Being audited by the IRS can be a stressful experience for anyone, but for US expats, the process can be even more complicated. However, with proper preparation and the right approach, an audit doesn’t have to be overwhelming. Here’s what US expats need to know about the process and how to handle it.
Key Takeaways:
- US expats are more likely to face an IRS audit than individuals living in the US.
- By avoiding common audit triggers, expats can reduce their chances of being audited.
- Understanding the audit process helps ensure a calm and appropriate response.
Why Does the IRS Audit US Expats?
The IRS conducts audits to verify that taxpayers are complying with tax laws. Common reasons for audits include:
- Errors in calculations or missing information on tax returns.
- Failing to report all global income.
- Filing incomplete returns.
- Raising “red flags” that draw the IRS’s attention.
The goal of an audit is to ensure accuracy in a taxpayer’s return and assess whether they’ve met their US tax obligations.
How Likely Are US Expats to Be Audited?
While audits are rare overall—impacting less than 1% of taxpayers annually—US expats face a higher likelihood of being audited. This increased risk stems from the complexity of expat taxes, which makes errors more likely, and the additional scrutiny that comes from living and working abroad.
Common Audit Triggers for US Expats
Here are eight common reasons that can trigger an IRS audit for expats:
- Failure to File a Tax Return
US citizens are required to file an annual federal tax return, no matter where they live. Failing to file can attract the IRS’s attention and lead to an audit.
Pro Tip: If you’re behind on filing, the IRS offers an amnesty program called the
- Streamlined Filing Compliance Procedures, allowing you to catch up without facing penalties.
- Not Reporting All Worldwide Income
US expats must report their entire global income. Leaving off income from any foreign or US-based source can result in an audit. - Filing Expat-Specific Forms
Many US expats must file additional forms, such as:
- Form 3520 (for foreign trusts)
- Form 5471 (for foreign corporations)
These forms are complex and increase audit risk, but not filing them when required can cause even bigger problems.
- Earning a High Income
High earners are more likely to face scrutiny. If your income is well above average, the IRS may take a closer look at your return.
- Non-traditional Income
Income from cryptocurrency, self-employment, investments, or rental properties often triggers more IRS scrutiny.
- Claiming Expat Tax Benefits
Expats can benefit from tax breaks like the Foreign Earned Income Exclusion (FEIE), Foreign Tax Credit, or Foreign Housing Deduction. However, the IRS may audit to verify your eligibility for these benefits.
- Large Cash Transactions
The IRS monitors large cash transactions for signs of tax evasion. If you’ve made significant payments in cash, it could raise a red flag.
- Not Reporting Foreign Assets
If you own foreign financial assets, you may need to file:
-
- FinCEN Form 114 (FBAR) for foreign bank accounts.
- Form 8938 (FATCA) for other foreign financial assets.
Failing to report these assets can significantly increase your audit risk.
What to Do If You Find a Mistake on Your Tax Return
If you discover an error after submitting your tax return, you can amend it using Form 1040-X. Common reasons to file an amended return include:
- Correcting income reporting errors.
- Claiming missed tax benefits.
- Changing your filing status or dependents.
However, you don’t need to amend your return for simple math errors, as the IRS will typically fix those for you. Additionally, avoid amending a return if you’ve already received an audit notice—it’s better to follow the IRS’s instructions in that case.
Does Filing an Amended Return Increase Audit Risk?
No, filing an amended return doesn’t automatically trigger an audit. The IRS accepts amended returns regularly, and this process alone doesn’t raise red flags.
How Long Should Expats Keep Tax Records?
In general, keep your tax records for at least three years after filing, as the IRS has a three-year statute of limitations for most audits. However, for expats, the timeline can be longer. If the IRS suspects that you underreported foreign income by more than $5,000, they can audit up to six years later. Additionally, if you never filed a return or filed fraudulently, there is no statute of limitations.
Given these risks, expats should consider keeping their records for longer than the standard three years.
I’m Being Audited—Now What?
If you’ve been notified that the IRS is auditing your taxes, follow these steps:
- Stay Calm
Audits don’t automatically mean you’ve done something wrong. Many audits result in no changes to taxes owed, so take a measured approach. - Cooperate with the IRS
Respond promptly and respectfully. Provide only the requested information without volunteering extra details. - Contact a Tax Professional
It’s always best to consult an expert when facing an audit. A tax professional can help you navigate the process and achieve the best possible outcome. - Organize Your Records
Make sure all your relevant tax documents are in order. The easier it is to provide documentation, the smoother the process will go. - Be Patient
Audits can take time—especially when done through correspondence. Avoid rushing the process and work closely with your tax advisor. - Wait for the IRS Decision
Once the IRS finishes its review, you’ll be informed of the outcome, which could result in:- No changes to your taxes.
- Changes that benefit you (e.g., a refund).
- Changes that work against you (e.g., you owe more).
- If you disagree with the IRS’s decision, you can appeal—just ensure you have solid documentation to back up your case.
Need Help with a Tax Audit?
If you’re facing an IRS audit as an expat, getting professional help is essential. At Robert Hall & Associates, we assist expats around the world in managing their US tax obligations and navigating audits with confidence. Contact us for guidance or to set up a consultation with one of our expat tax experts.
