How to Handle IRS Letters and Tax Notices as a U.S. Expat

May 20, 2025
How to Handle IRS Letters and Tax Notices as a U.S. Expat

Introduction

Receiving an IRS letter or tax notice can be stressful, especially for U.S. expats who may be unfamiliar with their tax obligations while living abroad. The IRS sends tax notices for various reasons, including unpaid taxes, filing errors, missing forms, or verification requests.

 

As a U.S. citizen or Green Card holder, you are required to file U.S. tax returns regardless of where you reside. This means the IRS may send notices even if you live overseas. Knowing how to handle these notices promptly and correctly is crucial to avoiding penalties, audits, or further legal issues.

 

This article provides a step-by-step guide for U.S. expats on handling IRS letters and tax notices, including common reasons for receiving a notice, response strategies, deadlines, and how to dispute incorrect claims.

 

1. Why Did You Receive an IRS Letter?

The IRS sends tax notices for various reasons, and not all require immediate concern. However, it is important to understand the type of notice and respond accordingly.

A. Common Reasons U.S. Expats Receive IRS Notices

  • Failure to File (CP59 Notice) – The IRS has no record of your tax return.
  • Unpaid Taxes (CP14 Notice) – You owe taxes and must make a payment.
  • Underreported Income (CP2000 Notice) – The IRS believes your reported income does not match third-party records.
  • Foreign Bank Account Reporting (FBAR) Noncompliance – Failing to report foreign financial accounts as required under FATCA (Foreign Account Tax Compliance Act).
  • Earned Income Tax Credit (EITC) or Foreign Tax Credit Issues – Errors related to credits claimed on your return.
  • Identity Verification (5071C Notice) – The IRS suspects potential identity theft and requires verification.

Each notice includes a unique letter code (CP or LTR) that indicates the purpose and required action.

 

2. Steps to Take When You Receive an IRS Notice as a U.S. Expat

Step 1: Read the Notice Carefully

  • Identify the reason for the notice and the IRS letter number (e.g., CP2000, CP14).
  • Determine whether immediate action is required or if the letter is simply an informational notice.
  • Review any deadlines listed—some require responses within 30 to 60 days.

Step 2: Verify the Accuracy of the IRS Claim

  • Compare the IRS notice with your filed tax return.
  • Check for possible errors or missing documents (e.g., foreign income reporting under Form 8938).
  • If the IRS claims underreported income, verify bank statements, W-2s, 1099s, or foreign tax documents.

Step 3: Determine Your Response Strategy

  • If the notice is correct, follow the IRS instructions to resolve the issue (e.g., making a payment or submitting missing forms).
  • If you disagree with the notice, you have the right to dispute it by providing supporting documentation.

Step 4: Respond to the IRS (If Required)

  • For tax discrepancies (CP2000, CP14): Send a written response explaining discrepancies, along with supporting documents.
  • For identity verification (5071C): Use the IRS online verification system or call the provided number.
  • For FBAR violations: Consult a tax professional before responding, as penalties can be severe.

Step 5: Keep Records of All Correspondence

  • Retain copies of all letters, responses, and proof of mailing.
  • If you communicate by phone, record the IRS agent's name, badge number, and details of the conversation.

 

3. Special Considerations for U.S. Expats Dealing with IRS Notices

Expats face unique tax challenges that may lead to IRS scrutiny.

A. Foreign Earned Income Exclusion (FEIE) & Foreign Tax Credit (FTC) Disputes

  • The IRS may question your eligibility for the Foreign Earned Income Exclusion (Form 2555) or Foreign Tax Credit (Form 1116).
  • To prove eligibility, submit supporting documentation such as:
    • Proof of foreign residence (utility bills, lease agreements, residency permit).
    • Foreign tax payment receipts if claiming the Foreign Tax Credit.

B. FATCA and FBAR Penalties for Unreported Foreign Accounts

  • If you have foreign financial accounts exceeding $10,000, you must file FBAR (FinCEN Form 114).
  • Under FATCA (Form 8938), higher asset thresholds apply, and non-compliance can lead to IRS penalties exceeding $10,000.
  • If the IRS accuses you of non-compliance, consult a tax professional before responding.

C. Mail Delays and Response Extensions for Expats

  • IRS notices may take longer to reach expats due to international mailing delays.
  • You can request additional time to respond by calling the International Taxpayer Service Line: +1-267-941-1000.

 

4. How to Dispute an IRS Notice as an Expat

If you believe an IRS notice is incorrect, you have the right to challenge it through the following steps:

A. File a Formal Dispute with the IRS

  • Respond in writing to the IRS office listed on your notice.
  • Include:
    • A clear explanation of why you disagree.
    • Copies of relevant documents (tax returns, payment proof, financial statements).
    • A signed statement requesting a correction.

B. Request a Collection Due Process (CDP) Hearing (For Tax Liabilities)

  • If you received a Final Notice of Intent to Levy, you can request a CDP hearing to contest the IRS’s claim.

C. Appeal Through the IRS Office of Appeals

  • If your dispute is unresolved, you can file an appeal with the IRS Independent Office of Appeals.

 

5. What Happens If You Ignore an IRS Letter?

Ignoring an IRS notice can lead to serious consequences, including:

  • Accruing interest and penalties on unpaid taxes.
  • Loss of passport renewal rights (under the FAST Act, the IRS can notify the State Department to revoke or deny your passport if you owe over $59,000 in back taxes).
  • Possible IRS audits or tax liens on foreign assets.

 

6. When to Seek Professional Help

While some IRS notices are routine, others require professional assistance. Seek help if:

  • You disagree with a tax assessment but lack the expertise to challenge it.
  • You receive a foreign income-related notice (FBAR, FATCA).
  • You have a large tax liability or face possible penalties.
  • You need assistance filing back taxes or entering an IRS amnesty program (e.g., Streamlined Foreign Offshore Procedures).

 

Conclusion

Handling an IRS notice as a U.S. expat requires understanding the reason for the letter, responding appropriately, and ensuring compliance with tax regulations. Whether the issue involves unpaid taxes, FBAR non-compliance, or income discrepancies, addressing it promptly and accurately helps avoid penalties and legal issues.

 

Tax Partners can assist U.S. expats in responding to IRS letters, resolving tax disputes, and ensuring full compliance with U.S. tax laws while living abroad.

 

This article is written for educational purposes.

 

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

 

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

 

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