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Expat Tax Blog

Jan 15

How does the IRS decide who to audit?

by julie

They say that the best defense is a good offense. So, to understand the best way to react to an audit from the IRS, it helps to understand the methods the IRS uses to select tax returns for audit. There are several methods that are used by the IRS. Some of them are objective and based on confidential formulas in the IRS computer system. Others are subjective and based on investigative work by IRS agents.

Keep in mind that just because you receive notice of an audit, it does not necessarily mean that there is a problem with your return.

Random Computer Selection

The IRS chooses some tax returns to audit by comparing your return to statistical data for similar tax returns. This statistical data is developed from historical audits of random samples of returns under the IRS National Research Program. As new data is gathered, the IRS updates the return selection formula.

Other returns  are chosen by computer based on the Discriminant Function System, or DIF. This mathematical formula is used to analyze each return and score it using data from previous IRS audits. The tax returns that score poorly are examined manually for potential further audit action. This formula is periodically updated to reflect current statistical data.

There are different formulas for different categories of taxpayers. The specific DIF formulas and other program details are not made public, but experience shows that certain things are more likely to generate a high DIF score and cause the tax return to get chosen for manual examination. These items include:

– Large expenses for automobiles
– Large expenses for travel and entertainment, such as sky box seats
– Large deductions for home offices
– Large contributions to charities
– Using tax shelters

Once a return is selected for manual examination, an IRS examiner can properly consider attachments, notes made on the tax return, and additional information that the computer formula could not take into account before deciding whether or not to audit the return.

Some returns are chosen randomly rather than by using statistical data. This allows the IRS to feed current data to the statistical methods and to measure taxpayer compliance.

Whole Story at TFX.

Jan 12

Streamlined Domestic Offshore & Certification Form 14654

by julie

Streamlined Program Overview

The IRS streamlined program breaks down into two camps.

  1. Streamlined Foreign Offshore Program (SFOP)
  2. Streamlined Domestic Offshore Program (SDOP) – described herein

The key difference between these two programs is that the first requires the taxpayer to meet the non-residency test. This has nothing to do with citizenship, or whether you filed 1040 or 1040NR, or the physical presence test.

To qualify for the more lenient program (Option 1 – Streamlined Foreign Offshore) – the taxpayer must be outside of the U.S. at least 35 days in 1 of the last 3 years (both programs require 3 tax returns + 6 FBARs).

If the taxpayer was present in the US (did not meet the above test), then they would only be eligible for DSOP.

The primary benefit of both programs is amnesty from FBAR penalties, failure to file penalties, and accuracy-related penalties.

Whole Story at TFX.

Jan 10

Choosing Between Traditional and Roth IRA Guide

by julie

How to Choose Between Traditional and Roth IRA

Based on 2017 tax year.

When choosing between a Traditional IRA and a Roth IRA, some of the key aspects to consider include income limits, tax incentives, withdrawal rules, and other specific rules and benefits.

Income Limits

1. Is there an age restriction for contribution?

a. Traditional IRA: Anyone with earned Income younger than age 70 ½ can contribute.

b. Roth IRA: No age restriction.

2. Is the contribution tax deductible?

a. Traditional IRA: Yes. However, eligibility for the tax deduction depends on your income and whether you or your spouse (if you’re married) are covered by a retirement plan with your job (i.e. 401(k)). For further detail please see the 2017 IRA Deduction Limits – If already covered by a retirement plan at work.

b. Roth IRA: No. Contributions are not tax deductible.

3. Is there an income-eligibility restriction? If so, how does that affect the contribution?

a. Traditional IRA: No. Contributions to a Traditional IRA are not limited by annual income.

b. Roth IRA: Yes. Contributions to a Roth IRA are affected by your filing status and the amount of your modified adjusted gross income (MAGI). For example, if you are single you must have a MAGI less than $133,000 in order to contribute to a Roth IRA. (Please note: contribution limits begin to phase out starting with a MAGI of $118,000.) Married couples filing a joint return must have a MAGI less than $196,000 in order to contribute to a Roth IRA. (Please note: contribution limits begin to phase out starting with a MAGI of $186,000.)  For further details, please see the IRS guidelines for the Amount of Roth IRA contributions.

Whole Story at TFX.

Jan 9

Tax Reform – Mandatory Repatriation of Deferred Foreign Income for Owners of Foreign Corporation

by julie

The recent tax reform is generally considered as a boon to corporations, reducing the U.S. corporate tax rate. However, the changes affect a wider net than the Exxons and the Apples of the world. The little fish in the big pond, individuals who own incorporated entities globally, are affected as well.  This article will describe the changes that these Joe Schmoe’s face.

Prior to the passage of the tax bill, U.S. persons (citizens, resident aliens, and domestic corporations) were taxed on worldwide income, whether earned in the U.S. or abroad. Foreign income earned by a U.S. shareholder of the foreign corporation generally was not subject to U.S. tax until the income was distributed as salary or dividend to the U.S. shareholder.

Under the Law H.R. 1 (originally known as the “Tax Cuts and Jobs Act.”) a U.S. person with the stock ownership of 10% or more in a Specified Foreign Corporation (SFC), must include their pro rata share of previously untaxed accumulated E&P (Earnings and Profits) in subpart F income of the tax year ending before January 1 2018. The “measurement date” for the calculation of Subpart F income subject to deemed repatriation is Nov. 2, 2017 or Dec. 31, 2017, whichever date had the higher  E&P balance.

Dividends paid to US shareholders during the mandatory repatriation year do not reduce the amount of E&P available for subpart F mandatory inclusion.

Whole Story at TFX.

Jan 9

Tax Reform – Specified Foreign Corporations and Importance for Americans Abroad

by julie

Who is Affected:

Under the Law H.R. 1 originally known as the “Tax Cuts and Jobs Act”, U.S. persons  (citizens, resident aliens, and domestic corporations) with 10% or higher stock ownership in Specified Foreign Corporations (SFC) are subject to “deemed repatriation” tax.

Which foreign corporations are SFC:

1. All Controlled Foreign Corporations (CFC). A CFC is any foreign corporation in which more than 50% of the total value of the stock is owned directly, indirectly or constructively by U.S. shareholders on any day during the taxable year of the corporation. This means that foreign corporation in which one or more US persons hold more than 50% of stock is a CFC, thus it is also a SFC (except for PFIC corporations explained below).


2. Any foreign corporation, which has a U.S. corporate shareholder.This means that non-CFC is not a SFC unless one of the U.S. shareholders is a U.S. business that owns at least 10% of the foreign corporation.

Whole Story at TFX.