Saturday, December 25, 2010

Overseas audit of US citizen taxpayer

Pity the expat US citizen who has to continue filing US taxes no matter where they live. I´ve always wonder what would happen if things when wrong, would the IRS come after me overseas?

Here´s a report from an accountant that went through one. In this case, the triggering event was that the taxpayer filed an amended return. You should never, ever, file an amended unless you talk to a compentent international tax lawyer. Amended returns are individually examined and the chance of audits are high unless you have all your ducks in a row.

There are basically two schools of thought regarding how to deal with mistakes: "quiet" disclosure, where you just file next years return correctly and forget about the past, and "noisy" where you go for the full confessional. The main trap in the noisy route is that you have to disclose absolutely everything that could possibly come up. If you leave out anything, this is far worse than going the quiet route, since they will most definitely be looking for problems. There are no points for partial effort.

One interesting mistake was that the taxpayer had used his US address as filing address (even though he lived abroad). If you use a foreign address, it makes the IRSs audit more difficult, since you can choose to have the audit at your place of business, which will require them to travel overseas.


Anonymous said...

Dont whine and complain about facts which happens to foreigners all the time in the States!

santcugat said...

If you live in the US, yes, you'd have to file taxes there. That's like that everywhere in the world.

What's different is that US citizens need to file US taxes on their world income even if they live in a different country and have no US-connected income.

What's worse is that normal things like buying a home or participating in a standard pension plan can put you in the situation where you have to pay large amounts of US tax on phantom income that you never received.