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FBAR STATUTE OF LIMITATIONS FOR PENALTY ASSESSMENT

The general statute of limitations for the IRS to assess tax or a civil penalty is three years from the filing of the tax return. There are several exceptions. The FBAR statute of limitations is generally 6 years from the filing due date of the FBAR. There are several international information forms pertaining to overseas assets and interests, including:

  1. Foreign Bank Account Report, or FBAR: Filed with Department of Treasury on FinCen form 114, not with an IRS tax return.
  2. IRS form 3520: Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. This is part of the tax return.
  3. IRS form 5471: Information Return of U.S. Persons With Respect to Certain Foreign Corporations. This is part of the tax return.
  4. IRS form 8865: Return of U.S. Persons With Respect to Certain Foreign Partnerships. This is part of the tax return.
  5. IRS form 8938: Statement of Specified Foreign Financial Assets. This is part of the tax return.

These returns are information returns only but are required to be filed. These returns merely disclose assets and interests abroad. Tax associated with these overseas assets are required to be reported on an individual’s 1040. Just because an income producing asset is overseas that doesn’t necessarily mean that the income will not be taxed by the IRS. Contrary, the U.S. taxes its citizens on their worldwide sources of income.

Any US person who has a financial interest in, or signature authority over, a foreign financial account with an aggregate value of $10,000 at any time during the calendar year, must file an FBAR by the due date prescribed.

What is a foreign financial account that must be reported on the FBAR?

A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution. A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund. An asset or interest in an asset that is not held in account generally doesn’t need to be included in the FBAR.

A foreign financial account is a financial account located outside of the United States. For example, an account maintained with a branch of a United States bank that is physically located outside of the United States is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account.

FBAR Statute of Limitations for Civil Penalties

The statutes of limitations on assessment statute expiration date (ASED) and collection statute expiration date (CSED) of FBAR civil penalties is found in 31 U.S.C. 5321(b)(1) and 5321(b)(2), respectively. The IRS must generally assess civil penalties within 6 years of the due date of the FBAR, regardless of whether the FBAR was timely filed. See more about the FBAR penalties on the IRS Internal Revenue Manual.

Statute of Limitation for Assessment for an IRS Tax Return

IRC section 6038 requires every U.S. person to furnish, with respect to any foreign business entity that such person controls, the information listed in Sec. 6038(a)(1). That information is reported on IRS form 5471, Information Return With Respect to Certain Foreign Corporations, and IRS form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.

A failure to timely report an international information return could cause a taxpayer’s entire related federal income tax return to remain open for assessment indefinitely until the required information is provided to the IRS (Sec. 6501(c)(8)) plus three years. A taxpayer can attempt to demonstrate that the reporting failure was due to reasonable cause to limit the impact and scope of the indefinite statute of limitations.

Under IRC section 6501(c)(8), if a taxpayer fails to file certain prescribed forms with his or her income tax return, the statute of limitations for assessment remains open until the forms are filed plus three additional years. Four commonly required international information returns that are required to be filed with the taxpayer’s return and that are subject to IRC section 6501(c)(8) are:

  • the Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund;
  • the Form 8938, Statement of Specified Foreign Financial Assets;
  • the Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations; and
  • the Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.

Therefore, it is imperative to check whether a taxpayer has failed to timely file a foreign information return, as such failure could have a significant impact on the statute of limitations for assessment.

Penalties that the IRS can Assess for Failure to Timely File Form 5471, 8865 or 8938

If a taxpayer fails to timely file Form 5471 or 8865, the IRS may assert a $10,000 penalty for each failure for each applicable annual accounting period, plus an additional $10,000 for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $60,000 per return. See Section 6038(b). If a taxpayer is required to file IRS form 8938 but does not file a complete and correct form 8938 by the due date (including extensions), the IRS can assess a penalty of $10,000. If the taxpayer does not file a correct and complete Form 8938 within 90 days after the IRS mails a notice of the failure to file, the IRS may assess an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.

Contact a Los Angeles Tax Attorney

If you have foreign assets, you may need to file an FBAR and other international information returns with your tax return. It is imperative that you determine whether your particular financial assets needs to be reported on an international information return. A Los Angeles tax attorney can help you determine if you are compliant with your international form filing requirements. If you are not compliant, there are options for you to take to avoid hefty penalties. Contact Disparte Tax Law today.