding at least a 10 percent ownership stake in the company. The Form must also be completed when a US shareholder acquires stock resulting in 10 percent ownership in a foreign company. If you have at least a 10 percent stake in multiple companies then you need to file a separate Form 5471 for each foreign company. To file correctly, the Form must be attached to your income tax return or partnership return and has to be filed by the filing due date of the respective return. If you are required to submit Form 5471, and do not attach it to your tax return, it is essentially as if you never signed the return, and as a result, you will become susceptible to the $10,000 per form penalty and the indefinite statute of limitations for the IRS to audit the entirety of the return you submitted.

Additional Foreign Reporting Requirements

The cost of failing to file Form 5471 is exceptionally  high, but it is not the only form pertaining to foreign reporting that can be easily overlooked and result in the IRS extending  the three-year statute of limitations period. The following are forms regarding cross-border  transactions  or foreign assets, which, if not filed , result in an extension of the standard three-year statute of limitations period  for an additional three years after the required  information makes it to the IRS.

  • Form 8621 – reporting requirement pertaining to certain passive foreign investment companies
  • Form 8865- reporting requirement pertaining to certain foreign partnerships
  • Form 8858- reporting requirement pertaining to certain foreign disregarded entities
  • Form 5472- reporting requirement pertaining to certain 25% foreign owned U S corporations and certain foreign corporations engaged in a U S trade or business
  • Form 926 – reporting requirement pertaining to certain transfers of property to foreign corporations
  • Form 8938- reporting requirement pertaining to certain foreign financials assets held by individuals
  • From 3520-A- reporting requirement pertaining to certain foreign trusts with US owners.

Many of these forms must be attached and filed with a taxpayers ‘ tax return even if there is no taxable income to report for the return to be considered complete. If a form is not included with the filed return, the clock for the statute of limitations never starts running, giving the IRS the power to audit all issues with respect to the income tax return , even after the supposed three-year statute of limitations has passed, unless the taxpayer can establish reasonable cause for the  failure to provide the information required by these forms.

The Bottom Line

Understanding and knowing the consequences related to failing to file certain tax forms with regards to foreign companies i s crucial for foreign companies and US taxpayers with foreign assets to protect themselves from unexpected surprises such as a $10,000 penalty or finding out that the statute of limitations for a certain tax year has been extended indefinitely. It is vital that your tax advisor knows how to navigate the complexities associated with foreign reporting to accurately file your returns. For more information and to find out how minimize potential liabilities with regard s to certain foreign reporting requirements that may affect you contact Craig Thompson at craig.thompson@aghllc.com.

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