Issues that drive cross-border audits
International examinations frequently focus on prices charged between related companies, foreign tax credits claimed on the US return, and whether income from foreign corporations or partnerships was properly reported. Penalties for late or incomplete international information returns can be assessed even when no additional tax is due, and they can be substantial. Withholding on payments to foreign persons is another frequent issue, because a US payer can be liable for tax it failed to withhold. Individuals with foreign accounts or businesses can face several of these issues at once. The IRS assigns international examiners to many of these matters, and their requests tend to be detailed.
Records held abroad
Documents located outside the United States are often central, and the IRS has tools to request them, including a formal document request. Failing to produce foreign records in response can, in some circumstances, prevent the taxpayer from relying on those records later in court. Foreign privacy or data protection laws can complicate production and should be raised early rather than used as a last-minute objection. Translations, and explanations of foreign accounting practices, often need to be prepared so the examiner reads the records correctly. Agreeing with the foreign affiliate's management on what can be produced, and by when, saves time later.
Domestic remedies and the competent authority
Disputes that would result in double taxation can sometimes be taken to the competent authorities of the two countries under a tax treaty's mutual agreement procedure. That route interacts with domestic options: settling an issue with IRS Appeals, for example, can limit what the US competent authority will reconsider. Penalty relief for information returns may be available on reasonable cause, and the explanation should be supported with facts. We review the examination file, the international filings, and the foreign tax positions, then map which issues belong in Appeals, which may need competent authority assistance, and which can be resolved with the examiner. Timing matters, because protective steps may be needed to keep both treaty and domestic remedies available.
