Expats face unique tax challenges including missing IRS letters, higher IRS scrutiny
In an age of information and digital expansion, more and more U.S. citizens are living, working, and traveling abroad. Yet for many expats, working with the IRS has become increasingly difficult. There are numerous hurdles for the IRS to provide service to and enhance the tax compliance of U.S. taxpayers living in other countries. Unfortunately, these challenges appear likely to continue as IRS rolls out compliance campaigns aimed at expats.
IRS required to mail taxpayers but most expat mail is “undeliverable”
The IRS relies heavily on notices and letters to communicate with all taxpayers. This is especially true for expats, who have limited access to in-person IRS support and may have trouble contacting the IRS via phone. During 2014, the IRS sent more than one notice for every 10 taxpayers living outside of the U.S. However, an earlier IRS analysis found that 65 percent of all international mail was returned and classified as “undeliverable as addressed.” Many expats are not receiving timely notices, are receiving delayed access to tax refunds and are potentially having their sensitive information misdelivered.
There are a number reasons why delivering notices and letters to expats is particularly difficult. First, the IRS must rely on a foreign postal delivery system, some of which are undeveloped or unreliable. Moreover, the changing postal regulations in each of these systems makes preparing a properly addressed piece of mail difficult. Finally, IRS internal systems are not compatible with many foreign addresses. This is both because international mailing addresses are often longer than the maximum number of characters allowed by the IRS system and because they may present information in a different manner than the standard used in the United States.
IRS shifts audit focus to expats
Since the enactment of the Foreign Account Tax Compliance Act (FATCA) in 2010, the IRS has increasingly placed emphasis on expat tax issues. From fiscal year 2012 to 2016 the number of audits for international taxpayers has increased by 30 percent while the overall number of audits for individuals has decreased by 30 percent. More recently, the IRS announced two new “compliance campaigns” focusing on expats: the foreign earned income exclusion campaign and the individual foreign tax credit campaign. These campaigns represent a new issue-based examination approach designed to make use of limited agency resources by focusing on issues that represent a risk of non-compliance. However, just because a return contains an issue covered by one of these compliance campaigns does not necessarily mean that the return will be examined; the IRS may also issue so-called “soft letters,” changes in forms or offer further public guidance. Expats who have claimed the foreign tax credit or foreign earned income exclusion in the past are at an increased audit risk.
The idea of being audited by the IRS is stressful for most people. Taxpayers who receive a notice related to these compliance campaigns should keep the following things in mind:
- Legitimate IRS audit notices will be in writing. The IRS will not contact taxpayers via phone, email or social media.
- It is important to respond to the IRS by the deadline. Taxpayers who receive communication from the IRS should take action as soon as possible. Untimely responses could lead to needlessly increasing the work needed to be performed to resolve the audit and could cause the taxpayer to waive some rights.
- Taxpayers will need to prepare complete responses to IRS correspondence and advocate their tax return position.
- Those who claimed the foreign tax credit may need to submit copies of the document assessing the taxes paid as well as proof of payment. Be sure to keep records of any foreign tax returns or assessments for credits claimed on the return.
- Those who claimed the foreign earned income exclusion may need to substantiate their residency status and connections to the country where they were living. Make sure to keep copies of things like leases, local bank statements and visa documentation.
H&R Block Advanced Notice and Audit Support fills the gap for expats
If a taxpayer misses a letter or notice from the IRS, the first indication that there’s a tax problem could be a lien or levy. With H&R Block Advanced Notice and Audit Support, taxpayers don’t have to worry about those kinds of surprises. With the service, H&R Block will receive duplicate copies of notices sent to the taxpayer by the IRS and will promptly upload copies of those notices to a secure data portal, leaving plenty of time to respond. Once the notice is uploaded to the data portal, an expat tax advisor will reach out to explain the notice and work to a resolution with the IRS at no additional charge.
The annual tax filing ritual is not the only time a taxpayer may need the help of a tax professional. Here are six times a tax professional.
Two education credits, the American Opportunity Tax Credit and the Lifetime Learning Credit, help taxpayers get back some of the costs of higher education.
The IRS began using tax software that makes it easier to determine if the amount of income a taxpayer reports matches what employers report