We live in a global society and in today’s economy, businesses are increasingly expanding their operations beyond domestic borders. This offers fantastic opportunities to companies. But it also means there are legal and tax issues that business owners may face. As a San Francisco tax attorney, one question I’m often asked is whether the Internal Revenue Service (IRS) can audit an international business. The short answer is: yes.
The IRS has the authority to audit any taxpayer, including international businesses that conduct business within the United States. However, the process of auditing an international business involves complexities due to the cross-border nature of its operations. Let’s look at some of the issues and questions that arise with international businesses and potential tax liabilities.
A foreign company that is engaged in trade or business in the United States at any time during the tax year is required to file a tax return with the IRS. Even if it has no income that is connected with the conduct of a trade or business in cities like San Francisco or the United States.
Simply opening a foreign entity does not mean the company is free from the IRS or an audit. United States citizens who have a business overseas may owe tax on foreign business income. Many U.S. citizens who own foreign entities may need to file Form 5471 or Form 8865 for their company. In some cases, taxpayers also need to file Form 926. It’s best to work with an experienced San Francisco tax attorney or professional who can look at your international business and income and determine what paperwork needs to be filed with the IRS.
Many countries, including the United States, have tax treaties or agreements with other nations to prevent double taxation and promote cooperation in tax matters. These treaties often include provisions for exchanging information between tax authorities. For international businesses, understanding the implications of these treaties is essential, as they can impact the IRS’ ability to audit international businesses.
International businesses often maintain bank accounts and assets in multiple countries. The IRS requires taxpayers to report foreign financial accounts and assets exceeding certain amounts. Failure to report that information may result in penalties and/or trigger an audit. Additionally, the IRS combats offshore tax evasion through initiatives like the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS).
Just like domestic businesses, proper documentation and record-keeping are critical for international businesses to substantiate their tax positions and comply with IRS requirements. This includes maintaining accurate financial records and documentation on foreign transactions. Failure to maintain accurate records may lead to a potential IRS audit and fines.
Additionally, international businesses must navigate many domestic and international tax laws, regulations and compliance requirements. It’s best to work with an experienced tax professional who can stay abreast of changes in tax laws, which potentially minimizes the risk of an IRS audit.
An international business does not mean it is exempt from reporting to the IRS or a potential audit. International businesses must proactively manage their tax affairs, maintain comprehensive records and stay compliant with applicable tax laws and regulations to mitigate the risk of an IRS audit. It’s always best to seek guidance from a San Francisco tax attorney or experienced tax professional when navigating the waters of the IRS and its international reach.
Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego.
