What are IRS audits and why do they affect foreign investors?
The Internal Revenue Service (IRS), the U.S. equivalent of Brazil’s Receita Federal, has increased oversight of foreign investors and international companies operating in the country. With the rise of cross-border transactions and the U.S. government’s focus on ensuring tax compliance, audits have become increasingly frequent and detailed.
For Brazilians with businesses or investments in the U.S., understanding how an IRS audit works and how to prepare is essential to reducing financial and legal risks.
When can a company or investor be audited?
The IRS may select taxpayers for audit for several reasons, including:
- Inconsistencies in tax returns (differences between reported income and information provided by third parties);
- Complex international operations, such as transfer pricing or cross-border capital flows;
- Excessive deductions or questionable tax credits;
- Investments in high-risk sectors, such as cryptocurrencies and digital assets;
- Random selection, since some audits are conducted on a purely random basis.
How does an IRS audit work?
An audit can take three main forms:
- Correspondence (Mail Audit): The taxpayer receives a letter requesting supporting documents to verify reported information.
- Office Audit: Requires presenting documents directly at an IRS office.
- Field Audit: Conducted at the company’s premises, usually more detailed and time-consuming.
Each type requires strong recordkeeping, clear communication, and, in many cases, support from tax professionals.
How to prepare for an IRS audits
- Maintain detailed records: Keep invoices, contracts, bank statements, and accounting reports for at least 7 years.
- Strengthen your international compliance: Align financial reports with US GAAP or IFRS, as required.
- Review cross-border operations: Document transfer pricing policies, dividend remittances, and intercompany loans.
- Conduct preventive internal audits: Anticipate potential IRS inquiries and identify inconsistencies in advance.
- Rely on specialized advisors: Experienced tax attorneys and accountants can guide you through preparation and response.
How to respond to an IRS audits
If you receive a notice:
- Do not ignore the correspondence: IRS deadlines are strict, and failing to respond may result in penalties.
- Provide only what is requested: Submit specific information without disclosing unnecessary data.
- Maintain clear and professional communication: Objective responses reduce the risk of the audit expanding.
- Negotiate when necessary: In some cases, it is possible to discuss or appeal assessments.
Conclusion: prevention is the best strategy
Although an IRS audit may seem intimidating, foreign companies and investors who adopt strong governance and compliance practices can significantly reduce risks and costs.
At Drummond Advisors, we assist investors and international companies in preparing for and responding to tax audits in the U.S., ensuring every step of the process is handled with strategy and security.
👉 Want to know if your company or investments may be at risk of an audit in the U.S.? Contact our specialists through the chat or email us at info@drummondadvisors.com
Written by Marcos Ferreira, Content Analyst at Drummond Advisors