Did you know that there are US expat tax filing red flags that will prompt the Internal Revenue Service (IRS) to come banging on your door?
If you didn’t, then it’s time for you to pay more attention to what you’re about to read.
There are tax filing requirements you may be doing incorrectly or may not be doing at all that will get you audited by the IRS.
Things like failing to report all of your foreign income tax USA and not completing all the required tax filing forms can subject you to an audit.
To help keep you from undergoing a potential IRS audit, here are four US expat tax filing red flags you need to avoid.
Let’s jump right in.
Table of Contents
1. Late expat tax payments and filing
Failing to file your US expat tax by the due date – which is April 15 – will result in not only accrued interests, but also a possible audit from the IRS.
Although expats get an automatic two-month filing extension – which makes your tax filing deadline June 15 – you will still need to pay your taxes by April 15.
A late tax filing doesn’t mean you’ll immediately be subjected to an audit, but it can put you on the radar and be under closer scrutiny by the IRS.
One of the best ways to help keep you from an IRS audit is to file and pay your taxes on time.
If you want to get a head start on your tax filing, you’ll need to prepare your requirements ahead of the due date.
This helps ensure you don’t miss out submitting any forms – such as Form 1040 – and other required documentation.
To get a copy of Form 1040, you can go on the IRS website and click on the link.
You can also read the instructions on how to file your Form 1040 on the same page, including copies of the Schedules you need to attach.
It’s always an excellent idea for you to file your expat taxes on time because not only will it prevent you from accruing interests, but it will also help you avoid potential IRS audits.
2. Incomplete forms
Filing your US expat taxes will require additional documentation and forms that might increase your chances of being audited.
However, you should always file these additional forms and requirements if they apply to you.
It can get confusing for you to sort out all of the forms and other documents you need to prepare along with the standard forms, but it will not excuse you from submitting incomplete requirements.
If you don’t want to raise any red flags with the IRS, you will need to complete all the forms required for your tax filing.
Here are some of the forms you need to include when filing your taxes.
- Foreign Earned Income Exclusion or FEIE (Form 2555). You can choose to exclude a portion of your foreign earned income by qualifying for the Bona Fide Residence Test and submitting Form 2555.
However, even if your earned income falls short of the FEIE exclusion limit ($105,900 for 2019), you still need to file your federal tax returns, qualify for the bona fide residence test, and submit Form 2555 to exclude part of your foreign income.
- Foreign Tax Credit (Form 1116). Like the FEIE, filing the Foreign Tax Credit will help you avoid double taxation when you’re taxed by both the US and the country where you live.
To claim a foreign tax credit, you will need to file Form 1116 along with your tax return.
- Foreign Bank and Financial Account Reporting or FBAR (FinCEN Form 114). The FBAR isn’t a tax form, and instead of filing it with the IRS, you need to submit it electronically with the Treasury Department.
However, this is a form that you are required to submit to disclose your foreign financial accounts, such as your bank account, mutual fund, and more.
Failure to report your FBAR can result in penalties of up to $10,000 per account and trigger an audit from the IRS, so your best bet is to know if you need to submit the form.
As long as you file your taxes, submit all the requirements, and not resort to tax evasion measures for, let’s say, fear of not being able to fund your business idea, then you’ll be good to go in the eyes of the IRS.
3. Working with the wrong expat tax preparation services
Preparing everything you need to file your US expat taxes can get confusing and overwhelming. Plus, it can take up a significant amount of your time.
However, working with expat tax professionals can help ensure that you complete all the required forms, submit all the requirements on time, and avail of the benefits that apply to you – that is, if they know what they’re doing.
For example, if you’re not sure where the figures on your returns are coming from, and your tax preparer can’t answer you either despite having access to all your tax information, then that should set off warning bells.
Remember that incomplete forms and late tax filings can subject you to an IRS audit.
If your tax preparer isn’t as diligent with your returns as necessary, then you could face penalties and be under the microscope of the IRS.
Although you have a responsibility to ensure that your tax information is complete and correct, the expat tax professionals you work with should exercise due diligence in preparing your taxes.
It’s also crucial for you to work with the right tax preparation services – ones that will keep you up with your tax obligations – because even if tax preparers might face penalties for potential mistakes, you will be the one to face the penalties for your incorrect returns.
The key is to find the right tax preparer – such as Expat Tax Professionals – and ask questions to understand the tax filing process, what it requires of you, and what your expat tax preparers can do to satisfy those requirements.
Doing so will help you understand the details and figures on your expat tax return, ensure that you file the correct tax information, help lower the risks that will lead you to an IRS audit.
4. Other kinds of income and other IRS audit triggers
Whether you’re an expat or not, if you’re self-employed, you have higher chances of being audited by the IRS over other regular US resident employees.
Other indicators like having significant employee business expenses, huge real estate losses, and large charitable donations can also trigger IRS audit red flags for you.
Although you can’t really “avoid” your other types of income or other red flags that are only determined by the IRS, you can learn the potential triggers for an IRS audit to help you prepare in case you DO get audited.
Getting selected for an audit doesn’t immediately mean that there is a problem, however.
There are instances where the IRS will conduct audits based on computer screening and random selection, or related examinations if there are issues with transactions that you’re involved in with other taxpayers – like your investors and business partners who were audited.
Your safest bet is to prepare and complete your tax information and requirements, plus, submit everything on time.
This helps ensure that if you do get selected for an audit by the IRS, you don’t raise any red flags, and the audit process will be smoother and pain-free for you.
Bottom Line
Filing your US expat taxes isn’t exactly a walk in the park, but there are red flags that you need to steer clear of if you want to avoid an IRS audit.
While you can’t exactly avoid an audit, you can keep from doing (or not doing) the things that will draw the attention of the IRS and prompt the department to keep a closer eye on you.
By taking the right steps and filing your expat tax properly, you’ll be prepared if you are selected for an audit.