The IRS is amping up its enforcement efforts in the international arena, as I noted here last month. In a report this week calling for a massive FY 2010 budget of close to $12.5 billion — $363 million more than the President has requested — the IRS Oversight Board expressed its support for the Administration’s plans to step up enforcement, “particularly in its approach to dealing more effectively with the increasing international tax activities of individual and business taxpayers.”

One aspect of the IRS’s new global focus that hasn’t received much attention — but should — is its potential impact on companies with employees assigned to overseas positions. If your organization’s payroll includes expatriates, this might be a good time to review your tax-related global mobility risks.

A new advisory from PricewaterhouseCoopers points out that the IRS has formed a new division within its Office of the Deputy Commissioner (International) specifically to increase scrutiny of expats. “This initiative is having a material effect on the corporate tax and human resources personnel who assign corporate professionals throughout the world,” the report notes.

PwC sees that material effect in four key areas:

Foreign tax credits (FTCs). The IRS has increased reviews of FTCs in terms of withholding, redeterminations, and limitations. FTC carryback refund claims, in particular, are receiving heightened attention, sometimes resulting in delays of 6 to 9 months.

The foreign earned income exclusion. The IRS recently relocated the service center that processes expat returns from Philadelphia to Austin, and, as a result, “systemic problems” have arisen in the processing of the tax exclusion for U.S. citizens who establish a tax home and residency in a foreign country, according to PwC. In some cases, the exclusion has been erroneously disallowed.

Penalties. Late filers take note — the IRS is taking a tougher stance on penalty abatements due to reasonable cause. Relocation is not considered reasonable cause.

Nonfilers. Miss a filing completely, and the IRS may do the paperwork for you, in the form of a substitute for return (SFR) — in which case, you can forget about any income exclusions, FTCs, or reasonable cause claims. “The end result of a nonfiler case could be increased cost to the employing company in terms of the IRS collection process as well as corporate reputation,” PwC notes.

Indeed, errors and omissions in expat tax compliance can easily escalate into reputational and financial reporting risks. Small wonder that Ernst & Young’s soon-to-be-published 2009 Global Mobility Effectiveness Survey identified tax risk as companies’ no. 1 global mobility concern. ###