Expatriate tax audit…Did you have some sleepless nights because you received a letter from IRS? The idea of IRS audit sounds terrifying to many people so it is important to understand the reasons that you received a letter and the steps you should undertake to prepare for an audit.
Reasons of an expatriate tax audit
There are numerous reasons that the IRS audit happens. Most of the time the IRS wants to verify some information from one year of an expat tax return. If you correctly prepared your return on overseas taxes, you have nothing to worry about. These are the most common reasons:
- Mathematical errors – These things happen quite often when you prepare a tax return yourself. If you disagree with the IRS calculations, you should prepare to challenge it.
- Incomplete tax information – Sometimes you hope that you sent the full package but you forgot one form by accident. The only thing that you have to do in this case is to fax a missing form timely.
- Failure to report some income – For example, you received 1099 form but forgot about it. You didn’t include it in your tax return but the IRS has this form. This kind of situation happens quite often. If you noticed any discrepancy before you received a letter from the IRS, make sure to file an amended return.
- Multiple “red” flags. For example, you made substantial charitable contributions or you claimed excessive “red flag” expenses like travel, meal, and entertainment. Be prepared to substantiate your expenses.
- Incomplete FBAR information. Many American expatriates get advice from a CPA who prepared a tax return while they lived in the USA. Unfortunately, many local CPAs are not aware of international tax law and do not know about the FBAR, FATCA, PFIC and other international tax expat issues. As a result, US expatriates file their tax returns and receive a letter from the IRS about a failure to file the FBAR. Please keep in mind that the failure to file the FBAR can result in civil and criminal penalties.
Whatever reason you have, do not spend too much worrying about it. It is important to act swiftly and reply to the IRS letter.
If you need help with your expatriate tax audit situation, make sure to contact the CPA who provides international tax services.