Introduction: Audit Reconsideration and the IRS Bill You Never Saw Coming
Audit reconsideration is the IRS procedure that reopens a tax assessment after it has already been made, so that you can correct a figure the IRS reached without your input. For Americans living in Britain, it is often the only practical way to overturn a large bill built on missed US tax returns, lost post and incomplete third-party data. Moreover, it remains available long after the Tax Court deadline has passed.
At TaxYork, we meet the same client several times a year. A senior banker, fund manager or company owner in London discovers a six-figure IRS balance for years they never filed. The IRS built the figure from US brokerage slips, ignored the cost of the shares, and gave no credit for the UK tax already paid. This guide explains how audit reconsideration works, why it favours well-documented taxpayers, and how to use it to cut an inflated assessment back to the tax you actually owe.
What Audit Reconsideration Means for Americans in Britain
The IRS Internal Revenue Manual defines audit reconsideration as the process the IRS uses to re-evaluate a prior audit where additional tax was assessed and remains unpaid, or where a credit was reversed. The relevant rules sit in IRM 4.13.1, the examination audit reconsideration process, last revised in December 2025. Importantly, the same manual confirms that the procedure also covers a taxpayer who contests a substitute for return by filing an original delinquent return.
That second limb is the one that matters most to expats. Consequently, if the IRS prepared a return for you because you did not file, you can still displace it with a genuine return and your own figures. There is no fee, no form that must be used, and no fixed deadline. However, the IRS treats the procedure as a matter of administrative grace rather than a statutory right, so the quality of your request decides the outcome.
Why Missed US Tax Returns Lead Here
Most assessments that reach audit reconsideration begin with missed US tax returns. The IRS receives Forms 1099 from US brokers, banks and fund platforms every year. When no return matches those forms, its systems flag a non-filer. Subsequently, the IRS sends letters to your last known address, which for many Americans in Britain is a parents' home in Connecticut or a flat they left a decade ago.
Our guide to the IRS substitute for return process for Americans abroad explains how the IRS builds that return. Likewise, our article on the 150-day notice of deficiency window for Americans abroad covers the Tax Court route you may already have missed. Audit reconsideration picks up exactly where those two stages end: once the tax is assessed and the bill is live.
When Audit Reconsideration Is Available
The IRS will not reopen every assessment. Therefore, before you gather a single document, confirm that your case meets the conditions. Otherwise, you may spend months waiting for a refusal that was predictable from the outset.
The Four Conditions the IRS Applies
The IRS manual sets four tests for accepting a request. First, you must have filed a tax return, which includes filing an original return after a substitute for return. Second, the assessment must remain unpaid, or you must be disputing credits the IRS reversed. Third, you must identify the specific adjustments you dispute. Finally, you must provide new information that the examiner did not consider, or show that the IRS made a computational or processing error.
The IRS explains the same conditions in plain language in Publication 3598, the audit reconsideration process. In addition, it lists the typical reasons for a request: you did not attend the audit, you moved and did not receive IRS correspondence, you have information you never supplied, or you disagree with the result. For most Americans in Britain, the honest answer is the second reason. The post simply never reached them.
When the IRS Will Refuse to Reopen
Several doors are firmly closed. The IRS will not grant audit reconsideration where you signed a closing agreement on Form 906, where it accepted an offer in compromise, or where you settled with the Independent Office of Appeals on Form 870-AD. Similarly, a final decision from the United States Tax Court or any other court ends the matter, as do final partnership adjustments under the old TEFRA regime.
These exclusions have a practical consequence. Specifically, if you once petitioned the Tax Court and then settled, you cannot use audit reconsideration to revisit the same year. Conversely, if you ignored the notice of deficiency entirely, which is common for expats who never saw it, the route stays open. In our experience, that is precisely the position of most clients who come to us with an old assessment.
Paid in Full: Why a Refund Claim Replaces Reconsideration
The procedure only reopens unpaid balances. If you have paid the assessment in full, perhaps because the IRS levied a US brokerage account, the IRS treats your request as a formal refund claim instead. You then file Form 1040-X, the amended US individual income tax return, and you must satisfy the refund time limits in section 6511 of the Internal Revenue Code.
That distinction carries real risk. Under section 6511, a claim is generally due within three years of filing the return or two years of paying the tax. However, where the claim relates to foreign tax credits, section 6511(d)(3) extends the window to ten years. Consequently, a partly paid balance is often better left partly paid while audit reconsideration runs, because it keeps the more flexible administrative route available.
Substitute for Return Assessments and the Original Return
A substitute for return is the most common starting point for an expat's audit reconsideration request. Accordingly, you need to understand how it is built, why it overstates tax, and what happens to your wider position once you file.
How a Section 6020(b) Return Overstates Your Tax
Section 6020 of the Internal Revenue Code authorises the IRS to prepare a return for a non-filer from the information it holds. In practice, that information is narrow. The IRS sees gross sale proceeds on Form 1099-B, often with no cost basis reported for shares bought before 2011 or transferred between brokers. It also sees US dividends and interest, but it sees nothing of your UK salary, your UK tax or your foreign tax credit position.
As a result, the substitute return usually treats the entire sale proceeds as profit. It applies single filing status and the standard deduction. Moreover, it gives no credit at all for tax paid to HMRC. For a high earner with a large US portfolio, the resulting assessment can be many times the correct figure, and penalties and interest are then calculated on that inflated base.
Filing the Original Return as Your Request
The cleanest audit reconsideration request after a substitute for return is a complete original Form 1040. You attach every schedule and form the year requires, including Form 1116 for the foreign tax credit, Form 8938 where your foreign assets exceed the thresholds, and Form 8621 for any UK funds. In addition, you enclose broker statements proving cost basis and HMRC records proving the UK tax paid.
Crucially, you must mark the return clearly so that it reaches the examination function rather than ordinary processing. We send it with a covering letter that identifies the assessment, the tax years and the substitute for return, and we request audit reconsideration expressly. Otherwise, a late original return can sit in a processing queue while collection continues against the old figure.
The Assessment Clock Your Late Return Restarts
There is a strategic point that most competing guides miss. Under section 6501(b)(3) of the Internal Revenue Code, a substitute for return does not start the statute of limitations on assessment. Your original return does. Therefore, filing it opens a fresh three-year window in which the IRS can examine the whole return, including items the substitute never touched.
Furthermore, section 6501(c)(8) keeps the assessment period open for any year in which a required foreign information return, such as Form 8938, 5471 or 8621, was not filed. For that reason, an audit reconsideration return must be complete and defensible, not merely lower. A request that cuts the bill but omits a UK pension, an ISA or a UK company invites a second, larger adjustment later.
FEIE, Foreign Tax Credits and UK Evidence
The biggest technical trap in expat audit reconsideration concerns the foreign earned income exclusion. Nevertheless, a well-advised high earner rarely needs the exclusion, because the foreign tax credit often works better and survives the same facts.
The FEIE Discovery Trap
The foreign earned income exclusion, worth up to $132,900 for 2026, is an election rather than an automatic relief. The IRS explains the claim in its guidance on Form 2555 and the foreign earned income exclusion. Importantly, Treasury Regulation 1.911-7 restricts late elections. A return filed more than a year after its due date can claim the exclusion only if you owe no US tax after it, or if you file before the IRS discovers that you failed to elect.
A substitute for return is, by definition, an IRS discovery. Consequently, if you still owe US tax after the exclusion, you may be unable to claim it in an audit reconsideration return. Where that happens, the only remaining path for the exclusion is a private letter ruling, which is slow and costly. In our experience, the better answer for most senior professionals is to rely on the foreign tax credit instead.
Why the Foreign Tax Credit Survives
The foreign tax credit has no equivalent discovery rule. You may claim it on an original return, an amended return or an audit reconsideration return, and the section 6511(d)(3) ten-year window protects refund claims that depend on it. The IRS summarises the regime on its page about the foreign tax credit for US taxpayers.
For a London earner paying 45% UK income tax, the credit usually eliminates US tax on salary entirely. Moreover, excess credits carry back one year and forward ten years, which can shelter later income. The main exception is the 3.8% net investment income tax, which the credit cannot offset for a US citizen resident in Britain. Our tax treaty optimisation service models the credit, the carryovers and the treaty resourcing rules together before we file anything.
Evidence From HMRC That the IRS Accepts
The IRS will not accept a foreign tax credit on your word alone. Accordingly, we support every UK figure with HMRC's own records. The most useful document is the SA302 tax calculation and the matching tax year overview, which you can download from your HMRC online account, as the government explains in its guide to getting your SA302 tax calculation.
For employees, P60s and payslips support the salary and PAYE figures. Additionally, capital gains need UK computations that match the US sale dates, and dividend income needs platform tax certificates. Remember that the UK tax year ends on 5 April, while the US year ends on 31 December. Therefore, each UK figure must be apportioned into the correct US year before it appears on Form 1116.
Building and Submitting the Audit Reconsideration Request
The strength of an audit reconsideration request lies in its organisation. The examiner reviewing it has limited time, so a clear, indexed package gets a faster and fairer decision.
Form 12661 and the Covering Letter
The IRS recommends Form 12661, the disputed issue verification form, to list each item you dispute. You are not obliged to use it, and a letter is equally valid. However, we always include the form, because it forces a line-by-line comparison between the IRS figure and yours. In addition, we attach a copy of the examination report, usually Form 4549, where the IRS issued one.
Send copies, never originals, because the IRS does not return documents. Similarly, include your taxpayer identification number and the tax year on every page. Publication 3598 also asks for daytime and evening telephone numbers. For a client in London, we give the representative's number under a Form 2848 power of attorney instead, which avoids time-zone problems entirely.
Submitting From the UK
The IRS page on the audit reconsideration process for correspondence examinations recommends its online Document Upload Tool, using the access code on your IRS letter. Otherwise, you mail the request to the office that handled the examination. For substitute for return cases, the address usually appears on the last notice you received.
International post adds weeks, so we use tracked courier delivery when mailing is unavoidable. Furthermore, you should monitor progress through your IRS online account and your IRS account transcripts rather than waiting for letters. The IRS quotes a 30-day response, but in our experience audit reconsideration decisions commonly take several months.
Collection, Interest and Your Passport While You Wait
When the IRS accepts a request for review, it can place a temporary hold on collection. However, the manual states that it will not do so where fewer than twelve months remain on the ten-year collection statute. In addition, Publication 3598 warns that collection resumes if you fail to answer a request for further information within 30 days, and that any existing instalment agreement must continue.
Interest keeps running throughout, so the delay has a cost. Furthermore, audit reconsideration is not one of the statutory exceptions that stop passport certification for a seriously delinquent tax debt, which exceeds $66,000 for 2026. Therefore, where the balance is large, we often pair the request with a collection alternative or a timely hearing, as our guide to collection due process hearings for Americans in Britain explains.
If the IRS Rejects Your Audit Reconsideration
A refusal is not the end of the road. Instead, you have three further routes, and choosing between them depends on your deadlines, your liquidity and the strength of your evidence.
The Independent Office of Appeals
When the IRS disallows a request in whole or in part, it issues a letter explaining your appeal rights. You can then ask for a conference with the IRS Independent Office of Appeals, which operates separately from the examination function. Consequently, a fresh officer reviews the evidence and can weigh litigation risk in a way that an examiner cannot.
Appeals is particularly valuable where the dispute turns on judgement, such as the correct apportionment of UK tax between US years or the treaty sourcing of a gain. In our experience, a well-prepared file that failed at examination on a technicality often settles sensibly at Appeals.
Collection Due Process as a Second Route
If the IRS issues a final notice of intent to levy, you gain a separate statutory right under section 6330 of the Internal Revenue Code. Importantly, you may challenge the underlying liability at that hearing if you did not receive a notice of deficiency or otherwise have a chance to dispute it. For expats whose post went astray, that condition is frequently met.
Therefore, audit reconsideration and collection due process can run side by side. The hearing gives you a statutory stay on levies and a route to the Tax Court, which reconsideration does not. Accordingly, we never let a 30-day hearing deadline lapse while a reconsideration request is pending.
Pay and Claim a Refund
The final option is to pay the assessment in full and file a formal refund claim. If the IRS denies the claim, you can then sue in federal district court or the Court of Federal Claims. This route suits clients with ample liquidity who want a judicial decision without delay.
However, it requires full payment first, and the refund time limits then apply strictly. As a result, we treat it as a last resort, typically reserved for disputes over legal interpretation rather than missing documents.
Missed FBARs, Information Returns and HMRC
An audit reconsideration request fixes the income tax assessment, but it does not fix everything else that follows missed US tax returns. Consequently, you should address the wider compliance picture in the same exercise.
Information Returns Belong in the Same Package
If you did not file income tax returns, you almost certainly did not file FBARs either. The FBAR is a separate filing with FinCEN, not the IRS, and you submit it electronically through the system described on FinCEN's page on reporting foreign bank and financial accounts. Our FBAR and FATCA reporting service prepares the missing reports alongside the reconsideration return so that the two sets of figures match exactly.
Similarly, UK pensions, ISAs, UK investment accounts and UK companies each carry their own US reporting duties. Filing them late is far safer than leaving the statute of limitations open indefinitely. Moreover, the examiner reviewing your audit reconsideration request will notice a return that reports UK income but no foreign accounts, so consistency protects the whole submission.
HMRC Determinations and the UK Equivalent
HMRC has its own version of the substitute for return. Under section 28C of the Taxes Management Act 1970, an officer can issue a determination of your tax when a required Self Assessment return is not filed. You displace it by filing the actual return within three years of the filing date or, if later, within twelve months of the determination.
That time limit is far stricter than the open-ended American route. Furthermore, HMRC charges its own late filing penalties, which it sets out in its guide to Self Assessment penalties. If you have missed UK tax returns as well as US ones, the UK side usually has the tighter deadline, so we deal with HMRC first and use the resulting SA302 figures in the US filing.
A Worked Case Study: Reducing a $609,000 Assessment to $19,800
The following illustrative case combines features of several real engagements, with names and details changed.
Michael is a US citizen and managing director at a London investment bank. He moved to Britain in 2014, filed UK returns every year and paid 45% UK tax on a salary of around £420,000. However, he stopped filing US returns after 2020. During 2021 and 2022 he sold shares from an old US brokerage account for $620,000 in each year, and he received about $31,000 of US dividends and $9,000 of interest annually.
The IRS matched the brokerage slips and found no returns. Consequently, it prepared substitute returns for both years. With no cost basis on the 1099-Bs, it treated the full $1.24 million of proceeds as income, applied single filing status, and assessed around $406,000 of tax. Failure-to-file and failure-to-pay penalties added roughly $142,000, and interest added a further $61,000. The demand reached his mother's address in Boston, and he learned of it only when she forwarded a final notice. By then, the Tax Court window had long closed.
We filed an audit reconsideration request for both years in the form of complete original Forms 1040. The broker's historic statements proved a cost basis of $525,000 in each year, which reduced the gains to $95,000 annually. HMRC's SA302s and his P60s supported a full foreign tax credit on the salary, and his UK capital gains tax computations supported a credit on the gains. Meanwhile, because the IRS had already discovered the non-filing and US tax remained due, we relied on the foreign tax credit rather than the exclusion.
The corrected liability for the two years came to $19,800. Most of it was the 3.8% net investment income tax, which no foreign tax credit can offset. The penalties were recalculated on the correct balance, and interest fell accordingly. In addition, we filed his missing FBARs and Forms 8938 in the same package, so that the assessment period for both years began running properly. In total, the audit reconsideration removed more than $580,000 from his IRS account.
How TaxYork Can Help
TaxYork provides comprehensive US and UK tax return preparation for high-net-worth Americans in Britain, dual nationals and accidental Americans. We prepare audit reconsideration requests as complete, evidence-backed original or amended returns, not as bare letters. Moreover, we reconcile every figure against HMRC's own records so that the IRS examiner has nothing to question.
Our team handles the related filings at the same time, including missed FBARs, Forms 8938, 8621 and 5471, and any overdue UK Self Assessment returns. We also act under a power of attorney, which means the IRS calls us rather than you. Consequently, you avoid transatlantic phone queues and missed calls at inconvenient hours. Our US tax returns for expats service covers each stage from the first notice to the final closing letter.
Conclusion
Audit reconsideration is the most underused remedy available to Americans in Britain. It reopens an assessment after the Tax Court deadline has gone, it accepts an original return in place of a substitute for return, and it allows the foreign tax credit that the IRS ignored. However, it is discretionary, it does not stop interest, and it can reopen the whole year to examination. For those reasons, it rewards a complete, well-evidenced filing and punishes a partial one.
If you face an IRS balance for years you never filed, act quickly. Protect your collection rights first, secure your HMRC evidence second, and then file a complete return that the IRS can accept without further questions. Handled properly, the procedure regularly reduces six-figure demands to a small fraction of their original size.
Contact Us
If the IRS has assessed tax for years you did not file, or if an old audit ended without your input, our specialists can review your position quickly. Please contact us for a confidential review of your IRS account. Alternatively, email hello@taxyork.com or call 020 3488 8606 to book a consultation with our US-UK team. We work with clients across London and the rest of the UK, and we can usually confirm within days whether an assessment can be reopened.
Disclaimer
This article provides general information about the IRS audit reconsideration procedure and US-UK cross-border taxation. It does not constitute tax, legal or financial advice, and it does not create a professional relationship. The case study is illustrative and combines features of several matters with details changed. Tax law, thresholds and IRS procedures change frequently, and outcomes depend entirely on individual facts. Accordingly, you should obtain advice specific to your circumstances before acting. TaxYork accepts no liability for action taken or omitted in reliance on this article.