Field Audit Procedure when the Records are Located outside the United States

Sometimes, a taxpayer lives in the U.S., but their records are kept in another country. The IRS usually doesn’t send agents overseas just to look at records. Instead, they ask the taxpayer to provide copies of the foreign records in the U.S. To get these records, the IRS can use several tools, such as:

• Information Document Requests (IDRs) – The IRS generally begins by requesting records through the normal examination process. IDRs are the standard first-step informal requests for information and documents.
• Formal Document Requests (FDRs) under IRC § 982 – If normal document requests fail to produce the requested foreign-based documentation, the IRS may issue an FDR.
• Administrative Summonses under IRC § 7602 – A summons is a formal, legally enforceable IRS demand requiring the production of books, records, and papers relevant to determining a taxpayer’s tax liability. The IRS may issue a summons to a taxpayer or other person subject to U.S. jurisdiction who has possession, custody, or control of the records. This will apply even when those records are physically maintained outside the United States. Courts can enforce such summonses. Summonses are a key enforcement tool available during examinations, including field audits conducted by revenue agents.
• Exchange of Information (EOI) Requests – Where applicable, the IRS may request information through tax treaties, Tax Information Exchange Agreements (TIEAs), and other international agreements. These procedures allow the IRS to obtain information from foreign tax authorities and are regularly used in international examinations.

How Does the IRS Estimate Income and Expenses in the Absence of Records?

There may be situations in which the IRS cannot obtain those records from the taxpayer. Instead, the IRS can reconstruct the taxpayer’s income using indirect methods. For example, the IRS may examine bank deposits and spending, changes in net worth, or the sources and destinations of funds. These techniques allow the IRS to estimate income even without the original paperwork.

This can lead to adjustments to the tax return, potentially increasing the assessed tax liability, along with penalties and interest.

Next, let’s understand the field audit procedure when the records and the taxpayer are located outside the United States.