Expats and the IRS – Prepare to be Bullied

One of those changes with retiring to Mexico is your relationship with the IRS.

Back when my company was in its hey-days having clients, vendors and employees across the US and Canada my tax return was huge and quite detailed.  This was back when, you may recall, baseball players got into all sorts of trouble with IRS as their multi-million dollar contracts were now to be broken down into income per game.  Then they filed and paid various state taxes depending where the game was played.

My taxes were very convoluted yet I never heard a peep from the IRS questioning a single digit on decades of returns.  I later learned the IRS doesn’t bother with big ticket returns figuring the filer could afford better lawyers than the IRS had on staff.

Then I came to San Miguel de Allende, made my money in Mexico and had simple, 2 page filings for the IRS each year.

Insider Tip – Unlike any other country, you owe US taxes on income you earn anywhere.

So, for example, one pays taxes on your Mexican income and then adjusts that against taxes required up North.  Very unusual one doesn’t pay more in taxes here than one owes the US so the whole exercise is a wash, but you still must file.

Once here I’ve been audited every 3 years on average.  Audited is really not the right word as an audit conjures up a meeting with an IRS agent to hand over your receipts and prove your calculations. Here you just receive the most vile letter I ever have requiring several thousand dollars be placed in this seemingly random account number or “we’ll take your passport”.

The wording was so nasty and brief, I truly assumed it was a scam to get folks to place money in this scammer’s account.  It took weeks to get a person to answer any phone at the IRS only to learn the letter was actually legit.

Then I learned the IRS likes to remove the number for taxes paid in Mexico on your return in hopes the US citizen will simply pay to keep their passport functional.

And I did!  The IRS representative told me to do so then request a refund.  That was a mistake.

With research I’ve learned two things.  One is the IRS, as a general rule of thumb, despises ex-pats and will play  the “we’ll cancel your passport” game to simply bump up their earnings and fret over refunds way in the future, if ever.

The second was the IRS is traditionally uber-aggressive with lower income returns convinced the filer can’t afford a lawyer and will pay whatever is asked.

The most baffling part of the experience is there is never any explanation for why the IRS believes one owes them more money.  No verbiage in any bill beyond ‘pay me or suffer’ threats.  Also, never once has a name been attached to the letter either.  It is all very secretive and a not so gentle reminder why, on the world stage, no one likes us!

Recently I got 40% back on an IRS error on a 2012 return.  No idea why only that much but I was shocked to get any money back ever.

Good luck filing and be prepared to spend a couple hours each year, beyond simply filing, to deal with bullying federal employees said taxes pay for!

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