Published on: January 22, 2018 Last modified: November 20, 2020

The IRS and Statutes of Limitation

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    Courts continue hearing cases concerning filings of the Report of Foreign Bank and Financial Account (FBAR). There are significant penalties that accompany the failure to file an FBAR. This can include significant fines and even prison time.

    The IRS does not have unlimited powers, however. As with the violations of other tax laws, there are restrictions as to how far the IRS can look back when it comes to investigations. A recent tax court decision looked at whether the IRS could retroactively go beyond the usual three-year statute of limitations regarding a failure to file an FBAR because of later changes to the law.

    What the court factors in on deciding how far the IRS can look back

    The requirements for FBAR have been around since 1970. Enforcement of the requirements, however, did not occur to any great extent until 2009.

    In the case in question, the defendant filed tax returns for 2006 through 2008. However, the defendant did not file any FBAR forms for that time period. In 2010, changes in the law allowed for the IRS to look back six years in FBAR legal matters. But these changes occurred after any alleged deficiencies happened pertaining to this case. Also, the IRS did not issue any notice of deficiency concerning this matter until 2014.

    The court simply said no to the IRS motion for the six-year look back. The court did not feel it was appropriate to extend the IRS’ reach in this specific situation as there was no filing requirement prior to 2010 for the applicable statute.

    What should taxpayers do?

    Hopefully, Michigan residents understand that every court decision is different because each case has a different set of facts. This applies to cases involving the IRS as well. And because of this, attorneys who try tax court cases need to analyze the facts closely before determining the correct application of the law.

    Do remember that though the IRS was not able to apply the six-year statute of limitations in this particular matter, they may still be able to go back six years regarding more recent FBAR deficiency matters. As a rule of thumb, one should not underestimate the enforcement powers of the IRS.

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