What To Do When Your US Expat Taxes Are Audited
For many Americans, the thought of being audited by the IRS brings almost overwhelming feelings of dread. And especially for taxpayers who handle their own US expat taxes, it’s not unusual to worry about whether the deductions and exclusions were calculated and applied correctly as they send in their return. So let’s shine a little light into the reality of a tax audit.
The Odds Are In Your Favor
In 2011, 1.58 million people were audited. That sounds like a lot, but it is actually little more than 1 percent of individual returns – meaning that nearly 99 percent of American taxpayers were not audited.
An Audit Doesn’t Guarantee That You’re In Trouble
It’s easy to leap to the assumption that your US expat taxes were somehow flagged because you owe money, but that may not be the case. Taxpayers are selected to be audited for several reasons, including:
- Computerized screening
- Random sampling
- An income document matching program used by the IRS
- Mathematical errors
- Incomplete tax returns (missing schedules)
- Failure to include all of the income that was reported to the IRS via 1099 Forms or W-2s
Yes, another reason for being audited is that your US expat taxes triggered one of the many unknown “red flags” that vary from year to year. The common suspected culprits include excessive deductions, large charitable contributions, habitual losses from “businesses,” and risky business expenses (travel, meals, entertainment, etc). But if you have been careful and honest in preparing your US expat taxes, this is unlikely to be a big concern for you.
And even if you don’t know why you were selected, remember that many examinations lead to refunds for the taxpayer or the IRS accepting the return without changes once documentation has been verified.
Keep Calm and Gather Your Documentation
The worst responses to an IRS notice are to panic, to either ignore the request or to respond defensively. Remind yourself that many IRS issues can be dealt with simply and painlessly, and the best way for you to get that happy resolution is to respond politely and pull the information from your US expat taxes together. Follow these simple guidelines:
- Be courteous and responsive to the auditor. Do not be defensive. Be professional, honest and forthcoming.
- Do not provide any additional information beyond what is specifically requested.
- Remember that IRS representatives have a duty to the US government, although they are people with jobs just like everyone else. Do not tell them anything that might compromise their position.
- Keep all of your documents organized. For example, if you have been asked to substantiate the expenses associated with your small business, have them all arranged by category. It is not necessary to arrange them by date.
The most important thing to keep in mind when receiving a notice is to be sure to respond to the IRS in a prompt and courteous manner and to make payments on money owed as soon as possible. Failing to do so may lead to even greater penalties. If you find yourself needing additional assistance, consult with a qualified and experienced tax professional who can help.
The Bottom Line
Even with an audit looming, try not to overreact. The audit process can take months, especially if you are doing it via mail, which will be the case for many taxpayers living overseas. If you’re very lucky, you may find you’re due a refund – and yes, this truly does happen! If you’re merely lucky, you may end up with the IRS agreeing that you’ve already paid the full amount of US expat taxes that were due. And an unlucky few will wind up owing back taxes to the IRS. If you are able, pay the bill without delay and have the issue closed. If you do not have the money to pay the entire balance immediately, you can call the IRS and make arrangements for a payment plan or start the process for a settlement.
For more information on audits, refer to this article on our website. If you have concerns about US expat taxes that you have filed in the past, we are happy to review prior tax returns for our customers. Contact Greenback Expat Tax Services to learn more about the services we offer.