It’s not something you want to think about, but old taxes can come back to haunt you. This is especially true of returns you’ve never filed. The statute of limitations – that legal egg timer, normally set to three years – never starts to run on unreported activities. And there are cases now of the IRS going back decades, collecting big money – plus penalties and interest – on form-filing failures, accounting errors, and innocent mistakes by unwary people.
Consider the recent case of Sumner Redstone, the Viacom chairman who failed to report a taxable gift to his children (this due to a disagreement in classification – Redstone maintains the gift was an “ordinary business transaction”). This happened in 1972, and nobody looked twice at it for 40 years. Then, just a few months ago, the IRS decided he owed $1.1 million in penalties and interest. All for an old error that everyone except the IRS had forgotten about.
The omissions don’t have to be deliberate. They can be as simple as missing certain forms (or filing the wrong ones), miscategorizing transactions (according to you-know-who’s standards), or misplacing a decimal point along a string of zeroes. Taxpayers with international interests have even more to worry about, thanks to the 2010 FATCA law, which expands requirements for foreign financial assets, and ensures that failure to do so subjects your return to an unlimited statute of limitations – meaning the IRS could come back to haunt you with an audit anytime they way, even decades later.
In short, any number of loopholes now leave the statute open-ended for the IRS. It’s how they write themselves a blank check with your money. And it makes amending old returns (with professional help) more important than ever.
In our business, I’ve heard plenty of people say they don’t want to go back and fix old errors, that omissions from five years ago are safely in the past. But it’s not just Sumner Redstone paying for the IRS’s new tenacity. According to recent reports, IRS investigations were up 9% from 2011 to 2012, and filings of indictments and other charges were up 13%. Even now, the IRS may be taking a good, hard look at your past. I recommend that you do the same.