# Tax audit



## Yossarian1

Hello again,
one more question. Has any of you received an audit from the IRS on your individual tax return?
I am referring to people who work and pay taxes here in US but are being paid by a foreign company. In this case, if you live in US for more than 183 days, you have to declare like I do your worldwide income no matter where it comes from.
But in that case, how does the IRS know that what you are declaring is your actual income? A worker like this would not have a W2. 
So, do they go to the effort of taking the foreign (in my case italian) paystubs, translate them, figure out what is the line that shows the gross salary, convert the currency, etc?
It's basically what I do every year to find out how much is my US taxable income, but I am not sure how would they verify it

thanks!


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## BBCWatcher

Are you asking out of purely academic interest, or are you being audited and would like to know what the audit process is?


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## Bevdeforges

If you are audited, you will normally receive a letter from the IRS explaining the basis of their audit. There is such a thing as a "compliance" audit - where they'll ask you to justify more or less everything on your return. But these are strictly random and pretty rare.

If they are auditing you for "cause" they will tell you what item or items on your return they are looking at. 
Cheers,
Bev


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## ForeignBody

You need to retain whatever it is that you use to produce the figures for your US return. This would normally be pay stubs and/or bank statements.


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## brown55

Producing documentation may not always be easy. For certain transactions, documents may not be in English. In some cases, documents may not exist at all, as procedures and requirements differ from country to country. For example, in a Pay As You Earn system, the local tax may be taken upfront and documents that would be considered standard in the US may not be issued as that is understood to have happened. I am curious as to how these situations are handled and how to be prepared.


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## Bevdeforges

brown55 said:


> Producing documentation may not always be easy. For certain transactions, documents may not be in English. In some cases, documents may not exist at all, as procedures and requirements differ from country to country. For example, in a Pay As You Earn system, the local tax may be taken upfront and documents that would be considered standard in the US may not be issued as that is understood to have happened. I am curious as to how these situations are handled and how to be prepared.


First of all, an audit of an overseas taxpayer with no US source income nor assets is pretty darned rare these days. But, as mentioned about, if you are audited, the initial audit letter will indicate what item or items they are interested in looking at.

In general, you retain whatever documents you used to prepare the returns - payslips, bank statements, etc. - and any worksheets you created to "translate" the figures you have to what to reported on your returns. By the time you send in your returns, you should be able to explain how you got each number you reported and point to the appropriate supporting document (in whatever language) and if you wind up estimating something, you should retain notes or worksheets explaining your logic in how you estimated the amounts you reported. 

But seriously, don't hold your breath waiting to be audited unless you KNOW you have some huge risk factor.
Cheers,
Bev


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## BBCWatcher

None of those issues are unique to residence outside the United States, by the way. You're expected/required to make your best, good faith effort.


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## Bevdeforges

The main difference with filing US taxes that include significant sources of income from outside the US is that, for foreign source income you aren't expected to have 1099s, W-2s or the other "standard" documents (which the IRS gets a copy of anyhow). You make do with what you have and in the very unlikely event that those particular items are subject to an audit, you explain how and where you got the numbers you reported.

Frankly, if your foreign source income gets subjected or selected for an audit, chances are that some sort of information was submitted to the IRS that conflicts with what you reported (i.e. the Panama Papers or some egregious bank leak like at USB or HSBC).
Cheers,
Bev


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## Yossarian1

Bevdeforges said:


> First of all, an audit of an overseas taxpayer with no US source income nor assets is pretty darned rare these days. But, as mentioned about, if you are audited, the initial audit letter will indicate what item or items they are interested in looking at.
> 
> In general, you retain whatever documents you used to prepare the returns - payslips, bank statements, etc. - and any worksheets you created to "translate" the figures you have to what to reported on your returns. By the time you send in your returns, you should be able to explain how you got each number you reported and point to the appropriate supporting document (in whatever language) and if you wind up estimating something, you should retain notes or worksheets explaining your logic in how you estimated the amounts you reported.
> 
> But seriously, don't hold your breath waiting to be audited unless you KNOW you have some huge risk factor.
> Cheers,
> Bev


Thanks for the answer.
No, fortunately I am not being audited, and the only risk factor is simply the fact I have a foreign bank account in my home country, so I file the FBAR, and I guess that puts me (and many on this forum) in a league more closely scrutinized by the IRS.
But I still wonder in that case how the IRS would manage or verify the data:
- paystub: would they really translate them, or trust that the number I indicate is the gross income?
- w2: the italian fiscal system has its own "w2" but for different reasons it does not show the entire income I declare in US. 
- employer provides the data: how would they verify that?
- bank transactions: the italian employer withholds by laws the income tax, so the transactions would only show the net income

Probably as you said it is very unlikely.


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## BBCWatcher

Yossarian1 said:


> ....so I file the FBAR, and I guess that puts me (and many on this forum) in a league more closely scrutinized by the IRS.


And why do you guess that?


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## Bevdeforges

Yossarian1 said:


> Thanks for the answer.
> No, fortunately I am not being audited, and the only risk factor is simply the fact I have a foreign bank account in my home country, so I file the FBAR, and I guess that puts me (and many on this forum) in a league more closely scrutinized by the IRS.


Not really - unless you've got an impressively large balance in that bank account but show no income on your tax returns. 


> But I still wonder in that case how the IRS would manage or verify the data:
> - paystub: would they really translate them, or trust that the number I indicate is the gross income?
> - w2: the italian fiscal system has its own "w2" but for different reasons it does not show the entire income I declare in US.
> - employer provides the data: how would they verify that?
> - bank transactions: the italian employer withholds by laws the income tax, so the transactions would only show the net income


Basically, they can't "verify" that type of information - they basically have to trust what you report on your tax returns (as well as your translation of the amounts into US$). At this point, the only "FATCA" information that is reported by the banks to the IRS (usually via the national banking authority) is the year-end balance in the account. I suppose at some point in the future, they might have to provide more transaction detail (or might do so if the IRS were to ask specifically for some reason). 

Basically, filing your FBARs doesn't seem to draw any particular attention (whereas NOT filing FBARs when you declare significant amounts of interest income from non-US sources might do). For now, it's more a reference tool to be used if and when they find something "odd" on your tax return.
Cheers,
Bev


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## byline

Bevdeforges said:


> Not really - unless you've got an impressively large balance in that bank account but show no income on your tax returns.


What if that impressively large bank account is the result of one's non-American spouse's earnings?


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## Bevdeforges

If it's listed as a jointly held account, that should be taken into account.

The FBARs only document the existence of overseas accounts. They don't actually indicate that any income is or should be reported on the tax returns.
Cheers,
Bev


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