By Orlando Gotay, Tax Attorney
I’ve been studying a recent report by the U.S. Inspector General for Tax Administration on how the United States’ IRS is auditing “expat” returns. Yes, the IRS gets audited. And it got quite the ear pull.
In this report, “expats” doesn’t mean Americans living overseas; it refers to persons who actually renounced their citizenship and cut the cord. Renouncing is not easy to do. Also, the tax code provides for a number of things one has to do—special forms to complete and submit—so that you can “true-up” with Uncle Sam as you say goodbye. That much is expected, and it makes sense.
Noteworthy was the embarrassing way in which the IRS administered its own laws. Part of keeping track of who renounced was left as a collateral duty to another office that kept track of low-income housing credits (!!). You get the idea; it goes downhill from there. From the tens of thousands of renunciations in the past 10 years or so, only a select few were sent letters telling them they needed to file the required forms; fewer still were audited.
The reason this is important to us: in a broader sense, it shines a light as to how the IRS is generally doing. Also, these reports identify specific gaps the IRS needs to fill. In an effort to address “recommendations,” management usually lathers attention to the area in particular and “for good measure” could also focus on broader, related areas, like “Americans living abroad,” for instance.
The IRS has been plagued for years with a cash crunch for its operations. With limited resources, they have to select what gets done first, or at all. The pandemic has only worsened this because there are simply fewer people to get the work done and fewer new hires.
But when there is a priority, the agency gets moving, and it’s best to avoid these “compliance campaigns” as the IRS calls them. By my count, there are about 13 active campaigns that focused on individual Americans living overseas. For a list, look up “LB&I active campaigns” on any search engine.
The incoming administration’s priorities may be different in terms of tax administration, but the IRS Commissioner, appointed by President Trump, has a term appointment that expires in 2023. It will be an interesting time for them—and for us too!
Orlando Gotay is a California-licensed tax attorney (Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court, and other taxing agencies. His love of things Mexican has led him to devote part of his practice to federal and state tax matters of U.S. expats in Mexico. He can be reached at firstname.lastname@example.org, Facebook: GotayTaxLawyer, or WhatsApp at +1-760-449-1668. This is just a most general outline. It is informational only and not meant as legal advice.