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When the IRS is allowed to audit your return forever

Being audited is nobody's idea of a good time. Last week we talked about various reasons the Internal Revenue Service might have to target you for an audit. Today, we are going to continue that discussion by taking a look at how long the IRS has to audit your tax return.

In general, there are three time frames the IRS is allowed to work within for an audit, depending on what the suspected problem is. If something is reported incorrectly on a normal tax return, the IRS usually has three years to audit that return. If there is a bigger issue, like problems on a return related to an offshore account, the IRS will be able to audit your return for up to six years. If you forget to file a return for a controlled foreign corporation, however, the IRS reserves the right to audit you indefinitely.

As we have discussed in previous posts, any issues related to overseas accounts or investments are a hot button for the IRS. When it comes to avoiding audits, the most important form in relation to this issue is Form 5471. If you, a U.S. shareholder, own more than half of a foreign company, you must file this form on time -- even if you do not owe taxes on the corporation. The IRS also requires those who own 10 percent of a foreign company to file this form.

Here's what can happen if you don't file Form 5471:

  • $10,000 fine for failing to file
  • Penalties for each late form
  • Penalties for each incorrect or incomplete form
  • Indefinite timeline for audit by the IRS

Hopefully now you understand the importance of correctly filing all tax forms -- especially those relating to offshore accounts and foreign investments. Many people find it worthwhile to work with an attorney when filing important tax forms. Getting it right the first time can help you avoid unforgiving fines and penalties later on.

Source: Forbes, "Scariest Tax Form? Skip It, And IRS Can Audit Forever," Robert W. Wood," March 3, 2014

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