Recent Overseas Taxpayer Audit Experience

9. " The 200x federal tax return was amended to reclassify compensation earned by the taxpayers for services performed in Hong Kong as wages, not subject to self-employment tax, versus self-employment income. The taxpayer spent a substantial part of the year performing management services as an employee for XXX (a Hong Kong corporation) and its wholly owned Hong Kong subsidiaries. These wages were erroneously classified as US source compensation subject to self-employment tax. " 10. Thus, the only issue is a legal one: independent contractor vs. employee and there are Revenue Rulings on point, right? 11. Wrong! IRS immediately requests all books and records, including bank records from all U.S. and foreign banks. 12. The first Information Document Request from IRS includes: a) Bank Statements and canceled checks that cover the period under examination. b) Copies of any foreign bank or similar financial institution account(s). c) All brokerage and other financial institution statements. 13. The issue presented is whether IRS is entitled to these documents, based on the amended return. C. Problems with the Return 1. Form 1040 Schedule B line is not checked - client lives overseas for years and has several foreign bank accounts. 2. TD forms have been filed, but the information has not been updated to include all accounts. 3. IRS zooms in on these issues and starts a bank deposits reconstruction of income - Note: there are four foreign bank accounts ...