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The Tax Practice of IIT Chicago-Kent College of Law
The Tax Practice of IIT Chicago-Kent College of Law

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Posted on in Tax Rants

Hello - 

We at the Tax Practice sincerely hope you are doing as well as can be expected under the present circumstances.  To assist you with navigating through these difficult times, we wanted to provide you with the following information and updates:

Tax Changes

Deadlines Extended:  The IRS announced that all filings and taxes due on 4/15/2020 (except for estate, gift, and payroll taxes) are now due on 7/15/2020. This extension also applies to the IRA contribution period, HSA contribution period, and the grace period to make contributions to qualified retirement plans under 404(a)(6).
 
Other Deferments:  Fifty percent of the payment of the employer and self-employed payroll taxes will be deferred until December 31, 2021, for qualified employers and self-employed individuals.
 
Pre-existing Installment Plans:   For installment plans in place, no payments need to be made for due dates between April 1 and July 15, 2020. No penalty fees will be charged, but interest will continue to accrue on any unpaid balances.  If you have your installment payments automatically debited from your bank account, you need to withdraw that authorization - contact your bank. This does not impact or change estimated tax payments due for 2020.
 
State of Illinois: The state of Illinois is instituting a similar plan as the IRS for filing and payment deadlines: any filings or payments due on 4/15/2020 will now be due on 7/15/2020.  

Posted on in IRS

Chicago tax attorney IRSLate this past Friday afternoon, I received a disturbing telephone call from a long-time client. There were two IRS Revenue Officers at his home, wanting to talk to him about his delinquent tax liabilities.

I was incensed. Why was I not contacted? I have a valid power of attorney on file, and had not previously been contacted by these officers, or anyone else from the IRS regarding this.

I insisted on speaking with one of the agents, who was relatively cordial (according to my client, his menacing attitude changed dramatically after he told him he was calling his lawyer). The Revenue Officer’s explanation? I needed to update my power of attorney, “to cover through 2020 or 2025.” What?

I happen to know that this client had no unpaid tax liability for the most recent filed year. That was, simply put, some hot bullcrap.

Earlier last week, I was myself visited by two Revenue Officers at my office regarding a client – completely unannounced, drop-in. I spoke to them briefly, and strongly suggested that next time they should make an appointment with me, and I would be more than happy to discuss these matters with them for as long as they needed my attention. That’s my job.

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Frequently, clients come to us believing that the IRS won’t impose Foreign Bank Account Reporting (“FBAR”) penalties on people who don’t actually owe the U.S. any tax. 

Sadly, that’s simply not the case.

For FBAR noncompliance, the penalty may be up to $10,000 if the failure to file is non-willful, and up to the greater of $100,000 or 50% of the total account balances if willful (i.e., intentional).  Some tax practitioners used to believe that the higher willful penalty would be capped at $100,000 – at least until this summer, when the Court of Federal Claims held in Norman v. United States that the taxpayer was liable for the 50% penalty imposed by 31 U.S.C. sec. 5314, significantly more than the regulatory “limit” of $100,000.   A huge bite!

Some legislative history on the penalty amount here:  Treasury Regulation 31 C.F.R section 1010.820 was written under the previous version of the Bank Secrecy Act, and capped the penalty at $100,000.  In 2004, Congress amended the law to increase the penalty.  Based on the reasoning set forth in Colliot v. United States (Texas District Court 2018), and Wadhan v. United States (Colorado District Court 2018), the court held that the new 2004 law did not supersede the regulation promulgated under the prior statute.  Good news for noncompliant taxpayers, but it didn’t last long.  In Norman, the Court of Federal Claims instead confirmed that Congress did indeed supersede the regulation and accordingly would not cap the penalty amount at $100,000.  Most likely, the IRS will update the regulation to avoid the issue being tried again. 

For those of you who have or had foreign bank accounts and are not in compliance with the FBAR requirements - even if you do not believe you were willful in your non-reporting - we encourage you to contact us and discuss your options, including the IRS Offshore Voluntary Disclosure Program.  Notably, the IRS continues to offer an attractive Streamlined Program for non-willful taxpayers that can bring you into compliance quickly, and also significantly limit the penalties exposure.

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Making plans to travel internationally for the winter break? Needing to attend a business conference in Venice? Got tickets to the Radiohead concert in Toronto?

If you owe a significant sum to the IRS, you may be in for a rude surprise. Recent implementation of enforcement policies is resulting in lots of delinquent taxpayers receiving notices that their application for a new passport will be denied or existing passport not renewed.

On December 4, 2015, the Fixing America’s Surface Transportation Act (“FAST act) became a law, and it created a new Internal Revenue Code section § 7345 which requires the IRS to notify the State Department when an individual is certified as owing a “seriously delinquent tax debt”.

The first alarm rang on January 16, 2018, when the IRS published a Notice explaining the new rules. Additional important details were also added to the Internal Revenue Manual. On January 22, 2018, after the implementation of the passport program, the IRS took its first steps.

To be considered a “seriously delinquent tax debt”, there must be an assessed and unpaid amount of $50,000 or more, and the IRS has filed a notice of lien or a levy was issued. The section provides statutory exceptions for current installment agreements, offers in compromise, and Collection Due Process hearings. Several other exceptions are available as well. The IRS will send a form to a taxpayer after it certifies the seriously delinquent tax debt.

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Posted on in Tax Rants

Many clients have been contacting me these past several weeks and asking what my take is on the IRS after the change in administration.   Will enforcement activities decrease as a result of the new president’s own rancor for the agency?  Or will the Service instead react like the intelligence community, digging in its collective heels and strengthening its entrenched bureaucracy, perhaps even resurrecting the more draconian tactics of past times?

The answer I have been offering to my clients is both frustrating and disturbing:  I really have no idea.   And I do not think anyone really does know what to expect.  Playing a wait-and-see game makes substantive tax planning difficult, and tax controversy representation even more challenging. 

If the new President, with a supporting Congress, follow through on advertised tax reform proposals, the overall rates will be lowered, saving money for middle and upper income taxpayers.  And if the Affordable Care Act is repealed (Obamacare), so goes the 3.8% surtax on investment income.  While it is uncertain if these changes will happen at all, it is even more unclear now whether they would become effective for the 2017 or the 2018 tax year, making the deferral-of-income strategy a difficult recommendation to counsel at this point.

Posted on in Tax Rants

International investment is becoming easier and easier, so long as you have available funds. 

Advancements in technology, as well as the decreasing significance of language barriers and restrictive politics has made it possible for U.S. interests to invest overseas, even if the capital outlay is not massive. 

But the U.S. reporting rules are strict, and compliance essential.  Here’s what you need to know about reporting requirements prior to undertaking even a minimal foreign investment project. 

FBAR Reporting

In February of 2007, the Internal Revenue Service issued a news release outlining the reporting requirements for foreign financial accounts held by U.S. taxpayers under the Bank Secrecy Act of 1970 (BSA).    

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Posted on in Tax Rants

Maybe I’m showing my age, but I recall the “reinvention” of the Internal Revenue Service following the nasty Senate hearings in 1998.   

This was before 9/11, when our government’s problems were consistent with a simpler, less troubled time.  For those of you who weren’t of age at the time to care about such things, or perhaps weren’t even inhabiting this planet yet, these hearings were a big deal.  The Tax Collector was put on trial, and the proceedings televised to the nation – the IRS’ Watergate.  Current employees provided testimony behind curtains with masked voices like the adults in Charlie Brown cartoons.  Taxpayers complained bitterly about the “Gestapo-like” tactics of aggressive Revenue Officers and Special (criminal) Agents. 

The aftermath?  Our government’s procurement of a million dollar consultant study analyzing the structural and other problems with the IRS bureaucracy.  The study led to some new legislation – the third, but most significant ever, Taxpayer Bill of Rights.  Also, the IRS reorganized itself, and rolled-out a functionally (rather than geographically) based bureaucracy, while at the same time publicly dedicating itself to improved customer relations and a responsive, educating, client-servicing agency.   The “New” IRS. 

Tax Lien filings and levies dropped significantly in the wake of the roll-out.  Seizures were dramatically reduced and, in part due to the new protective legislation requiring a district court order, the taking of residences to satisfy tax debts all but disappeared entirely from the IRS Collection toolbox.

Shortly thereafter, the offer in compromise program criteria were liberalized, so instead of a 95% plus rejection rate, more and more taxpayers started realizing the “fresh start” promised by the alternative.   And the government reportedly reduced its receivables significantly, making it more resemble a business.  Good for everybody. 

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overpaid, overpayment of taxes, Chicago Tax AttorneysOn our website and blog, we’ve discussed extensively the various scenarios for underpayment of taxes, tax audits, tax court litigation, etc. But what happens when you pay too much in taxes? This happens a lot more than most people recognize, and consequently, many taxpayers do not realize their overpayment until it’s too late.

Won’t the IRS Just Refund My Overpaid Taxes?

Like most dealings with the IRS, the answer to this question is…it depends. The key is if the IRS is aware of the overpayment. For example, if you file a tax return that shows you owing $1000 and you accidentally mail in a check for $1500, the IRS will probably (though there is no guarantee) catch the mistake and refund you the $500 overage. The far more common scenario, however, is an overpayment that the IRS is not aware of. Common examples that fall into this category include failure to claim a credit or deduction you are entitled to (such as the Earned Income Tax Credit or home mortgage deduction) or in the case of a business filer who was entitled to carry a net operating loss from a prior year. There are also cases in which a taxpayer overpays as a result of an audit examination.

Filing a Claim for Refund

In the vast majority of cases, there are two ways to file a refund claim when you overpay your taxes.  In many instances, you may be able to file an amended return for the tax year in question to correct the error and claim your overpayment. The other method is to file Form 843 Claim for Refund and Request for Abatement. When filing this form, it is important to clearly state the specific reason(s) for the refund claim. In certain limited circumstances, you may also choose to file an "informal" Claim for Refund – this is just a letter to the IRS claiming an overpayment of a particular amount for a specific reason. This method is seldom used, and you should only choose this option with the assistance of a skilled tax attorney. Whatever method you select to claim your refund for overpaid taxes, it is best to take action sooner rather than later; unless there are extenuating circumstances, the statute of limitations for filing a refund claim is within three years of the date of filing the return or two years of the date the overpayment was made, whichever is later.  Its actually a bit more complicated than just that, though, because you can only claim an overpayment of monies that were paid within the prior two years.  One more thing to be careful of is filing a claim for an excessive or unjustified amount. Because of the high number of frivolous claims, Congress has given the IRS the authority to levy a penalty equal to 20% of the amount of the claim.

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