What to Do If the IRS Requests Additional Tax Payment
If you receive a notice from the Internal Revenue Service (IRS) requesting an additional tax payment, it is most likely a CP2000 Notice (Notice of Proposed Adjustment for Underreported Tax) issued by the IRS.
Here are some of the most common reasons why U.S.-Taiwan dual nationals receive an IRS notice demanding more tax:
1. Failure to Report Foreign Passive Income
This is the most frequent issue encountered by dual nationals:
- The IRS is aware of your Taiwan income, but you failed to report it (or reported it incorrectly) on your tax return: Although your active income (salary) in Taiwan may have been offset using Form 2555 (FEIE) or Form 1116 (FTC), income generated from your Taiwanese bank or brokerage accounts, such as Interest, Dividends, or Capital Gains, is considered global income and must be reported to the U.S.
- Information Mismatch Error: The IRS compares income from all sources. If your Taiwanese accounts were reported to the IRS via the Foreign Account Tax Compliance Act (FATCA), but you failed to report this interest or dividend income on Form 1040, a CP2000 notice will be triggered.
- Underreporting Investment Income: You may have failed to include investment gains from the Taiwanese financial markets (such as profits from stock or fund trading) in your U.S. capital gains calculation.
2. Errors in Calculating the Foreign Tax Credit (FTC)
- Complex Credit Calculation: The calculation of the Foreign Tax Credit (Form 1116) is highly complex. It requires income to be categorized (Passive, General, etc.) and is subject to many limitations. Calculation errors or misapplication of Taiwanese tax payments to ineligible U.S. tax items can lead to a demand for additional tax.
- Foreign Currency Conversion Issues: Taiwanese income taxes paid must be converted into USD using the correct exchange rate for the credit to apply. Using an incorrect exchange rate may result in an insufficient credit amount.
3. Errors in Claiming the Foreign Earned Income Exclusion (FEIE)
If you use Form 2555 (FEIE) to exclude your Taiwanese salary income:
- Income Type Restriction: FEIE applies only to active income (earned income) and cannot be used for passive income such as interest, dividends, or rental income. If you mistakenly exclude passive income, the IRS will demand additional tax.
- Threshold Limit: The exclusion amount has an annual limit that cannot be exceeded.
Furthermore, the tax matters for U.S.-Taiwan dual nationals are extremely complex, and the IRS's automated system (CP2000) may not account for the exemptions or credits you are entitled to as an overseas resident. If this issue stems from a past failure to properly report foreign income or assets, a CPA can also assist you in evaluating whether you need to amend prior tax returns to mitigate the risk of future penalties.
USCPA Sophie Luo (羅霞) reminds you not to panic or ignore the CP2000 notice when you receive it. You are strongly advised not to respond to the CP2000 notice on your own. You must consult a Certified Public Accountant (CPA) who is familiar with international tax law and the U.S. tax rules for overseas citizens to ensure compliance and reduce the risk of future penalties.
If you have any questions or need further help,
please contact us at the USCPA Sophie Luo (羅霞) +886 980919600
or Email: ustaxproservice@gmail.com
Also welcome to visit our website: https://www.ustaxproservice.com
(USTAX Service LLC)