Your US Expat Tax Return and Top 5 Audit Risks
As an expat, you already have plenty to think about when it comes to your US expat tax return. From understanding what forms you need to complete to ensuring you don’t leave any deductions on the table, it can be quite the process. One thing that may not be on your radar is the potential of being audited – which is actually not detrimental so long as you take care of your expat tax obligations properly. Here are the top five things you should be aware of when it comes to audit risks.
1. Expats Have An Increased Chance of Being Audited
All US persons must file a US Tax Return each year to report their income to the IRS, and everyone has the potential to be audited by the IRS. Because of the complexity and nature of US expat taxes – and it being more challenging to verify income earned overseas – Americans living abroad face an increased risk of being audited. Though only 1% of US taxpayers are audited each year, it’s important for US expats to be aware of their responsibilities when it comes to filing taxes, since the chance of being audited is larger. Not to mention, the audit risk period has been extended from three years to six years from the filing date in some cases – and the IRS has no time limit if you never file or file a fraudulent US expat tax return.
2. Certain Tax Forms Can Increase Audit Risk
As you’re likely aware, filing expat taxes brings with it some extra requirements, namely including additional forms with your Form 1040. Some of these forms carry a higher audit risk, but it’s important to note that you should always file them if they’re required of your situation! These include:
Form 2555: Foreign Earned Income Exclusion
Form 1116: Foreign Tax Credit
Form 8621: Passive Foreign Investment Company (PFIC)
Form 3520 & 3520a: Foreign Trust Reporting
Form 5471: Shareholder of Foreign Corporation
Form 8938: Statement of Specified Foreign Financial Assets
You can find more details about these forms in the article. Not only is it important that you do file these forms if required, but it’s critical that you fill them out correctly and provide all necessary information. Make sure you aren’t forgetting any income, investments and other factors that can affect your US expat tax return.
3. Other Types of Income Can Trigger Red Flags
If you’re self-employed – expat or not – you have an increased risk of being audited over that of a W2 employee. Things like large numbers of capital gain transactions on your Schedule D, high employee business expenses, significant charitable contributions and losses on real estate can also increase your chance of being audited. You can learn more about the IRS audit process for the self-employed or small business owners here.
4. Filing Late Increases Scrutiny
The tax deadlines set out by the IRS are there for a reason, and it’s important to ensure you’ve taken care of your filing requirements ahead of the deadline. Not to mention, some credits and deductions are only available when filed by the due date. Your expat taxes are due by June 15th, but if you need more time to file, you can always request a further extension, which buys you until October 16th to complete your expat taxes. Note that any taxes owed will still be due on Tax Day (April 18th this year) or interest will accrue until paid.
5. Ask Questions When Using a Paid Preparer
Working with an expatriate tax professional is a great way to ensure you’re completing all required forms and taking advantage of savings applicable to Americans living abroad (get more tax savings information in our tax guide for Americans working overseas). However, it’s still important to understand where the figures on your return originated – if you aren’t sure, it’s a good idea to ask questions so you are knowledgeable when it comes to your US expat tax return.
When it comes down to it, you are the responsible party for your expat taxes, even if you have someone else prepare it for you, so being aware and confident that the information is correct is essential. However, paid preparers who knowingly prepare false expatriate tax returns or don’t show due diligence when preparing taxes may face IRS penalties, but these are not the same as the specific penalties assessed against an incorrect expatriate tax return.
Knowing where the facts and figures on your tax return come from can help you defend yourself if you face an audit by the IRS, so be sure to ask questions whenever you need more information! In the end, being aware of these risks and ensuring you file the correct information can help you lower your chances of being audited.
Have More Questions About Filing US Expat Taxes?
Our team of expat-expert accountants have the knowledge you’re looking for when it comes to US expatriate taxes. Contact us today to learn more about expat tax requirements for your specific situation, so you can take the necessary steps to stay compliant with the IRS.
