IRS audit risks increase with unfiled foreign information returns

In the United States, taxpayers face significant challenges if they do not file specific foreign information returns. Recent guidelines note that the IRS can audit indefinitely in these situations, particularly under section 6501(c)(8). This provision applies to several forms, such as IRS Form 8621, IRS Form 5471, and IRS Form 8865, among others. Taxpayers often overlook this critical rule, leading to potential audits several years after the fact. Such audits can be initiated even if the taxpayer filed their income tax return correctly and on time, emphasizing the complexity of tax compliance. Despite the uncertainty around audit rates, it is widely known that the IRS had a modest audit rate of less than 1% for taxpayer returns between 2013 and 2021, despite an effort to improve enforcement with additional funding under the Inflation Reduction Act. This funding aimed to enhance IRS resources and efficiency. However, with Congress retracting some of this funding, uncertainties surrounding audit processes have arisen. The IRS is now tasked with reassessing its audit priorities amid staff reductions and advancements in artificial intelligence. The current shift in IRS operations toward a reliance on AI raises concerns among tax professionals and taxpayers about efficiency and accuracy in audits. Concerningly, the IRS is expected to maintain conventional methods like correspondence audits, which are typically addressed through mail and often involve simpler tax situations. With fewer staff members available to assist, there is apprehension that individual cases may face further backlog and delays in resolution. As a consequence of these developments, expert opinions indicate that taxpayers could experience increased frustration when dealing with audit notices. According to tax advocates, fewer human resources within IRS enforcement and related services might lead to inadequate oversight and potential errors in automated assessments, worsening taxpayer relations. It remains crucial for taxpayers to be aware of their obligations regarding foreign information returns and the implications of failing to comply with these requirements to avoid unnecessary audit risks.