You’ve probably heard about a tax audit, but you may consider it as a concept that only applies to evil corporations and tax-evading, dishonest taxpayers.
It is a common perception, and rightfully so. Those who shirk their tax duties or hide their income should fear an IRS audit. But what about us, hardworking, honest American expats?
Of course, no one is exempted from being audited, but because expatriates live and work outside the United States, it is harder for the IRS to verify income. Therefore, expats may face more scrutiny.
The expatriate status alone could lead individuals to become more likely to incorrectly file tax returns or more tempted to commit tax evasions. Expat tax filing is certainly more complicated, thus increasing the chance of an audit.
In the past, the Statute of Limitations for an audit was three years, but it has now increased to six years. Thus, reviewing your past returns becomes increasingly important.
To avoid an audit is to file taxes correctly
Even if you file according to the rules of the IRS, there is still a chance of an audit. The audit itself may be annoying, but the real problem would be the penalties and back taxes for incorrect filing.
Here are four questions you should ask yourself to lower the audit risk.
What are my income sources?
It should be obvious that the purpose of an audit is to catch underreported gross income which lowers the tax liability. Therefore, including all your income sources to report a correct amount of gross income is the key to avoiding a tax audit.
Additionally, an overstatement of unrecovered costs or other basis is considered an omission of gross income. So avoid any wrongful act to decrease the taxable income.
Which documents should I keep track?
Mistakes happen, and to minimize them, keep track of all your financial records. This includes bank statements, investment records, and pay stubs.
Am I using the right forms?
The more complicated the tax situation is, the more forms you would need to use. Often, different deductions and tax credits require separate forms, meaning you must first understand what you qualify for. Also, locate the right forms to apply for applicable tax benefits.
Oh, and don’t forget about the forms required to comply with FATCA regulations.
Meet the filing deadline.
An airtight tax return is no use unless you actually file it on time. For 2019, make sure youre tax returns are filed by April 17.
A missed deadline could lead to missed deductions and credits, and increased audit risk. Or worse, you could face serious legal and financial consequences.