IRS Red Flags Every American Living Abroad Must Know

Are you an American who stays Abroad? Do you know about red flags related to IRS? Do not worry! At, we will discuss all the IRS red flags that you must be aware of if you are an American who stays abroad and you must be aware of them. So, make sure to stay tuned with USTAXFiling to get all the updates related to US Tax Filing for expats.

One of the biggest fear for several Americans is being audited by the Internal Revenue Service. Also, as per the IRS report, Americans who stay abroad are ten times as likely to be audited as income taxpayers staying in the United States.

It is because Americans who stay abroad are more likely to trigger red flags accidentally. To assist you in eliminating this issue, we have made a list of IRS red flags that you must know. In this blog, we will discuss in minute detail all the IRS red flags:

Not Filing an Income Tax Return 

All citizens of the United States have to file a yearly income tax return regardless of where they stay in the world. If you are not aware of this need, you are not at all alone. While it is a common issue, it must not be taken lightly. Every year, several expats fail to file an income tax return. Failure to file income tax returns is among the most common IRS red flag. Also, if the Internal Revenue Service does not connect with you about your failure to file income tax, you might end up facing steep charges, and ignorance will not be entertained.

Also, if you act fast, you can eliminate these charges. The Internal Revenue Service offers an amnesty program to assist expats in coming into compliance without facing any charges: the Streamlined filing compliance.

To use the amnesty program, you have to:

  • File the three current delinquent income tax returns
  • You can state your failure to file was not wilful refusal and because of ignorance
  • You can file an FBAR or foreign bank account report for each of the last six years
  • You have to pay any outstanding income taxes that you have from the three delinquent income tax returns.

After that, the Internal Revenue Service might determine you to be in compliance.

Failing to report an FBA (Foreign Bank Account) is a IRS Red Flag

Citizens of the United States have to file FBAR (Foreign Bank Account Report) if they have at least $10000 stored in one or more foreign financial accounts at a point during the year. The rule is well-designed to prevent Americans from evading their income tax obligations by hiding their wealth abroad. If you fail to file a Foreign Bank Account Report when needed, the Internal Revenue Service might mark it as a red flag for an income tax audit.

Failing to Report All Taxable Income 

Another IRS red flag that comes into the picture is failing to report all your taxable income. As a citizen of the United States, you should report your income worldwide every year- not only income that came from a source in the United States.

You should not assume that you will get away with hiding your foreign income. From 2010 FATCA (Foreign Account Tax Compliance Act) virtually financial firms and all foreign banks should offer the Internal Revenue Service details about account holders who are citizens of the United States. It means that the Internal Revenue Service understands how much income a given expat has to report.

Expats who prefer to shirk their obligations of tax are not likely to get away with it for long. If you wish to eliminate an Internal Revenue Service audit, you should be honest about your income.

Earning a High Income 

When your income increases, do your probability of triggering an Internal Revenue Service audit. There are many reasons for this. One of the reasons is that the Internal Revenue Service is accused of putting an examination on low-income people. In response to the criticism, the Internal Revenue Service has made a point to target wealthier Americans for income tax audits.

If you earn more than an Average American, it is good to take care when you report your income. Also, you don’t have to attempt to hide the true scope of income. It might make only matters worse.

 Claiming a Lot of Credits and Deductions

As an expat, you have the choice to claim more credits and deductions than several Americans, such as:

  • FHD (Foreign Housing Deduction)
  • FTC (Foreign Tax Credit)
  • FEIE (Foreign Earned Income Exclusion)

These income tax breaks are a huge benefit of life abroad. Also, they may build an IRS red flag. The IRS (Internal Revenue Service) does its best to sniff out income taxpayers who claim credits and deductions for the ones they are not eligible for. When you use income tax breaks to decrease your income tax bill, the IRS (Internal Revenue Service) might wish to double-check that you don’t make a mistake.

The probability is that audit increase even more if you are self-employed. Having your own business also opens the gate to extra tax deductions that the Internal Revenue Service might prefer to check. (For instance, claiming a huge loss that may raise a red flag)

None of this means that you must eliminate claiming any credits and deductions that you will. You have to be assured that you become eligible and retain any supporting papers to back up your claims.

Investing in Virtual Currency 

Virtual currency, also called cryptocurrency, has emerged as a thriving market over the past years. Digital currencies such as Ethereum and Bitcoin have gone from being jokes to an investment in the minds of several Americans. Also, the decentralized nature of cryptocurrencies has made them a famous avenue for Americans thinking about eliminating paying income taxes on their wealth.

The Internal Revenue Service is well aware of the phenomenon and is working with time to clamp down on these types of tax aversion strategies. They went to federal court to get the names of clients using Coinbase, a virtual currency exchange. They also have teams of agents whose main role is to conduct cryptocurrency-related audits. 

When you deal with cryptocurrencies such as Bitcoin, you don’t have to expect them to hold your income tax obligations. It means that they are subject to capital gain income taxes, and you should report them on your annual income tax return. Under United States regulations, virtual currencies are treated as property for tax reasons. If the Internal Revenue Service sees any proof of suspicious activity in your virtual currency investments, it will open the door to an audit.

Taking a Payout Early from an IRA or 401(k) Account 

Suppose you make an early withdrawal from 401 (k), a traditional or other retirement plan results in tax charges. There are specific exceptions when you purchase your first home or have a kid, but in normal cases, the charges may apply.

Also, not every American person is aware of this fact. It is simple for those obligations of income tax to fall through the cracks. As per a 2015 review of the Internal Revenue Service, 40 percent of reviewed people had made a mistake on their income tax return related to a retirement fund account.

To make sure that income taxpayers are not taking tax-free money, the Internal Revenue Service looks into expats who make withdrawals early.

Making Large Cash Transactions 

Similar to virtual currencies, cash will be used to make transactions that fly under the radar of the Internal Revenue Service. Due to this, the Internal Revenue Service grabs attention to cash transactions when huge cash amounts are involved. If you use cash or money to make sizable payments, you should not be surprised if the Internal Revenue Service has any questions.

What Must Americans Living Overseas Do If They Get an IRS Red Flags Audit Notice? 

If you know these things, you will reduce your probability of an IRS audit. Also, even when you take any precautions, audits might take place, especially when you stay in a foreign nation.

So, what must you do if you get that dreaded audit notice?

Ensure that the notice of audit is real and genuine. The Internal Revenue Service may connect with you about an audit through the mail. If you get a text message, phone call, or email related to an audit, it might be a scam.

If you think the notice is real, you must stop and take a deep breath. You should not panic. Many audits are painless. In several scenarios, the Internal Revenue Service is not bringing the hammer down. They do not wish to overturn your life. They might have any queries that need to be answered and have to check your financial details.

So, it is best to keep all tax-related records on hand for a minimum of three years after you file your income tax return. Many audits might take place within two years of filing.

The audit notice might clarify the concerns of the IRS and how you may respond. You wish to consult an expat tax consultant to recommend the best action course. Audits might be complicated, and the stakes are huge. It is worth it to have anyone you may trust in your corner.

Whatever the information of the audit, you must stay courteous when you deal with the Internal Revenue Service. You might be scared or even frustrated, but you don’t have to push yourself into making any mistakes. If you lose your temper or otherwise, acting may not improve the case for anyone.

Get Reliable Assistance with Your Expat Income Taxes 

In this post, we discussed IRS red flags related to expat income taxes. The best method to eliminate an IRS (Internal Revenue Service) while staying overseas is to hire an expert for expat income taxes. An eligible income tax expert may assist you in reducing the risk of triggering any IRS red flags when you file your income tax return.

Maybe we will lend a hand. At ex-pat tax services, we assist expats around the globe in filing their US income taxes on time and accurately. Our dedicated and talented team of experts is highly skilled and educated to take care of your income filing needs. Our experts ensure to discuss with you everything related to income tax filing at USTAXFiling and resolve your queries at the earliest. Also, our experts at USTAXFiling have all the latest updates related to income tax filing. You can relax and enjoy while our USTAX filing experts help you with IRS red flags and income tax filing. Also, our experts at USTAXFiling are available for 24 hours to cater to all your income tax filing needs. So, what are you waiting for? Schedule a call with USTAXFiling, your income tax filing partner, right away!income tax filing 

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