We have all heard tax horror stories, of people audited, fined, and punished for small accidental errors on their returns. While rare, these stories make people wonder if the IRS could come after them.
General Timelines for Audits
In most cases, the IRS has only three years to decide to audit you. However, this timeline is extended in some cases. For instance, if you left out more than a quarter of your income on your return, the IRS has a whopping six years to discover the mistake and audit you. The same applies if you failed to claim foreign income over $5,000 in a year. In rare cases, people even make tax errors that allow the IRS to audit forever. That’s right; there are instances in which the IRS reserves the right to come after taxpayers at any time.
Mistakes That Allow the IRS to Audit Forever
There are a few errors that will allow the IRS to come after you at any time. Some of these are quite simple; if you even forget to sign your tax return, the timeline for the statute of limitations never begins and you are thus subject to prosecution at any time in the future. Most commonly, people forget to file one of three very important forms: the Form 8938 for overseas assets, the Form 5471 pertaining to ownership of foreign corporations, and the Form 3520 for foreign gifts or inheritance. The failure to file these forms leaves you open to audit and prosecution for the rest of your life.
While allowing the IRS to audit forever seems harsh, there are reasonable justifications behind these laws. Failing to file a form is basically like failing to sign your return; the IRS has no information by which to decide if you are paying appropriate tax. While US companies will file their own paperwork on shareholders, allowing the IRS to compare records, foreign entities generally do not do this. There is no reasonable way for the IRS to get information on foreign gifts, inheritances, and holdings without the American taxpayer notifying them, so the statute of limitations clock basically never begins ticking. If you are concerned about the possibility of an IRS audit either now or years in the future, it is important to discuss the issue with a qualified CPA.
