Statute of Limitations for Offshore Assets

It is common for people to utilize offshore accounts or foreign accounts to protect their assets. When making plans for asset protection, people often operate under the assumption that creditors will be limited to a shorter statute of limitations in the offshore jurisdiction where the asset is located. These offshore jurisdictions typically have shorter statutes of limitations for fraudulent conveyances, which may allow a taxpayer to feel more secure about the period of exposure from potential tax mistakes and creditor lawsuits. However, changes in federal laws have made alterations to the statute of limitations for offshore assets of which taxpayers with offshore assets should be aware. The Los Angeles tax lawyers at the Ben-Cohen Law Firm can provide you legal advice regarding such laws.

Taxpayers who own foreign financial assets need to be aware of how long their tax returns may be challenged. Foreign financial assets can include foreign bank accounts, stock issued by a foreign corporation, an interest in a foreign partnership, a note issued by a foreign person, and an interest in a foreign trust or foreign estate. The statute of limitations is the period of time within which a taxpayer is exposed to the possibility of an audit or other potentially adverse events. Traditionally, the main IRS statute of limitations is three years, but the IRS has expanded its power to audit for additional years by creating a number of exceptions. These exceptions increase the period of time within which you may be exposed to various forms of liability, including liability related to offshore assets.

If you have income from a foreign source or a foreign account, you should consider the ramifications of the Hiring Incentives to Restore Employment (HIRE) Act. This law amends the Internal Revenue Code by extending specific statute of limitations rules to certain IRS forms. This law affects tax returns that were filed after March 18, 2010, as well as tax returns filed before March 18, 2010, if the statute of limitations had not already expired by that date. Before the HIRE Act, there was an extended statute of limitations for the assessment of taxes related to periods in which foreign financial information was not reported. The HIRE Act has expanded the scope of the statute of limitations extension. It also includes, as a revenue offset, the Foreign Account Tax Compliance Act (FATCA), which tries to battle tax evasion by using enhanced information reporting.

When certain IRS forms are not timely filed, the expiration date for assessing the tax will not expire until three years have passed from the date the requisite information is given to the IRS. Before the HIRE Act, the statute of limitations was only open with regard to the period to which the foreign information related, but now the statute of limitations stays open with regard to the entire tax return, not only those aspects related to foreign transactions and assets. This extension applies to non-filing of the right form, as well as when the right form has been filed but is incomplete. Furthermore, if a taxpayer fails to report more than $5,000 of gross income from a foreign financial asset, a six year statute of limitations applies to the entire return.

There is an exception to the expanded statute of limitations as it relates to foreign accounts. When a taxpayer is able to show that they failed to file the required foreign information reporting form because of some reasonable cause, rather than willful neglect, the extended statute of limitations will only cover the foreign items that were not reported and would not apply to the entire tax return.

The standard for reasonable cause in this context is ordinary business prudence and care. This means that you made provisions for your business duties to be met when reasonably foreseeable events happen and that you took the degree of care that a reasonably prudent person would use. To decide whether you used this degree of care, certain factors will be considered, such as your explanations for your failure to file, your taxpaying compliance history, and how much time passed between the event that you cite as your reason for not complying and your subsequent compliance. For example, showing circumstances beyond your control can help your case.

These days, the IRS pursues offshore income and assets in an aggressive manner. The revised statute of limitations may present significant problems for people with offshore accounts or other foreign financial assets. Your ability to present a reasonable cause defense decreases as time passes because of the potential loss of evidence to back up your claims. Utilizing the services of an experienced Los Angeles lawyer may make a critical difference to your situation. If you are concerned about how the statute of limitations applies to you, the skillful tax attorneys at the Ben-Cohen Law Firm may be able to advise you. Contact us online or at (310) 272-7600 to set up an appointment.