Form 12661: How to Dispute IRS Audit Findings as a US Expat

If you disagree with an IRS audit assessment and have new information to provide, Form 12661 (Disputed Issue Verification) allows you to request the IRS reconsider its findings formally. This form is your opportunity for a second chance when you believe the audit results are incorrect.

Here’s immediate relief: Your audit risk as an expat is extremely low, with only 0.2% of individual tax returns audited according to the latest IRS compliance data. But if you’ve been audited and disagree with the results, you have options. The audit reconsideration process provides you with the opportunity to challenge the IRS by submitting additional information, primarily through Form 12661.

Most expats can resolve audit disputes successfully when they act quickly and provide proper documentation. In this guide, we’ll explain exactly when to use Form 12661, how to complete it correctly, and what happens after you submit it. You’ll have peace of mind knowing you’ve taken the right steps to dispute incorrect audit findings.

What Is Form 12661 and When Would I Use It?

IRS Form 12661, officially known as Disputed Issue Verification, is a key document in the audit reconsideration process, used to disagree with the results of an IRS audit formally. The form serves a simple but crucial purpose: it allows you to clearly identify specific items on your audit report that you dispute and provide explanations or supporting documentation to back up your claims.

The IRS summarizes the audit reconsideration process as “requests to reevaluate the results of an audit assessment when a taxpayer disagrees with the original audit determination and the additional tax has not been fully paid.”

Form 12661 is most commonly used after correspondence audits, office audits, or field audits when new or previously overlooked supporting documents are discovered. These might include bank statements, loan documents, receipts for foreign taxes paid, or corrected information about your Foreign Earned Income Exclusion claim.

The key distinction: this form is specifically for situations where you have new information to provide the IRS as to why you disagree with the assessment. Simply rehashing previously made arguments won’t work unless the IRS never received your original documentation.

Do I Need Form 12661 to Dispute My Audit?

You should use Form 12661 if any of these situations apply to you:

You Have New Documentation: If you recently discovered bank statements, receipts, or loan documents that support your tax return position, you can submit them with your audit reconsideration request. For expats, this often includes documentation of foreign taxes paid, proof of physical presence abroad, or records showing foreign housing expenses.
You Missed the Original Audit: Many taxpayers file a reconsideration request after missing their audit appointment or failing to respond by the audit deadline. Living abroad makes it easy to miss correspondence if you’ve moved or if the mail service is unreliable.
You Never Received the Audit Notice: If you moved countries and didn’t receive the IRS audit report or Notice of Deficiency, audit reconsideration gives you the chance to present your case.
You Disagree with the Assessment: You can file Form 12661 if you disagree with the IRS audit report or believe the tax assessment includes disputed issue verification errors, such as miscalculations or improper disallowances of deductions or tax credits. Common expat issues include incorrect Foreign Tax Credit calculations or improper denial of the Foreign Earned Income Exclusion.

Important timing requirement: Taxpayers may file for audit reconsideration after the audit process has concluded, provided the tax liability remains unpaid. You cannot agree with the audit, pay your balance, and then apply for reconsideration. If you’ve already paid the disputed amount, you’ll need to file Form 1040X (Amended U.S. Individual Income Tax Return) instead to claim a refund.

When Can’t I Use Form 12661?

There are times when Form 12661 is not the right tool. You cannot use it if:

A court (such as the U.S. Tax Court) has already issued a final determination about the tax assessment
You’ve already signed a closing agreement or accepted a settlement
You’ve already paid the disputed tax bill in full
The IRS assessed as a result of a compromise you entered into

If you try to use Form 12661 to submit information you’ve already submitted to the IRS, your reconsideration request will be unsuccessful. The exception is if the IRS never saw previously submitted information because it got lost in the mail during a correspondence audit.

How Do I Complete Form 12661?

Filling out IRS Form 12661 properly is essential if you want your audit reconsideration request to be taken seriously by the Internal Revenue Service. Here’s a step-by-step guide:

Step 1: Provide Your Basic Information

In the first two lines of this form, you’ll give your name, the tax period in question, and your Social Security number (or other applicable TIN). Accuracy in this section is crucial, as it helps the IRS quickly locate your tax return and audit assessment records.

Step 2: Identify What You’re Disputing

You should have an audit report (IRS Form 4549, Income Tax Examination Changes) that the IRS sent you following the audit. This will outline the changes the IRS made, including any additional tax liability, penalties, and interest.

For each disputed issue, you need to:

Clearly label what you’re disputing (e.g., “Disallowed Foreign Earned Income Exclusion for 2023”)
Provide the amount claimed on your original return
Indicate the amounts the IRS allowed on the audit report
Explain specifically why you disagree

Step 3: Write Your Explanation

Simply disagreeing with the audit report isn’t enough. You must prove your position with solid records. Your explanation should be clear and concise, directly addressing why the IRS determination was incorrect.

For expats, common explanations include:

“I met the physical presence test with 342 days abroad, as shown by the attached passport stamps and flight records.”
“I paid foreign taxes of $12,450 as documented by my UK Self-Assessment tax return, entitling me to the Foreign Tax Credit.”
“The FBAR filing was not willful as I was unaware of the requirement while living abroad.”

Step 4: Attach Supporting Documentation

In most situations, any reason you provide the IRS for disputing a tax adjustment will need support from documentation. Standard supporting documents for expats include:

Passport pages showing entry and exit stamps
Foreign tax returns and payment receipts
Bank statements for foreign accounts
Employment contracts showing overseas work
Lease agreements or utility bills proving foreign residence
Flight or travel records
Form 2555 calculations with supporting worksheets

Critical: Make copies of all documents. Only send copies with your Form 12661 submission, and keep the originals because the IRS won’t return any paperwork you send them.

The three most common mistakes taxpayers make when filling out Form 12661 are:

Not providing sufficient documentary evidence
Providing supporting documentation that the IRS has already reviewed
Not offering an apparent reference to connect the reason for the dispute listed on Form 12661 and the attached documents.

How Do I Submit Form 12661?

Reconsideration requests can be submitted electronically by uploading through the Digital Upload Tool at www.irs.gov/examreply or by using the Digital Mobile Adaptive Forms at www.irs.gov/dmaf/12661.

You can also submit by fax or mail. If you prefer to fax your documents, include your identifying information (your TIN and tax year) on each page you fax to ensure all pages are associated with your case.

Send your request to the IRS office that last corresponded with you about the audit. If you’re unsure which office to contact, call the IRS campus listed in Publication 3598 to obtain the correct address.

What to include in your submission:

Completed Form 12661
A copy of your examination report (Form 4549), if available
Copies of all new supporting documentation
A daytime and evening telephone number with the best time to reach you
A brief cover letter explaining your request for reconsideration

What Happens After I Submit Form 12661?

The IRS strives to handle all requests received in a timely manner. You should expect to hear from the IRS regarding your reconsideration request within 30 days after submission.

During the review process:

The IRS will examine your new documentation
They may contact you if additional information is needed
Collection actions are typically suspended while your case is reviewed
The IRS will either accept your requested changes (in whole or in part) or reject them

Once an Audit Reconsideration claim is filed, the IRS will either accept the Taxpayer’s requested changes (in whole or in part) or reject the requested changes. If an Audit Reconsideration claim is denied, a taxpayer can file an administrative appeal with the IRS Office of Appeals.

What If I Don’t Qualify for Audit Reconsideration?

If you don’t meet the requirements for Form 12661, you still have options:

Already Paid the Tax? If you’ve paid the disputed amount in full, file Form 1040X (Amended U.S. Individual Income Tax Return) to claim a refund instead of using Form 12661.

Years Behind on Filing? If you haven’t filed tax returns for multiple years and the IRS conducted a Substitute for Return assessment, you should file your original returns and may want to consider the Streamlined Filing Compliance Procedures instead.

FBAR Issues? If your audit relates to unreported foreign accounts, review the Delinquent FBAR Submission Procedures, which allow you to catch up on past FBAR filings without penalties if you meet certain requirements.

Will Form 12661 Work for My Situation?

Scenario 1: Disallowed Foreign Earned Income Exclusion

Mark lived in Singapore and claimed the $126,500 FEIE for 2024. The IRS disallowed it, claiming he didn’t meet the physical presence test. Mark gathers his passport stamps and flight records showing 348 days abroad and submits Form 12661 with this documentation.

Result: The IRS accepts his documentation and removes the additional tax assessment.

Scenario 2: Incorrect Foreign Tax Credit Calculation

Sarah paid $18,000 in UK taxes, but the IRS only credited $12,000 on her audit. She didn’t respond to the original audit because she had moved from London to Edinburgh and never received the correspondence. Using Form 12661, she submits her UK Self-Assessment tax return and payment receipts, showing that the full $18,000 has been paid.

Result: The IRS recalculates and applies the correct credit amount.

Scenario 3: FBAR Penalty Relief

David failed to file FBARs for three years while living in Germany because his tax preparer did not inform him about the requirement. The IRS assessed non-willful penalties. David files Form 12661 explaining his reliance on professional advice and submits evidence that he correctly reported all foreign account income on his tax returns.

Result: The IRS accepts his non-willful explanation and reduces the penalties.

How Can I Avoid Audit Issues in the First Place?

The best approach is to prevent audit problems before they start. Here’s how:

Report Everything, Then Claim Exclusions: Many expats mistakenly don’t report foreign income at all. The correct approach is to report all worldwide income on your Form 1040, then apply the Foreign Earned Income Exclusion or Foreign Tax Credit to reduce your tax to $0.
File Your FBAR Every Year: If you have $10,000 or more in foreign accounts at any point during the year, file your FBAR by the October 15 deadline. This simple compliance step prevents most expat audit issues.
Keep Detailed Records: Maintain documentation of your days abroad, foreign taxes paid, and overseas residence for a minimum of six years. If you’re ever audited, you’ll have everything you need to support your return.
Work with an Expat Tax Specialist: Expat tax returns involve complex calculations that increase audit risk when done incorrectly. A specialist can help you file correctly the first time.

Should I Get Help with My Audit Reconsideration?

Being audited doesn’t necessarily mean you’ve done anything wrong. The IRS wants to verify your claims, and with proper documentation, most expat audits conclude with minimal changes.

If you’re facing an audit reconsideration situation or worried about how to respond to IRS correspondence, we can help. Greenback is an American company founded in 2009 by US expats for expats. We have focused exclusively on expat taxes since our inception. Many of our CPAs and Enrolled Agents are expats themselves, living in 14 time zones and experiencing firsthand the challenges of living abroad. They possess the knowledge and patience to assist you in resolving complex audit situations.

No matter how late, messy, or complex your return may be, we can help. Contact us, and one of our customer champions will gladly help. If you need specific advice on your tax situation, click below to get a consultation with one of our expat tax experts.

Want your very own personal US expat tax hero? Look no further.

Our mission: to make US expat tax prep hassle-free. Between your dedicated, talented (and pretty cool!) accountant, to a simple, secure portal, tax time will be a breeze.

Get Started Today

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or accounting advice. Everyone’s tax situation is different. For advice related to your specific situation, please consult with a tax professional.