IRS Audits and Foreign Owners of US Property

The individual audit rate in the United States sits below 1%. Read on its own, that number invites complacency. It should not. Selection is not a lottery — it is a score, and owning US rental property while holding assets abroad adds several of the factors the scoring model weights most heavily.

What decides the outcome is rarely concealment. It is the treatment of judgement calls: the depreciation basis, the line between a repair and an improvement, whether a loss was deductible at all. Each is defensible with contemporaneous records and indefensible without them.

In this article, we examine how returns are selected, the five positions that draw questions from property owners, and the documentation that settles each one before it becomes a dispute.

1. Three Formats, and How Long the Window Stays Open

Most examinations never involve a visit. Correspondence audits — a letter asking for substantiation of specific line items — are by far the most common format. Office examinations require you or your representative to bring records to an IRS office. Field examinations, where an agent reviews books on site, are reserved for larger and more complex matters.

One rule holds across all three: notice arrives by mail. The IRS states plainly that it does not initiate contact by phone or email demanding immediate payment. Anything that does is a scam.

The standard look-back period is three years from filing. It extends to six years where there is a substantial omission of income, and there is no time limit at all on an unfiled return or a fraudulent one. Filing in one country does not extinguish the obligation in the other.

Two practical points follow from the format. A correspondence audit is usually narrow — it names the line items in question and asks for substantiation, which means the response is a document exercise rather than a negotiation. Sending exactly what was asked for, and nothing else, closes most of them.

The second point concerns representation. Non-residents may authorise a US tax professional to deal with the IRS directly, which matters when the time difference makes correspondence slow. Arranging that authority in advance costs nothing and saves weeks if a notice ever arrives.

2. How a Return Gets Selected

Selection is largely mechanical rather than discretionary. Returns are scored against statistical norms for comparable income levels and activities, and combinations that sit far outside those norms score higher for examination.

The second route is document matching. Banks, brokers and payers report amounts to the IRS directly; where the return and the information return disagree, an inquiry is generated automatically, with no human deciding to open one.

Non-residents and expatriates add a third layer: foreign asset reporting. Accounts abroad above the reporting thresholds must be disclosed on the FBAR and, in many cases, on Form 8938. Penalties for failing to report can exceed the tax at stake, and the obligation applies even where the account produced no income at all. Tracking balances through the year is the practical defence.

There is a third route that owners underestimate: the return of someone else. Examinations of a partnership, an LLC or a management company can pull in the individual returns of the people behind them. If you hold US property through an entity, its filing quality is part of your own exposure.

This is one reason the choice of ownership structure deserves attention before purchase rather than after. Our guide to holding structures sets out how each form files and what each one reports.

3. The Five Positions Property Owners Are Asked About

Rental ownership generates judgement calls every year. Working alongside US accounting firms, the same five positions come up repeatedly in examination correspondence.

As the table shows, four of the five are decided by paperwork created at the time, not by argument afterwards. The withholding question is the one to plan before closing rather than after — the mechanics are covered in our guide to FIRPTA withholding.

The land and building allocation deserves particular attention because it is set once and then compounds. Only the building depreciates; land does not. An allocation taken from the closing statement or a formal appraisal is straightforward to defend, while one adopted because it produced a convenient answer is not.

Personal use is the position most often overlooked by owners of a second home. Days the property is occupied by the owner, family or friends at below-market rent are personal days, and they reduce the deductible share of every expense. A simple dated occupancy record settles the question, as our pied-a-terre guide explains.

4. The Record Almost Nobody Keeps

Of the five, the hours log is the one deferred most often and regretted most sharply. Whether rental losses can offset other income turns on the level of the owner's participation, and participation is measured in hours.

A log reconstructed after a notice arrives carries very little weight. Contemporaneous entries — date, task, duration — carry a great deal. It is unglamorous work that quietly decides a five-figure question, and the same discipline supports the depreciation positions covered in our depreciation guide and the annual filing rhythm set out in the first-year tax calendar.

For owners using a management company, ask for a monthly activity statement. It is the closest thing to a ready-made log, and our property management guide covers what a manager should be reporting.

One more habit is worth building in the first year: keep the closing statement, the appraisal and the depreciation schedule together in a single place, and add each year's return to it. Ownership records are needed far more often than examinations occur — on a refinance, on a sale, and in any estate filing.

5. Final Thoughts: The Objection, and the Answer

However, some argue that audits are rare enough to ignore — that preparing for a sub-1% event is wasted effort. The arithmetic has some appeal, and it is true that no owner should organise a portfolio around fear of examination.

The rebuttal is that the records in question are not audit records. They are the same documents that establish the depreciable basis, prove a repair deduction and support a loss claim — the work is required to file correctly whether or not anyone ever asks. Cross-border owners also face a second exposure, because reporting failures on foreign accounts are penalised separately from any tax owed.

Keep the closing statement, the appraisal, the contractor invoices, the photographs and the hours log from the first year of ownership, and the question resolves itself in a letter rather than a dispute. If you are structuring a US purchase now and want the record-keeping designed in from the start, speak with our team and we will set out what your accountant will need.

Reinvent NY provides business consulting, operational support, and coordination services. Legal advice and immigration filings are handled by independent licensed attorneys. Real estate services are provided through licensed professionals and applicable brokerage relationships. This article is for informational purposes only and does not constitute legal or investment advice.

More on US property tax: US Estate Tax for Nonresidents, US Real Estate Tax Strategies 2026, ITIN for Real Estate Investors.