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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.
We are experts at help you avoid these problems. Visit our website at or email us at 

February 16, 2013

An Overlooked Expat Deduction? - The Foreign housing exclusion or deduction.

In addition to the foreign earned income exclusion, you can also claim an exclusion or a deduction from gross income for your housing amount if your tax home is in a foreign country and you qualify for the exclusions and deduction under either the bona fide residence test or the physical presence test.
The housing exclusion applies only to amounts considered paid for with employer-provided amounts, which includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year (without regard to the foreign earned income exclusion). The housing deduction applies only to amounts paid for with self-employment earnings.
Read more about your expatriate and nonresident income tax benefits and rules at   We have  been preparing expatriate and US nonresident tax returns for over 30 years.

February 3, 2013

US Expatriate Entrepreneurs - States with No Income Tax

US Expatriates are not required by law to maintain a state of residency or pay state income taxes. However many expatriate entrepreneurs need to locate a corporation or other business entity for their  business, but do not want to have to pay state income taxes.  The following states have no income taxes and may be suitable to keep a US presence (and form a corporation or LLC located there for your business) but not subject yourself to state income taxes:

  1. Nevada
  2. Washington
  3. Texas (does have a franchise tax on corporations)
  4. Alaska
  5. Florida
  6. South Dakota
  7. Wyoming 
We can assist you in forming a Corporation or LLC in these states, advise you on the best US tax elections to make (Subchapter S corporation election, etc) and the best way to utilize these entities with your offshore business operations.  We have helped hundreds of US Citizens doing business abroad in the same manner with great success.

If you went abroad, or are going abroad, and you live in California, Virginia, New Mexico and several other states that make it very difficult to give up your tax domicile (they want to keep taxing you after you have left the state to live outside the US) you may want to consider switching your legal residency (either before or after you have left) to one of these states and transfer all other indices of residency to one of these income tax free states.  It can avoid big potential problems later with the State you lived in (if it has tough rules on abandoning your tax domicile).

If you have questions email us at or visit our website at .

Counties Around with World With No Personal Income Tax - US Expat Tax Planning

US Entrepreneur expats are always asking us,  Which countries in the can I locate my business that have no personal income tax.  For a list of the fifteen countries CLICK HERE. If you set up your business in one of these countries and use the US foreign earned income exclusion along with the foreign housing deduction you can make in excess of $110,000 or more and not pay any income tax AT ALL on your business earnings.

For a list of the tax rates in various countries in the world go to this wikipedia link for a great table.

As a US citizen or green card holder you must report your worldwide income  on your US tax return no matter where you live in the world.  If you live in a country that has taxes, you can claim a credit for those taxes as a direct offset against the your US tax on the same income. However, if you earnings are from your own labors it is possible to earn the amounts set forth above and pay no taxes on your US tax return (or anywhere else) at all.  This is one of the greatest tax breaks around. If you spouse also works, he or she can also claim the foreign earned income exclusion against their earnings.

If you are self employed, you may have to pay US self employment tax (social security and medicare) on your earnings, if you live in a country with no social security agreement with the US. However, if you structure your offshore business correctly using a foreign corporation, it is even possible to avoid having to pay those amounts.

We can help you set up your business abroad for the optimum tax savings fully complying with all US tax laws.  If you need help email us at or leave a message on skype at dondnelson.