Why is the IRS auditing my foreign income when I paid tax abroad?
Paying tax abroad does not answer the American question, it only changes the relief claimed. An examination of a return with foreign income is usually about three things: whether the income was reported in the right amount and character, whether the relief claimed for foreign tax is evidenced in a form the IRS accepts, and whether the information returns that accompany foreign income and foreign accounts were filed. The first is arithmetic and translation. The second is documentary. The third is where the exposure sits, because the penalties attached to those returns can exceed the tax the examination is nominally about.
What documents prove foreign tax paid to the IRS?
Something final, and something that ties to the figure claimed. A foreign assessment or notice of tax payable, the filed foreign return it came from, and proof of payment, presented with the conversion applied and the workings visible. A payslip deduction line or a bank debit rarely carries it on its own, because neither shows the foreign liability finally determined. Where the foreign year does not align with the American one, the reconciliation has to be shown rather than asserted. Assemble this before the examination asks for it: these documents come from a foreign authority, on its timetable rather than yours.
Can an audit of my return spread to my foreign account reports?
That is the usual direction of travel. Once an examiner is looking at foreign income, the accounts and holdings that produced it are in view, and the reports filed about those accounts and assets are the natural next question: were they filed, were they complete, do the balances and descriptions match the income on the return. Preparation is therefore reconciliation, with the reports, the return and the underlying statements telling one story. Where a report was missed or understated, it is far better identified by your own side and dealt with deliberately than found by the examiner.
Do my foreign statements need translating for an examination?
Yes, and consistently. Statements, assessments and contracts in another language are of little use to an examiner as filed, so they go in with translations, with the currency conversion applied on a stated basis and the same basis used everywhere in the file. The point is not formality. Conversion that differs between the return, the relief claimed for foreign tax and the account reports reads as a discrepancy and generates questions of its own, and a question answered late in an examination costs more than the same answer prepared with the submission.
Is it worse if my foreign income never appeared on a US form?
It changes what the examiner can check against, not what you owe. Domestic income arrives with a third-party report, so the examination is largely a comparison. Foreign income often arrives with nothing, so the record you produce is the record. In practice the weight shifts onto your documentation — the foreign payer's statements, the foreign return, the accounts the money moved through — and the examination tends to widen into the information returns rather than stop at the income figure. A file reconciled before it is asked for narrows that again.
Should I amend my return before the audit or wait?
It depends on what the amendment would say and on how far the examination has got. An amendment that corrects income or a relief claim already under examination is usually better handled inside the examination, as a reconciliation, so that two versions of the same year are not sitting on the file contradicting each other. An unfiled or incomplete information return is a different problem with its own routes, and those routes are affected by whether an examination has already begun. Sequence is the whole question here, and it should be settled before anything is filed.
How do I actually stop being taxed twice?
In this order. Fix your residence under each country's own rules, and if both claim you, apply the treaty tie-breaker. Identify where each type of income is sourced. Read the article that covers that income type, because it decides who taxes and at what maximum rate. Then claim the relief on the residence-country return, with proof of the foreign tax. Most of the tax people lose to double taxation is lost at the last step, not the first. See how double taxation is relieved.
Do I get credit for all of the foreign tax I paid?
Only up to your own country's tax on that same income, and only for tax you were legally obliged to pay. Two consequences follow. Living somewhere that taxes you more heavily than your residence country does leaves an excess that becomes a carryover rather than a refund. And withholding suffered above the treaty rate is not creditable — the route back to that money is a refund claim in the country that took it. See claiming the credit.
