How to Prepare for an IRS Audit

Pillar 1: The Fortified Financial System

This journey to audit-readiness begins not with complex legal maneuvers, but with a fundamental redesign of your day-to-day financial operations. Most Global Professionals operate from a "digital shoebox"—a chaotic mix of personal and business funds, with receipts scattered across cloud folders and email inboxes. This reactive approach is your single greatest liability in a tax audit. It creates ambiguity, and ambiguity is where IRS agents find problems.

Your first move is to build an operational infrastructure of absolute clarity. This isn't about just organizing tax records; it's about creating a fortified system where the evidence of your compliance is an automatic byproduct of your workflow.

• Implement the 'Single Source of Truth' Method: This is non-negotiable. Immediately stop co-mingling personal and business funds. An agent's first task is to verify your income and expenses; mixed accounts force them to scrutinize every transaction, dramatically increasing the scope and stress of an audit. Designate one specific multi-currency account (e.g., Wise Business or Rho) for all business income and a separate one for all business expenses. This single strategic decision neutralizes the vast majority of audit chaos by creating clean, undeniable financial trails.
• Master Multi-Currency Bookkeeping in Real-Time: Your financial life is scattered across USD, EUR, GBP, and beyond. Waiting until year-end to reconstruct this reality is a recipe for disaster. Use accounting software that integrates directly with your multi-currency accounts to categorize transactions as they happen. This transforms a frantic year-end scramble into a simple, ongoing habit, ensuring every claim is backed by a contemporaneous record. You will never have to guess the business purpose of a 10-month-old transaction in Thai Baht.
• Create an "Audit-Ready" Digital Vault: A random cloud folder is not a system. Your objective is to create an organized, accessible archive that's ready for immediate scrutiny. Use a dedicated and consistent folder structure—for example, "Taxes/[YEAR]/[QUARTER]"—to file digital copies of essential documents on a monthly basis. This vault must contain every invoice you send, every major expense receipt (the IRS requires documentary evidence for most expenses over $75), and every bank statement. This isn't just storage; it's a meticulously organized library of proof.
• Automate Your Proof of Payment: An expense on a spreadsheet is a claim; an expense backed by irrefutable proof of payment is a fact. For every quarterly tax payment and significant business expense, create an unbreakable link between your claim and your proof. Save a PDF confirmation of the transaction and the corresponding bank statement showing the debit in the same folder. This two-part verification system leaves no room for an agent to question the validity of a transaction.

Pillar 2: The Proactive Compliance Dashboard

With your fortified financial infrastructure in place, you can now build the early-warning system that sits on top of it. This layer addresses the specific, high-stakes compliance risks unique to a Global Professional. It’s about creating simple, repeatable habits that transform your biggest anxieties—the Foreign Earned Income Exclusion (FEIE) and Foreign Bank Account Report (FBAR)—into a simple, data-driven dashboard. This is your ultimate proof of diligence.

• The Unbreakable FEIE 330-Day Counter: Your entire FEIE claim rests on proving you were physically outside the US for at least 330 full days within a 12-month period. Relying on memory is a catastrophic risk. Instead, maintain a rigorous, two-part system. First, use a dedicated travel calendar or app to log every single full day spent outside the United States. A "full day" is a complete 24-hour period from midnight to midnight. Second, maintain a corresponding "Evidence File" in your digital vault. For every trip, save digital copies of flight itineraries, accommodation receipts, and even utility bills that place you in a specific foreign country on a specific date. This file serves as irrefutable, third-party proof that substantiates your travel log, making your claim virtually unchallengeable.
• The Monthly FBAR "High Water Mark" Check-In: The severe penalties for FBAR violations stem from a common misunderstanding: the $10,000 threshold is based on the aggregate highest value of all your foreign accounts at any point during the year. To eliminate this risk, turn it into a simple monthly habit. On the last business day of each month, log into every foreign financial account you own or have signature authority over (this includes bank accounts, brokerage accounts, and services like Wise or Revolut). For each account, record the "high water mark"—the highest balance it reached during the year to date, which can be found by reviewing your statements. This simple check-in transforms a once-yearly source of dread into a manageable and documented task, creating a clear record of your compliance efforts.
• The "Business vs. Personal" Travel Log: As a Global Professional, the line between business and leisure travel is often blurred, creating a prime target for IRS scrutiny. To defend your travel-related business deductions, you must maintain a contemporaneous log for every trip. For each day, note the primary purpose. A day qualifies as a "business day" if you spend the majority of your time on business activities; travel days generally count as business days as well. Your log is your primary defense against an agent re-characterizing legitimate business travel as a personal vacation.

Pillar 3: The Professional Shield Protocol

Your meticulous documentation is the unshakable foundation for the final layer of your defense: the human protocol for managing any official inquiry. Systems and records are essential, but true resilience comes from having the right professional team and a clear-headed protocol in place before an IRS notice ever arrives. This is how you ensure a query remains a simple request for information rather than escalating into a source of stress.

• Vet Your "Audit Quarterback" Before the Game Starts: The single most critical mistake a global professional can make is waiting for a crisis to find an expert. You must proactively identify and establish a relationship with a U.S.-based CPA, Enrolled Agent, or Tax Attorney who specializes in expatriate taxation. A generalist accountant will not have the nuanced understanding of the FEIE, foreign tax credits, and FBAR requirements that define your financial life. Your goal is to have a trusted expert on standby—someone who already knows your situation and can immediately step in to manage the process.

• Master the Power of Attorney (Form 2848): Upon receiving a notice, you will sign a Form 2848, Power of Attorney. This legal document authorizes your chosen representative to speak directly with the IRS on your behalf. From that moment on, you should never speak directly to an IRS agent. Your representative becomes your firewall. They manage all communications, handle document requests, and answer any questions, preventing you from misspeaking or inadvertently volunteering information that could complicate your case.

• Understand the Nature of the Inquiry: An IRS audit is rarely a wide-ranging inquisition. The initial letter will be specific, stating the tax year and the precise items under review. Most inquiries are simple Correspondence Audits, handled entirely by mail and focused on a narrow issue. More detailed Office Audits require a visit to an IRS office, which your representative will attend for you. The most serious type, a Field Audit, involves an in-depth review of records at your representative's office. In all cases, your protocol is to provide your representative with only the specific documents requested and let them handle the response. A focused, precise response is the hallmark of a professional in control.

• Assert Your Taxpayer Rights with Confidence: The IRS examination process is governed by a strict set of rules, and you have clearly defined rights, including the right to professional representation and the right to privacy. As Enrolled Agent Randall Brody, founder of Tax Samaritan, states, "Most taxpayers are no match for the examination procedures of the IRS...taxpayers frequently pay more...than would have been possible with knowledgeable and experienced representation." Engaging an expert is the most effective way to assert your rights and ensure the process is fair, focused, and resolved efficiently.

Conclusion: From Anxiety to Agency

Ultimately, transforming your audit defense is about fundamentally redesigning your relationship with compliance itself. The visceral fear that an IRS notice provokes is not an inevitable part of life as a Global Professional; it is a direct symptom of operational chaos. It thrives on disorganized records, ambiguous financial data, and a lack of professional readiness. This entire playbook is designed to eliminate that chaos, replacing it with the profound confidence that comes from control.

This is not a last-minute checklist; it is a strategic framework for building a Business-of-One that is perpetually prepared. You achieve this by committing to three core principles:

• Systematize Your Finances: You abandon the digital shoebox and build a clean, automated bookkeeping architecture where your financial truth is a clear, coherent story.
• Master Your Metrics: You stop guessing about your FEIE days and FBAR high-water marks. You track these critical data points with disciplined consistency.
• Establish Your Shield: You engage your "Audit Quarterback" before the game begins, transforming a potential crisis into a simple hand-off to a trusted expert.

The contrast between the unprepared and the fortified professional is stark. It is the difference between reacting with panic and responding with a plan.

By implementing these pillars, you fundamentally alter the audit dynamic. The inquiry is no longer an investigation into your life; it is a simple request for information that your systems are already designed to provide. You move from a state of ambiguous risk to one of professional agency, confident that your success is built on a foundation of unshakeable integrity.