Avoiding a Tax Audit for US Expats
All US taxpayers may undergo an IRS audit. Every year, 1% of all US taxpayers go through this somewhat scary process. US expats even have higher chances of going through a tax audit. If you are not careful, you may be caught up in a situation where you have to provide evidence and answer queries about your tax filing.
Find out the possible reasons you may be a candidate for a tax audit, the things to be careful about to avoid the audit, and an overview in case you get audited.
Reasons You May Get an Audit
As a US expat, IRS will have more reasons to audit you compared to US citizens living in the country. For this cause, you have to be extra wary with these factors whenever you file your tax returns.
US Expat Tax Forms
There are several forms associated with your tax filing as a US expat taxpayer. These forms may be complex to accomplish but proper preparation and enough time to fill up these forms will lessen mistakes and take you away from the possibility of getting an audit.
These are the US expat tax forms where major questions may arise:
Form 1116: Foreign Tax Credit
Form 2555: Foreign Earned Income Exclusion
Form 3520 & 3520a: Foreign Trust Reporting
Form 5471: Shareholder of a Foreign Corporation
Form 8621: Passive Foreign Investment Company (PFIC)
Form 8865: Foreign Partnerships
Form 8938: Statement of Specified Foreign Financial Assets
Other Incomes, Expenses, and Losses
Aside from being a US expat, your employment status and some financial transactions associated with your offshore business, if you have one, may trigger IRS to double-check on you.
A self-employed expat has a higher risk of getting an audit compared to an employee in a company. For a business owner, the following events may lead you to an audit:
- Large contributions to charitable institutions
- Numerous capital gain transactions
- Losses in real estate
- High amounts for employee business expenses
Things You Must Do to Avoid a Tax Audit
If the above situations happen to you, then there’s a possibility IRS will contact you for a tax audit. But you can avoid that in the first place if you will keep in mind the following suggestions:
Complete and Submit All Required Forms
As mentioned above, there are tax forms you must accomplish and submit. You have to fill up these forms completely and accurately. Any mistake can be a red flag that will be IRS’s reason to examine you.
You must also consider that IRS updates some of these forms and you may find extra or revised forms depending on the year of your filing. In 2015, for instance, IRS required these forms and schedules from US expats besides the forms mentioned above:
Form 1040 – U.S. Individual Income Tax Return
Form 1040X – Amended Individual Income Tax Return
Form 1040NR – U.S. Nonresident Alien Income Tax Return
Form 1040NR-EZ – U.S. Income Tax Return for Certain Nonresident Aliens with No Dependents
Form 2350 – Application for Extension of Time to File U.S. Income Tax Return
Form 2555-EZ – Foreign Earned Income Exclusion
Form 3903 – Moving Expenses
Form 4868 – Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
Form 8582 – Passive Activity Loss Limitations
Form 8854 – Initial and Annual Expatriation Statement
Form 8949 – Sales and Other Dispositions of Capital Assets
Form 14438 – Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer Taxpayers
Schedule B – Interest and Ordinary Dividends
Schedule C – Profit or Loss from Business
Schedule D – Capital Gains and Losses
Schedule E – Supplemental Income and Loss
File on Time
Late submissions and tax filings are sure ways to get IRS’s attention. If you want to avoid getting into financial evaluation by the Government, take careful note of due dates and file before the deadline. You also get to avail of credits and deductions when you file on time or before the required time.
For 2017, the tax return due date is April 18, with extension filing (e-file) up to October 6.
Record Your Tax Figures
You would want to be ready if in case IRS scrutinizes your tax filings. Another best preparation is to have all the figures you placed on your tax forms in a record. You also want to keep associated financial documents like pay slips, bank statements, investment records, and the like.
Ask Help from a Tax Professional
Tax experts or accountants can do the filing for you but the responsibility still rests on you. You can ask them questions if you find uncertain figures or data in your forms. They can also provide valuable suggestions about your tax filing.
What If You Get Audited?
Even with your best foot forward, there may be instances when you still have to provide proofs of the figures in your tax filing. In case you are audited, here are some of the things to expect.
IRS has three years to audit your tax return. In the case of income understatement, it may take up to six years. The IRS also has six years to audit FBAR forms. IRS will be asking for proofs of information you included or did not include in your tax returns. It will be your personal responsibility to provide these documents as evidence.
If IRS finds evidence of an understatement, you will have to pay penalties, interests, or more taxes. Even as a US expat, your chances of avoiding the IRS audit are wider if you practice these tax filing tips and get away with the extra payments.