Expatriates Living Abroad May be at Risk for an Audit?

Even though you live and work abroad the IRS may still audit your return. This is most often accomplished by mail and telephone. Failure to respond to any audit notice from the IRS will result in assessment for taxes due for all items questioned.

There are some objective factors that may put you as an expatriate

at higher risk for experiencing an IRS audit. Here’s a quick checklist.

• Do you earn over $200,000 annually?
• Have you failed to report past income on your return?
• Have you claimed more itemized deductions than allowed?
• Do you operate a business?
• Did you claim rental losses on your return?
• Did you take a home office deduction?
• Did you claim gambling losses on your return?
• Do you hold a foreign bank account or earn income from a foreign source?
• Do you own a foreign corporation?
• Do you have an interest in a foreign trust>
• Do you own foreign mutual funds (requires special forms be filed with your tax return)?

While none of these factors ensures that you will be audited, they do help create a picture of the type of taxpayer that may draw additional IRS scrutiny.  Under the new Presidential administration there will be a significant increase in audits of those who live outside of the USA.

We can help you if your receive an IRS notice with your response and represent you in an audit.  Email us at ustax@hotmail.com or phone 949-480-1235 (US)

HOW TO AVOID AN IRS EXPATRIATE TAX AUDIT

Though in the past very few expatriate tax returns were ever audited by the IRS, the level of audits now and in the future are going to increase significantly. Listed below are some tips you can use when you expatriate tax return is prepared which will reduce the chance it will be audited.

• If you have any unusual items of income or expense on your return attach a footnote explaining that item. An explanation may head off the audit.
• 
  If you file special foreign forms such as 5471, 8865, TDF 90-22.1, etc. make certain they are filled out correctly and in full. Failure to due so will cause the IRS to inquire further.
• Do not attach items to your return which are not required by the IRS such as earnings statements from foreign employers, investment statements, supporting bills, etc. Attaching these items may raise questions.
• Only fill in the portions of Form 2555 that are required for the Foreign Earned Income Exclusion type you claimed.
• Try extending your return to 10/15. Though the IRS does not admit it, many tax experts feel that returns that are extended and not filed until the last minute are not audited as often as those filed by the normal due date.
• Report all foreign bank accounts, financial accounts, foreign income, etc. The IRS will shortly be receiving reports from foreign banks and other financial decisions which they will match with your return and the TDF 90-22.1 (FBAR) forms that you file.
• File tax returns for all tax years even if you earning are below the minimum required for filing. This not only causes the 3 year statute of limitations to run out but avoids IRS inquiries in later years about unfiled US tax returns.
• The foreign tax credit Form 1116 is complex. If you are not certain it is completed correctly, best to get an expert to review it to make certain there are no issues.
• When audited it is best to retain at expatriate tax professional to deal with the IRS Agent. The IRS agent is a Tax Collector and is not your friend. You may make statements to the agent that can hurt you or expand the scope of the audit. A professional will prevent this from happening.

We can prepare your expatriate tax return for your or review your self prepared return to assure you it is prepared correctly. We have been preparing US expatriate and international tax returns for over 30 years. It is all we do and is our specialty. Please call or email for further assistance.

Don D. Nelson, C.P.A., Attorney

Kauffman Nelson LLP - CPAs

Dana Point, California 92629 USA

US Phone: 949-481-4094 US Fax 949-218-6483

Email: ddnelson@gmail.com ustax@hotmail.com

Websites: www.TaxMeLess.com www.expatattorneycpa.com

Latest International Tax Developments Blog: www.usexpatriate.blogspot.com

TYPES OF INFORMATION AND QUESTIONS ASKED IN IRS AUDIT OF WEALTHY TAXPAYERS- DOWNLOAD ACTUAL AUDIT QUESTIONS

The IRS has stepped up audits of wealthy taxpayers and others at the higher income levels. The Wall Street Journal has released a copy of the audit requests given one of those taxpayers. You can download a copy of the IRS audit questionnaire here.

Though you may not consider yourself wealthy, this questionnaire will give you a good idea of the possible questions the IRS will ask you upon audit. Read it and plan to have you tax return prepared based on the types of questions you may be asked later on audit. Audits usually do not occur until 2-3 years after the return is actually filed. Remember, when audited if you have written documentation of an item of income or expense, it is probable that the IRS agent will accept that item on your tax return. If you have no written support, it is probable that item will be disallowed.


Do not ever represent yourself on an IRS or State Audit. It is always best to have an independent tax practitioner represent you so you can in most situations avoid talking with the IRS auditor in person and perhaps making statements that will hurt you.