February 19, 2013
10 Things that Cause Tax Audits of US Expatriates
1. Not Reporting All Of Your Taxable Income: The IRS cross checks your income sources with 1099s and W-2s. If your income has dropped, that may be a red flag. Do not under report your income, no matter how tempting. If you have some self-employed income, report it and then use every deduction or write off you can find. They have tax treaties with many countries and may find out what you actually made abroad even though you thought they could not find out.
2. Filling Out Forms 2555 Incorrectly: Leave boxes or lines blank, or fill out this form wrong you may cause an audit, an IRS letter of Inquiry, or perhaps a letter disallowing your foreign earned income exclusion. Be careful if you use a program and do your return yourself. Best to have a professional review it before you file. The IRS has found that many people are claiming this exemption are not eligible. Therefore, the number of audits has increased substantially.
3. Form 1116 (foreign tax credit) not done correctly: This is a difficult form to prepare and if done incorrectly, the IRS may disallow any foreign tax credit at all.
4. Taking Higher Than The Average Deductions: If the deductions on your return are disproportionately large compared to your income, the IRS audit formulas will go “tilt”. So if you have large medical deductions be sure you can prove them if need be.
5. IRS Finders Fee Program: The IRS does pay rewards to those who turn in US taxpayers for not reporting substantial amounts of income on their returns. If you have a co-worker, etc. who no longer likes you and knows your secrets, you may be in danger if those individuals learn about the big rewards that the IRS pays for turning you in.
6. Business Meals, Travel And Entertainment: Schedule C is filled with tax deductions for the self-employed individual. And the IRS has figured out that often some self-employed individuals tend to claim excessive deductions. They then make the assumption that all such individuals may cheat so Schedule C will get a review.
7. Claiming 100% Use Of Your Car For Business: If you are self-employed and use your car for business be honest with how much you actually use the car for business. Keep very good records of the miles you drive. I know it’s a nuisance, but necessary.
8 . Large Cash Transactions: The IRS requires reports in the US to be filed for cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses. If they receive these reports from these places they may audit you. The IRS also tracks wire transfers in and out of the Country. Such transfers may result in an audit if your tax return fails to show the receipt of such money as income or the amount does not fit in with your financial resources. If you receive a large gift from abroad, you my have to file form 3520 to report that gift (no tax is due if you file this form for gifts from nonresidents outside of the USA) or risk a huge penalty for not reporting the gift.
9. Math Errors: If you do your tax return in long hand, check your math and be sure to sign the return and put in the correct social security numbers. A sloppy return can trigger an audit.
10. Failure to Properly Abandon your State Tax Domicile: Many states like Virginia, New Mexico, California and other have state tax laws that make it difficult to move abroad and stop paying state taxes if one of these is your prior state of residency. This is aggravated if you keep using an address in that State or return to that state after spending 2 to 4 years abroad. These states get your Tax information from the Federal return you file and because you are still using an address in that State on your return, send you an assessment or audit you for taxes they feel are due. Take precautions to properly surrender your tax domicile (which is often different than residency) to avoid this problem.
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