Last week, the IRS announced a new compliance initiative aimed at the estimated seven million Americans who reside outside the United States. The IRS has launched a new International Compliance Project under which the IRS will match up forms 1099-R with “a selection of individuals with foreign addresses,” pull those returns for a “look see” to ascertain whether the expat correctly reported an early distribution from a retirement account on his form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts) . If the IRS concludes from its preliminary check that a little chat might be in order, the expat will receive a “compliance contact letter” asking for additional information. A reference on the announcement to “other resources” reassures us that receipt of a compliance check letter is not an audit or investigation. Rather, the IRS is “just checking” to see what’s up and warns that if the taxpayer blows the letter off and refuses to provide the information requested, it may just decide that a full blown examination or investigation is warranted.
Lessons to be learned: (1) the IRS has gotten very good at matching up 1099’s and other information returns with 1040’s. (2) the IRS continues to be very serious about tax compliance amongst Americans living abroad, and (3) playing fast and loose with your IRA or other retirement account is not the way you want to go if you just want to see if the IRS can take a joke.