The IRS has problems they've been battling for years; fewer resources, and a smaller budget. Add to that orders from Congress to collect more revenue and the need to to keep up their "all powerful" image (revolts are "so 1776-y") and you've got a desperate IRS.
If we think back to 2006, a lot of the clients we had that were being audited were 'Regular Joe's'. Let's say, Joe the plumber. Joe had a decent income, and maybe some dubious expenses. An auditor would visit Joe to go through all his records, assess his penalties, and collect their money.
Fast forward to current day. Our domestic economy isn't the best right now. Joe the plumber now has an income that's just okay. Even if the IRS found some dubious expenses, the assessment is going to be lower and Joe probably doesn't have a great ability to pay. Is it really the best use of IRS resources to send an auditor out to investigate Joe?
So now what?
The IRS sights are set on international audits; they say so themselves with the creation of "International Practice Units" (or, "IPU"). There are a few reasons for this:
- Foreign reporting is incredibly difficult to get right.
- The penalties for technical violations can be significant. Think about it; the penalties for mis-filing or not filing certain foreign reporting forms are a percentage of the account value!
- Failure to mis-file or not file some of these forms can leave your entire tax return open for assessment indefinitely!
- It's easy – You can look at say, Form 5471, and see that in one year a Form 926 was required. The IRS can then quickly check to see if one was filed. Instead of doing blind audits, they are looking for specific issues.
- Most importantly, the IRS usually has a source that has a good ability to pay.
The IRS is simply looking at the issues they can easily make money on in a cost-effective manner. And that is what the IPU's are all about.
International Practice Units
Per irs.gov, the IPU's are:
"As part of LB&I International’s knowledge management efforts, Practice Units are developed through internal collaboration and serve as both job aids and training materials on international tax issues. For example, Practice Units provide IRS staff with explanations of general international tax concepts as well as information about a specific type of transaction.
Practice Units are not official pronouncements of law or directives and cannot be used, cited or relied upon as such. Practice Units may not contain a comprehensive discussion of all pertinent issues, law or the IRS's interpretation of current law."
So they can reference them when they need to, but don't have to be held to them like actual law.
Who will be affected, and what to do
While the obvious targets are LB & I's and Multi-National Corporations, expats will also be on the radar of the IRS. There are IPU's about Foreign Housing Exclusions and Form 926.
Businesses should review their records to ensure all the t's are crossed, and all the i's dotted. They should ensure their CPA is very familiar with international reporting requirements. Unfortunately, a mistake by a CPA or tax preparer (assuming they tell the truth) will not be a complete defense to penalties.
Expats too, should make sure that they choose someone with international experience. The double taxation and reporting requirements alone are reason enough to hire a professional for assistance. We already learned that Turbo Tax isn't accurate for some US citizens that live and work overseas…
If you need help
Contact us. We can:
- Review your records to ensure they are accurate
- Amend any errors we find, and keep penalties to a minimum
- Get you into the appropriate disclosure program if necessary
- Set you up for future success
If we find that your records are accurate, we won't try to scare you into buying services you don't need. Call us at 888-727-8796 or email us at info@irsmedic.com. Your communications with us are subject to the attorney client privilege. Learn more about our services and fees here.
