IRS Advisory Report Signals New Friction for Americans Living Abroad

Greenback analysis of a newly released IRS advisory report offers early insight into how IRS operations are evolving, and why Americans living abroad may face more friction when interacting with the IRS, especially around identity verification and correspondence.

The report comes from the Internal Revenue Service Advisory Council (IRSAC), a panel of tax professionals that advises IRS leadership on operational risks, taxpayer experience, and system priorities. While the report does not change tax law, it provides clear signals about where the IRS is under strain, and how those pressures are likely to show up for taxpayers.

For Americans living abroad, the key signal is subtle but important: as the IRS automates for domestic efficiency, international filings are more likely to be treated as exceptions, particularly when a return triggers identity verification, automated correspondence, or manual review.

This article does not cover tax law changes. It explains what the IRS Advisory Council’s findings signal about how the IRS processes, flags, and communicates with expat taxpayers.

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What the IRS Advisory Report Signals for Expats

The IRSAC report highlights a paradox: the IRS is a victim of its own efficiency.

By the agency’s own math, it currently boasts a 415:1 return on investment, collecting roughly $5.1 trillion on a $12.3 billion budget. However, analysis of the latest report suggests that this efficiency may be hitting a wall.

While the 2022 Inflation Reduction Act (IRA) initially promised nearly $80 billion in modernization funds, the reality on the ground has shifted. As of early 2026, Congress has rescinded or redirected approximately $41.8 billion of that supplemental funding.

Strategic Shifts Due to Funding Constraints

The reduction in expected funding suggests the IRS may be unable to complete the comprehensive, end-to-end system overhauls originally planned. Instead, the agency appears to be shifting toward a “triage” approach to modernization. This means:

Investing in low-cost, scalable digital tools
Reducing reliance on human review
Pushing compliance earlier in the filing lifecycle

Where Expats Feel the Friction First

While the filing rules remain the same, the report suggests that the actual process of dealing with the IRS, from verifying your identity to resolving a simple error, could become much more complicated for those living overseas.

The report highlights a growing tension: as the IRS modernizes its systems for a domestic, digital-first audience, the “manual” pathways that expats might rely on are becoming more constrained.

Identity and Correspondence

The most significant “friction point” in the report isn’t the tax calculation itself, but the process of proving who you are and resolving errors.

The National Taxpayer Advocate (TAS) and IRSAC data show:

Historic Identity Backlogs: The average time to resolve identity theft and verification issues has spiked from 129 days in 2019 to as much as 676 days (nearly two years) in late 2024. To manage this, the IRS is moving toward automated identity verification (like ID.me) and broader use of Identity Protection PINs (IP PINs).

Why expats feel this differently: For an American abroad, this means a routine “flag” on a return, which might be resolved in weeks for a domestic filer, could result in a two-year deadlock due to international mail lags and a lack of specialized staff to handle non-U.S. documentation.

When IRS automation hits an edge case, expats feel it first.

Greenback specializes in U.S. expat tax filings and IRS interactions that don’t fit the domestic mold. Get started to see how we can support your situation.

Proactive Compliance: The Rise of the “Automated Nudge”

The IRS is moving away from traditional downstream audits in favor of “proactive compliance.” This involves using automated data-matching to “nudge” taxpayers before a problem escalates.

The agency is increasingly relying on:

Automated Notices: Computer-generated letters triggered by mismatches in Foreign Tax Credit (FTC) or Foreign Earned Income Exclusion (FEIE) data.
Digital Correspondence: A push to move all communication into the “IRS Online Account” portal.

What this means for expats: While these tools are meant to be helpful, they assume a level of digital accessibility that some overseas tax filers may lack. If an automated notice requires a response within 30 days but takes 20 days to arrive in a foreign mailbox, the “friction” is in the timeline, vs. the tax law itself.

Digital-First Systems with Domestic Assumptions

The report supports a “digital-first” IRS but acknowledges that many systems remain siloed and built on domestic assumptions.

System Fragmentation: The IRS manages approximately 60 case management systems, many of which do not communicate effectively with one another.
Compatibility Gaps: Many of these digital portals still struggle with:
- Foreign phone numbers for two-factor authentication.
- Non-U.S. address formats and postal codes.
- Refund hurdles as the agency attempts to eliminate paper checks in favor of direct deposit systems that may require access to a U.S.-based bank account.

The Broad Impact: As the IRS builds a “seamless” experience for the 90% of domestic filers, the 10% with international “exceptions” may find fewer human escalation paths when digital tools fail to recognize their foreign data.

Why This Matters

The basic tax rules for Americans abroad haven’t changed, but the way the IRS processes your return and handles your questions is shifting.

The report suggests the IRS is becoming:

High-Speed for Simple Cases: If you are a domestic taxpayer with a standard return, the system is faster than ever.
The “Manual Lane” for Expats: If your return doesn’t fit the standard domestic mold, which includes most expat filings, it is more likely to be pulled for “manual review.”

This creates a new kind of risk for people living overseas:

Identity verification is now a “gatekeeper”: Before the IRS even looks at your tax calculations, its automated systems must verify who you are. If a security filter flags your return, it doesn’t matter how accurate your math is; the return stops moving until the “gatekeeper” is satisfied.
Small errors lead to long delays: Because the IRS has moved staff away from specialized units to answer general phone lines, the backlog for resolving flagged returns has reached an average of 20 to 22 months.

What Expats Should Do Now

Based on the challenges highlighted in the report, here is how you can protect yourself:

Respond to Notices Immediately:

International mail is slow, and IRS response windows are short (often only 30 days). If you receive a notice, treat it as a priority. Responding via your online portal is almost always faster and more reliable than mailing a letter across the ocean.

Verify Your Digital Access Early:

Don’t wait until tax season to try and log into your IRS Online Account. These systems often struggle with foreign phone numbers or non-U.S. addresses. Testing your access now gives you time to resolve “digital walls” before your deadline.

Protect Your ID Protection PIN:

If the IRS has issued you an Identity Protection PIN (IP PIN), treat it as carefully as your passport. Without this six-digit number, the IRS’s new high-speed systems will automatically reject your return, forcing you into that 20-month manual backlog.

Watch Your “Digital Paper Trail”

Starting in 2026, the IRS will receive more data than ever on digital assets (like crypto). Ensure your records are exact; the IRS’s new automated “matching” systems will flag any mismatch between what a broker reports and what you file.

The Bottom Line

As the IRS builds a “seamless” experience for the majority of domestic taxpayers, Americans living abroad (who are, by definition, an “exception” to the domestic system) face a higher risk of getting stuck in the gears.

Working with a Greenback Expat CPA, who specializes in these international friction points can help ensure that a routine automated check doesn’t turn into a multi-year ordeal.

Stay out of the IRS “manual lane.”

Work with Greenback’s expat-focused CPAs to file accurately, respond faster to IRS notices, and avoid long delays caused by identity or correspondence issues.

Frequently Asked Questions

What is the IRS Advisory Council (IRSAC)?

The IRS Advisory Council (IRSAC) is a panel of tax professionals appointed to advise the IRS Commissioner on taxpayer service, compliance, and tax administration challenges. It provides an annual report identifying operational risks, taxpayer experience issues, and areas the IRS should prioritize.

Does this IRS advisory report change U.S. tax law for expats?

No, the IRSAC report does not change tax law. It offers insight into where the IRS is under operational stress and how its systems may respond to certain situations, especially as it modernizes service platforms for efficiency. These operational signals can indirectly affect how expats experience the IRS.

Why does the report focus so much on digital modernization?

The IRS has been investing in digital transformation to reduce costs and improve efficiency, made possible in part by funding from the 2022 Inflation Reduction Act. However, much of that funding has been rescinded or redirected, forcing the IRS to prioritize smaller, scalable digital tools over large system overhauls.

What do “proactive compliance” or “automated nudges” mean?

These terms describe the IRS’s shift toward using automated notices and system-generated prompts to engage taxpayers earlier in the compliance process, rather than relying on human audits later. For expats, this means system flags (like ID verification requests or mismatch notices) can arrive quickly and may require responses within tight timelines. This approach aims to prevent mistakes but can create friction if not resolved promptly.

How are identity verification issues impacting expats?

Identity verification is one of the largest operational bottlenecks for the IRS. The time to resolve identity theft or verification issues has increased significantly, and automated systems may require verification before processing a return. For expats, international correspondence delays can extend resolution timelines even further.

Should expats expect more audits?

he report signals a focus on earlier identification of risks through data matching and automation, not necessarily a dramatic increase in traditional audits. However, when automated systems detect discrepancies — especially around foreign income, Foreign Earned Income Exclusion (FEIE), or Foreign Tax Credits (FTC) — those cases might receive closer scrutiny and require response action.

How does IRS funding uncertainty affect expats?

With reductions in expected modernization funding, the IRS is prioritizing smaller digital tools and compliance projects over large-scale infrastructure investments. This means systems may become more capable in some areas but less flexible for exceptions, which disproportionately affects expats, whose filings often don’t conform to standard U.S. profiles.