5 Red Flags That May Trigger an IRS Audit for Taxes (2024)

5 Common International Tax Red Flags for Tax Returns

5 Red Flags That May Trigger an IRS Audit for Taxes  

While any tax return or international information reporting form has the potential for being audited, when a taxpayer has international components to their tax return — there is an increased chance of an IRS Tax Audit. That is simply because oftentimes taxpayers are (understandably) unsure about what is required on the US tax return in order to disclose their foreign accounts, assets, investments, and income — and this can lead to the filing of incomplete returns and/or reporting forms.  Although there is no way to completely bulletproof a US tax return from being audited, there are ways to reduce and minimize the risk of becoming subject to an audit on matters involving international tax law and compliance. Here are five common international tax law red flags to be aware of when filing your tax return.

Form 8938 Quiet Disclosure (Account Opened in Current Year)

Form 8938 is required to be filed by certain taxpayers who have foreign accounts and assets and meet the threshold requirements for filing. Unlike the FBAR, which is a similar form to Form 8938, the latter asks specific questions about each account. For example, one question is whether the account was opened in the current year. If the Taxpayers does not indicates that the account was open in the current year but did not file prior year form 8938, it could be to the Internal Revenue Service initiating an audit for the prior year’s tax returns to determine why an open account was not filed in prior years –– and could lead to penalties.

Incorrect Form 8938 Reporting & EOI

In accordance with FATCA (Foreign Account Tax Compliance Act), more than 110 foreign countries and hundreds of thousands of Foreign Financial Institutions (FFI) proactively report US account holder and income information to the IRS. If a taxpayer files a Form 8938 or fails to do so — and/or fails to report income associated with an account that was reported by the Foreign Financial Institution in accordance with FACTA — it could lead to an audit.

Excluding Foreign Income & FATCA

Many Foreign Financial Institutions report account holder account balance and income-related information to the IRS. This can get confusing for many US persons who have foreign accounts that generate foreign income, because oftentimes in foreign countries, passive income such as interest and dividends may be tax-exempt. Unfortunately, that same foreign income is not typically exempt in the US — and so if the FFI reports the income to the IRS, but the taxpayer did not include it on their US tax return — it could lead to an audit.

Schedule B is Incomplete

Schedule B is used to report both domestic and foreign interest and dividends. If the taxpayer has foreign accounts, then they are also required to complete the bottom of Schedule B, even if they do not have income associated with the account. If a taxpayer identifies that they have interest or dividends — especially if it is with a Foreign Financial Institution –  but they do not complete the bottom of schedule B, it could be seen as an incomplete form by the IRS and lead to an audit.

Foreign Spouse But No Foreign Income Reported

It is not uncommon for a US person who has a foreign spouse to include a foreign spouse on their US tax return. It is important to remember that if you include a foreign spouse on your tax return, you also have to include that foreign spouse’s income along with your own income. If a taxpayer includes a foreign spouse — especially if they later become a US person — and it does not include the foreign spouse’s income, it could lead to an audit.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax and specifically IRS offshore disclosure.

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