Few things can be more frightening and intimidating to an expat than the prospect of an IRS audit. While those feelings are understandable and no one should ever take an audit notice from the IRS lightly, there is also no reason for you to be overly concerned when the IRS decides to take a closer look at your tax return.
That your return is being examined does not necessarily mean that the IRS believes you have made an error or have been dishonest. There is just typically an amount (or possibly amounts) on your return that are out of the ordinary. This doesn’t mean that your return is wrong. It just means that the IRS is looking for verification.
The good news is that a fair amount of the time an audit results in no change to your return or tax owed. In some situations you may be able to get a refund. The IRS attempts to audit tax returns as soon as possible after they are filed. Most audits will be of returns filed within the last two years; however, the IRS can include returns filed within the last three years and, if a substantial error is uncovered, go back to further years but typically not more than the last six years.
But when it comes to avoiding an audit, what is an expat to do? Let’s take a look at a few considerations:
- Engage a professional. A CPA or other tax professional should not only try to lower your tax liability but they should also review your return for “red flags”.
- Verify your information. Make sure the information on your tax return matches up to the source documents (1099s, 1098s, etc). Double check what has been entered on the return itself.
- Be reasonable. All too often taxpayers take unreasonable positions on their tax returns. Are those expenses really all business expenses? Does that deduction really make sense in light of your situation?
But what if you are audited?
Whether or not you need representation when responding to an audit notice is a decision you have to make. In general, most taxpayers can handle a matching audit and even a simple correspondence audit on their own. However, when it comes to office or field audits where you are talking on the phone and meeting face-to-face with an IRS agent, I highly recommend that you retain qualified representation.
When your return is being audited, the IRS will provide you with a written request for the documents needed. The
IRS will accept some electronic records; contact your auditor to determine what can be accepted. If the auditor
asks you for any information beyond what was in the original written request, insist that the revised request be made in writing according to IRS protocol.
Even honest taxpayers can be their own worst enemy during an IRS audit. If you are not familiar with audit procedures and you don’t know for sure what the issues are, it’s easy to get tripped up and say the wrong thing. You can’t refuse to speak with the IRS, unless you have given a power of attorney to a tax or legal professional. You can insist on having a representative with you either in person or via phone conference to guide you through the process.
The reality is that there are worse things in life than an IRS audit. However, any chance you have to avoid one is of course in your best interest. Make sure that you have reviewed your return for any red flags and your chance of an audit will decrease substantially.