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.
What happens if the two countries disagree about which of them can tax me?
The treaty has a procedure for exactly that. You apply to the competent authority in your residence country, which takes the case up with its counterpart, and the two negotiate a position that removes the double taxation. Some treaties add binding arbitration if they cannot agree. It is slow and it runs on documents, so the practical work is preserving the record and filing protective claims while the clock runs. See our treaty work.
Is the sale of foreign property taxable where I live?
For a resident, yes — worldwide gains are taxable, and the gain is computed in your own currency, so the exchange rate at purchase and at sale changes the number even when the local-currency price did not move. The country where the property sits usually taxes it too, often with a withholding or clearance step before closing, and that tax becomes a credit. A principal residence relief may apply to a home abroad on the same terms as one at home. See principal residence and foreign property.
