Before we dive into the nuts and bolts of fixing past problems, let’s deal with the question of “How far back do I go?” Ten years? Three years? Nothing?

“How far back to I go for what?”

When you are doing remedial paperwork for the IRS, you should understand what you’re doing the work for. In the case of your RRSP and filing Form 8891, you are fixing an unreported income problem. The default U.S. tax law that applies to RRSPs makes you taxable on the income earned inside the RRSP every year. You didn’t report that income. From the perspective of the IRS, this is “unreported taxable income” and this makes them grumpy.

So, for the purposes of this Chapter we are solving an “unreported taxable income” problem. With that in mind, let’s look at the rules.

Normal rule: three years from filing tax return

When you file a U.S. tax return, the government ordinarily has three years to audit you. After that, the year is closed forever and even if you left something off you cannot be forced to pay the extra tax for the income you failed to report. There are exceptions to this rule for situations like “substantial understatement of income” (you left off at least 25% of your income), civil tax fraud, etc. In those cases the IRS can go back in time at least six years and sometimes longer.

None of the “more than three years” exceptions will likely apply to you. Yes, if you have a massive, massive RRSP it will generate a lot of investment income which is not distributed to you. If you don’t have a lot of reportable income, you could be in the “I left off more than 25% of my income” situation. The RRSP investment income would be treated as taxable income to you in the United States, and compared to your reported taxable income it would be large. Maybe more than 25% of your reported taxable income.

But for most of you, this is not a problem. Your investment earnings inside the RRSP will be small in comparison to your reported taxable income in the United States. Thus, I am going to assume that the three year rule applies to you.

Example

You filed your 2008 Form 1040 on or before April 15, 2009 (the due date). The IRS has until April 15, 2012 to audit your tax return and assess an additional tax liability if they find additional income.

Example

You filed your 2008 Form 1040 on extension, on October 15, 2009. The IRS has until October 15, 2012 to audit your tax return and assess additional tax liability if they find additional income.

This is the default situation, which most people would assume applies to the situation of an RRSP that was not reported correctly for prior years.

Default rule for foreign trusts: 3 years after filing Form 3520

If you have a foreign trust, you are are supposed to file Form 3520. The “three years for the IRS to catch me” clock does not start ticking on until you file Form 3520.

From the Instructions to the 2009 Form 3520:

Note. If a complete Form 3520 is not filed by the due date, including extensions, the time for assessment of any tax imposed with respect to any event or period to which the information required to be reported in Parts I through III of such Form 3520 relates, will not expire before the date that is 3 years after the date on which the required information is reported. See section 6501(c)(8).

Actually, it is worse than that. For any tax returns filed on or after March 18, 2010, the entire income tax return’s statute of limitations is open forever if you fail to file the Form 3520 for your foreign trust.

RRSPs as foreign trusts: the IRS cancelled the reporting requirement

An RRSP is a foreign trust. However, there is no reporting requirement for an RRSP–Form 3520 and Form 3520-A are not required. Since the exception to the general rule (3 years for the IRS to audit you) in Section 6501(c)(8) does not apply, we are back to the normal audit cycle.

Bottom line: three years for RRSPs

If you did not file Form 8891, the IRS can probably only go back three years from the date you filed Form 1040 in order to audit you for unreported income from your RRSP.

Example

You filed your 2007 Form 1040 on April 15, 2008. The IRS has until April 15, 2011 to audit that tax return. If you should have filed Form 8891 and you didn’t, they can catch that error as long as they get to you before April 15, 2011.
Example

You filed your 2006 Form 1040 on April 15, 2007. The IRS had until April 15, 2010 to find you. Clearly, they didn’t find you. For you, 2006 is closed forever. You are safe even if you did not file Form 8891.