Today the IRS released FY 2017 audit statistics. For expats like myself- the news is not good. 5.2% of all international individual returns filled with the IRS in FY 2017 were selected for audit. This is up from 3.9% in FY 2016.
How did the average American compare? 0.6% of all individual income tax returns were selected for audit in FY 2017, down from 0.7% in FY 2016. This means if you live outside of the US- your chance of being audited was over 8 times higher than the average American in 2017.
Source: IRS 2017 Data Book Table 9a
What can you do to keep the IRS at bay as a expat?
Make sure that you vet your US tax preparer. There are plenty of exceptionally qualified US tax accountants living outside the US. Make sure to check their credentials, and work experience. If you are audited by the IRS, are they able to represent you? If your accountant has one of the designations below, they can represent you before all levels of the IRS.
If your accountant does not have any of the above designations- it does NOT mean that they are not a proficient US tax return professional. Some of the most knowledgeable US tax professionals I have ever met do not have a US designation. All it means is that they are unable to represent you before the IRS.
The IRS LB&I (Large Business & International) unit continues to focus on making sure that US persons living abroad are disclosing certain financial interests correctly.
For many expats, the Foreign Tax Credit, or the Foreign Earned Income Exclusion means that you will not owe on your US tax return. The real issue comes from the many different kinds of disclosures you have to include on your US tax return. If you fail to disclose certain accounts or transactions, the penalties start at US$10,000 per year and go up from there. If you have any of the following, it is a good idea to talk to a US tax accountant to get your tax house in order:
Own more than 10% of a company located outside the US
Have Mutual Funds or ETF's that are based outside the US
Have bank accounts located the US that exceed US$10,000 during the year
Have a life Insurance policy outside the US with a cash surrender value of over US$10,000.
By the way- the list above is not all-inclusive. There are other situations as well that may need to be reported to the IRS.
Also, it is a good idea to see what your accountant would charge for an IRS audit. Some bill by the hour, others by the issue involved. Some US tax accountants offer audit representation as an add-on fee to their tax return. It is a good idea to see, so that if you do face an audit- you have an idea beforehand how much it might cost to hire an accountant.
If you have any particular questions relating to your particular tax situation, reach out to your US Tax accountant, or go to www.ustaxresources.ca.
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.