IRS Auditing More Expatriate Returns – Sooner or Later It Is Going to Happen to Either You or Someone You Know- Be Prepared
The Key to Successfully Surviving an IRS Expatriate Audit – Be Prepared
Sooner or later, either you personally or someone…what happens next? will receive an Audit Notice.
It starts off with “Mr. and Mrs. Taxpayer, you have been selected for an audit.
In the past, U.S. Citizens filing Expatriate tax returns were rarely audited; however, this has now changed. The IRS is specifically selecting these types of returns for audit. You may have already or will soon receive a notice of audit.
How Are Returns Selected?
Tax returns are selected for examination using one or more of the following methods:
- Random selection and computer screening – sometimes returns are selected based solely on a statistical formula. When returns are filed, they are compared against “norms” for similar returns. The “norms” are developed from audits of a statistically valid random sample of returns. These returns are selected as part of the National Research Program, which the IRS conducts to update return selection information.
- Document matching – When payor records, such as Forms W-2 or Form 1099, don’t match the information reported, generally a correspondence audit is initiated in the form of a CP2000 notice.
- Related examinations – Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit and revealed a potential issue with your return.
What Are the Types of Audits?
In general, there are three types of tax audits:
- Correspondence Audits: Some audits are conducted entirely by mail. The IRS has significantly increased those types of audits. They realized they could conduct significantly more audit using correspondence, rather than field or office audit. Should you receive a correspondence audit, you will receive a letter from the IRS asking for additional information about certain items shown on the tax return. The IRS will start the process by sending a CP2000 letter which will identify the items obtained from third parties doesn’t match the information you reported on your tax return. Most of the Expat Audits are conducted by mail and the IRS agent makes their audit decisions based on the documents, and answers supplied to the Agent by the taxpayer being audited.
- Office Audits: This type of tax audit is conducted at an IRS office and generally will focus on specific areas of the return.
- Field Audits: A field tax audit is generally the most feared audit and conducted by the most experienced IRS examiners, known as Revenue Agents. They are usually conducted by the auditor at your place of business or home.
You Have the Right to Audit Representation
All taxpayers have a right to audit representation and the IRS is required to immediately cease direct communications with you and communicate strictly with your representative once you have representation. You should consider very carefully before deciding to represent yourself. As experts on US expatriate and international tax law, we may save you significant additional tax adjustments and penalties.
We recently acquired copies of the questionnaires used by the IRS to conduct audits of Form 2555- Foreign Earned Income Exclusion.
The following forms are used by the IRS to audit expatriates claiming the foreign earned income exclusion. Download these forms and use them to determine if you have adequate support for your Form 2555.