IRS Audit and Correspondence Representation
The IRS are more likely to audit or review the return of an Expat in light of the recent IRS crackdown on tax evasion. Since foreign income is more verifiable directly by the IRS, it is difficult for the IRS to verify the accuracy of Expat tax returns. FATCA legislations were put in place to allow transparency which enables IRS to scrutinize and determine the foreign financial assets of its taxpayers. Following is a brief overview of IRS audits and representation options.
Who can be a representative?
- An attorney
- CPA, Certified Public Accountant
- Enrolled agent
These representatives can speak and correspond to the IRS on your behalf, as well as guide you on how to deal with the often-overwhelming paperwork required in an audit.
How will the IRS contact me?
The IRS communicates with taxpayers primarily via mail. Millions of letters are sent out each year to taxpayers within the US and around the world. There are many different types of IRS letters addressing various issues. Below is a list of the letters most often issued.
- Request for substantiation of foreign income, or dependents
- ID verification under the Taxpayer Protection Program
- Notice informing the taxpayer of a miscalculation on the return
All IRS letters requesting information should be responded to in a timely manner. It is recommended to include a copy of the letter received and an explanation. Always read a letter carefully and ask for clarification if unsure what is needed.
What is an audit?
An audit happens when the IRS decides to examine your return to determine if everything was filed correctly. If you are audited, you will receive a letter informing you that your return was selected for examination. Auditors can request extensive documentation to prove your filing status, dependents, income and any aspect of your tax return that is under review. They can also request bank statements to ensure that no income was left unreported.
If documents are submitted timely, are accurate and prove that the return was correct, the auditor will determine as such and close the audit.
Can I appeal an IRS determination?
If you disagree with an IRS auditor’s determination on your case, you have the option to appeal that decision with the IRS. By filing a form 12203, you can reopen the case for review with the IRS Appeals department. There needs to be a legitimate reason for the appeal, backed by tax law in order for the case to be accepted and opened. Once the case is opened, an appeals officer will reach out to you and schedule a teleconference in order to settle the case informally and agreeably.
How do I open a case with the tax court?
If the appeals officer does not agree with your position, or if you do not respond to an audit or appeals case in a timely manner, the IRS will send you a Notice of Deficiency. This NOD includes instructions on how to petition a tax court to address your tax issue. The deadline to petition is 90 days from the date of the NOD. If you fail to petition timely, the tax will be assessed.
Once the case is open in tax court, it is assigned to an IRS attorney, who will work with you, or your representative, to reach a basis for settlement of the court case.
What is a statute of limitation?
The IRS generally cannot audit a return more than three years after it was filed. The statute of limitation is extended to six years in cases where there was a “substantial understatement of income.”. The three-year statute of limitation is also doubled in cases where more than $5,000 in income attributable to foreign financial assets was omitted from the return.
In cases where a return was not filed, or if a fraudulent or false return was filed, there is no statute of limitation for audit.
Failure to file a form 5471 causes your return to remain open for audit indefinitely. Other forms relating to foreign assets, gifts and inheritance are also very important.
When will the IRS demand payment?
If you fail to pay your taxes owed to the IRS, the first step that the IRS will take is to send you a notice demanding the payment. This in effect is the beginning of the collections process.
Once your account is in collections, the IRS have the right, after certain timeframes, to take action to collect the debt due if no steps have been taken to pay it. Actions taken can include levies and garnishment of wages. The end of the collection process occurs when the debt is paid or the IRS is no longer legally within the right to collect the debt, which is usually ten years.
However, the statute of limitation for debt collection is suspended if a taxpayer leaves the US and only resumes when they return. As such, there is no statute of limitation for collecting debts of US citizens who reside abroad on a permanent basis.
In light of this, taxpayers are urged to set up an installment agreement to begin paying off debts due, even if they cannot afford to pay up the entire debt. Once can also propose a partial payment installment agreement (PPOA) or an Offer in compromise (OIC).
If one is not within the means to do so there is the option of reporting your debt as currently not collectible. The IRS will agree to this status if they determine that you do not actually have the means to make payments. This does not mean that the debt is removed, rather no collection action is taken as long as the debt is classed as not collectible. The IRS can move the debt back to collections if they determine, or have reason to believe that your situation has changed.
Over the past decade, we at Expat Tax CPA’s have guided thousands of clients through often complicated and drawn out audit cases and procedures. During this time, we have gained much expertise in this area, which has allowed us to succeed and bring about great audit results, where others may have failed.
It is imperative that tax returns be filed accurately to avoid unnecessary and aggravating reviews and audits. Additionally, in the case that you are audited, you will be assured of passing the audit since your returns had no discrepancies or errors.
Tax laws are complex for all taxpayers, and all the more so for Expats. Click here to learn about our audit and correspondence insurance policy service, so that you can be rest assured and worry free.