Documents Retention and US Expat Tax Returns

By ZM Ishmurzina

Document retention might be an issue for any taxpayer. Many U.S. citizens and green card holders think about documents retention only in case of a tax audit. We earlier discussed What is a tax audit. However, it is even more challenging to retain expat tax documents for American expats living overseas that move from one foreign country to another. The issue of tax return records is even more important in the light of FBARs and FATCA developments.

This is an email from one of our clients, American expats living overseas. “What is a tax audit? I found some expat tax documents from a prior year. However, the IRS requested tax return records from other years. I was informed that there are special rules for documents retention.”

Key rules about retention of documents

Who is responsible for documents retention?

First and foremost, it is important to remember that American expats are fully responsible for all tax deductions and tax position taken on US expat tax returns. In case of the IRS audit a taxpayer is required to provide all supporting documents so it is important to keep all cancelled checks and receipts as a part of documents retention.

How long should American expatriates keep tax return records?

American expats must retain tax documents until the statute of limitation expires. As a general rule, the statute of limitation expires within 3 years after a tax return has been filed. However, there are several exceptions to this statute of limitation in regards to documents retention.

Let’s review the statute of limitation in regards to documents retention.

  1. The statute of limitation does not begin if a US expat tax return has never been filed or American expats filed a fraudulent expat tax return. It means that the IRS can go after a taxpayer anytime.
  2. The statute of limitation does not begin if American expatriates did not complete all foreign reporting requirements. For example, many American expats might not be aware that they are required to file additional forms for the foreign corporation, foreign trust, foreign partnership, FATCA or other overseas tax forms.
  3. The statute of limitation will extend to 6 years if a taxpayer failed to report income in the amount of $5,000 from certain foreign assets.
  4. If a taxpayer underreported at least 25% of gross income, then the IRS can go back 6 years to audit US expat tax returns.
  5. Many American expats are aware of FBARs (Report of Foreign Bank and Financial accounts) that must be filed by June 30. There is no extension for this form. US taxpayers are required to keep the records about their foreign financial accounts for 5 years from the due date of FBAR in case of the IRS inquiry. This documents retention rule is very important for American expats.
  6. In case of major events like a purchase of property or business, it is important to retain tax return records indefinitely until the sale date. This information will help determine the cost basis that will minimize the US expat tax liability.
  7. The period of documents retention might be longer in case of estate or deceased relatives.

American expatriates are advised to contact a CPA if they are not sure whether to retain or destroy expat tax documents. International tax experts at Artio Partners are here to help you.