This article describes the trends and nature of IRS audits impacting US taxpayers abroad. My article will analyze the enhanced frequency risk of audit to US persons who live outside the US.
The only source of data I use to facilitate this analysis comes from the IRS. The data stems from the annually published "IRS Data Book" which provides a plethora of statistics relating to all activities the IRS conducts in a particular year. Each year relates to the IRS' activities from October 1 through September 30. For example the 2016 data book covers data covering October 1 2015, through September 30 2016.
The risk of audit for individual US taxpayers living abroad is higher compared to the overall average for all US persons.
Figure 1 - Percentage of US Individual Returns Audited
In 2015-2016, there was a 6X greater likelihood of an American person living abroad being audited compared to the average American. As the focus has shifted to international taxpayers, this data is not entirely shocking.
Overall, 24.5% of the audits American individuals faced in 2015-2016, were "field" audits. the remaining 76.5% were "correspondence" audits.
When the taxpayer lives overseas, the percentage shifts to 90.0% "field" and 10.0% "correspondence" audits.
Figure 2 - 2015/2016 IRS Audits by type
What is a "Field" audit?
A Field audit means there will generally be an interview of some sort. The interview may be at an IRS office, or at the taxpayer's home, place of business, or accountant's office. The majority of field audits are conducted by the most senior grade of auditor, a Revenue Agent. Other types of field audits are conducted by Tax Compliance Officers, or Tax Examiners.
I was a Revenue Agent at the IRS.
What is a "Correspondence" audit?
These types of audit are worked exclusively over the mail, and handle simple requests, such as asking for substantiation for your charitable donations.
Regardless of the type of audit - you will always be contacted initially by mail. The IRS will provide all contact information and instructions in the letter you receive.
If you live outside the United States, there has been a historically higher chance of being audited compared to living inside the US.
What if I get a letter from the IRS?
Please refer to the blog post "I have been contacted by the IRS, what should I do?"
Lastly, remember that all tax returns prepared by US Tax Resources are covered with IRS Audit Defence (subject to restrictions).
About the author: Ian Davis is currently Canada’s only former IRS auditor; and Founder and President of US Tax Resources Inc. A Canadian firm whose mission is to provide stress relief from US tax through simple and affordable tax preparation and advisory services.
Ian is a dual US/Canadian citizen living with his family in Canada.