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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 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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cnc status, tax debt, Chicago Tax Attorneys"Available for a limited time only," the advertisements said, "The IRS' CNC Tax Program can help keep you from paying the IRS if you can't afford it!"

You may have heard an advertisement like that on the radio or TV in the past few years. But the truth is that the Currently Not Collectible moniker isn't a 'program;' it's a status that selectin taxpayers can be placed in by the IRS, if they are temporarily experiencing an extreme economic hardship. There is no 'limited time," – that’s a sales pitch. Put simply, the CNC status is a tax controversy in which the IRS marks your account as "this person is too poor to collect from." That status doesn't mean that you don't owe the money; it just means that you can't pay right now, so the IRS goes into 'observation mode' and waits for you to show signs of being able to pay. Here's an example scenario:

 

  1. You fall behind on your installment tax payments.
  2. The IRS detects that you've fallen behind, and they terminate your installment agreement.
  3. The IRS re-engages its normal process of attempting to actively collect via calling, sending letters, inviting you to their office, and/or visiting your home or business.
  4. You still cannot pay.
  5. The IRS begins enforced collections, meaning they attempt to garnish your wages, seize your bank accounts, file liens against identified assets.
  6. You realize that they're going to come after you relentlessly (they are the IRS, after all) and that you can't afford to live if they keep messing with your paychecks. So, you talk to an agent and you demonstrate that paying what you owe – even by monthly installments - would create a severe economic hardship, such that you will not be able to pay your electric bill or buy groceries for your family. Furthermore, if your delinquency involves some form of paperwork (i.e. a tax return that was never filed, or withholding that was insufficient to meet your tax burden), you must resolve that problem as well. Finally, you file Form 433-A or 433-F, along with all of the statements, receipts, and paystubs that prove your hardship.
  7. The IRS will attempt to work with you to find an Offer in Compromise or other method of collecting on the debt first prior to using the CNC status. If they can squeeze something out of you, that’s the oreferred mode.
  8. Assuming that fails, the IRS puts the "Currently Not Collectible" status on your account, and they wait. Note that penalties and interest still accrue during this time - you just don't have to pay those penalties and interest until you're out of hardship.
  9. While they're waiting, you still pay your current taxes as normal; you just don't have to pay on the delinquent taxes you owe. If you fail to file or fail to pay, the CNC is dropped and collection efforts resume.
  10. If, on the documents you're filing in order to maintain your CNC status, your financial situation shows that you're doing well enough to begin payments on your existing debt, the CNC status is removed and collection efforts resume.
  11. Most CNC statuses come with a 'follow-up date' upon which the CNC automatically expires and the IRS collection efforts begin again. It may be possible to get back into CNC status by re-requesting, and thus obtain a new follow-up date.
  12. Finally, if your account remains in CNC status for so long that the debt expires (10 years in most cases), the CNC status ends and your account normalizes without any payments made on the debt (or the interest or penalties that accrued associated with that debt).

This process is long, full of numerous potential pitfalls, and it's not that great of an option anyway, as you have to live a life of poverty in order to utilize it. The one positive to CNC status is the knowledge that there is a scenario in which the IRS allows you to live and pay your bills without taking your grocery money. If you are behind on back taxes and are currently in (or on the road to) CNC status, it is important to seek professional guidance to determine your best path forward. At Chicago-Kent Tax Clinic, we provide free consultations and low-cost representation from attorneys with in-depth experience working with the IRS and in private practice. To speak with one of our skilled Chicago tax lawyers, contact us today at 312-906-5041.

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Posted on in IRS

qualified offer, tax court, Chicago Tax AttorneysYour tax return has been audited, and you're reasonably certain that the IRS is (mostly) wrong.  While your inclination might be to take your winning case directly to the Tax Court, there are very good reasons why you should submit a reasonable offer to settle the case before you file your petition starting the litigation.

According to the IRS' own rules, if you make an offer to settle the case administratively (i.e., with the IRS Appeals Division) that is "qualified", and the IRS rejects the offer and you subsequently succeed in the Tax Court, you may be able to recover the costs you incurred in connection with your attempts to administratively resolve the case.

So, what’s a Qualified Offer?  One that is:

  • Made at least 30 days before the case goes to trial in Tax Court;
  • Specifies an amount of liability that you are willing to accept and pay;
  • Designated by you specifically as a Qualified Offer; and…
  • Not withdrawn (by you) before:
    • The IRS rejects the offer,
    • The trial begins, or
    • 90 days go by after the offer is first submitted to the IRS,

Given the high representation expenses typically incurred when dealing with the IRS Appeals Division (and simultaneously preparing for likely litigation), that is a potentially massive amount of money you can save if you are successful in court after submitting the Qualified Offer.  And, there really is not a downside, other than the time and effort it takes to make certain you comply with the requirements.

Details Added by Tax Court

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preparing taxes, Chicago IL tax attorney"Four federal judges sitting on two different courts have all agreed that Congress never gave the IRS the power to license tax preparers, and an agency cannot just give itself such licensing authority." - Dan Alban, Institute for Justice attorney.

The IRS tried as hard as it could. From 2010 through 2014, they did everything in their power to grant themselves the right to certify tax preparers. This following the discovery in 2006 that upwards of 60 percent of all tax fraud was traceable to the preparers of tax documents rather than their clients. But in May of 2014, after a U.S. Court of Appeals backed up the judgment above (from Loving vs. IRS), the IRS chose not to appeal the case to the Supreme Court.

So It's Safe to Be a Return Preparer Now?

In short…not particularly. While the person for whom the tax return was prepared still generally ends up paying significant penalties and interest when the malformed or fraudulent return is discovered, that doesn't mean the preparer is off the hook. In particular, there are several categories of penalties that specifically apply to the preparer of a return-whether that person is the taxpayer or not. Among them are civil penalties for:

  • Understatement of liability due to unreasonable positions or willful/reckless misconduct.
  • Aiding or abetting the understatement of a tax liability on behalf of a taxpayer.
  • Failure to give the taxpayer a copy of their return, or to retain a copy.
  • Failure to sign, provide a proper TIN on or file a return.
  • Endorsing or negotiating a check made out to a taxpayer.
  • Failure to exercise due diligence determining ETIC eligibility.
  • Promoting abusive tax shelters.
  • Disclosing or misusing information provided to you by a client for preparation purposes.

And criminal penalties for:

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foreign account disclosures, Chicago tax law attorneyThe IRS recently finished a four-year rollout of a law called FATCA: the Foreign Account Tax Compliance Act. Explicitly, it says "Americans being taxed on their total international income, all financial institutions are henceforth required to annually turn over all data they have on any American using their service. Failure to do so will lock an institution out of all American markets unless they instead choose to withhold 30 percent of that American's deposits for tax purposes." In other words, for global financial institutions, FATCA is one tax controversy you definitely want to avoid at all costs.

FATCA has had a transformative effect on the nature of international finance, creating a level of transparency almost unheard of previously. After Credit Suisse pled guilty to willful FATCA violations and paid a $2.6 billion fine, the rest of the banking world pretty much scrambled to line up and hand the IRS any and all financial data they had on Americans. It's been an extremely effective tool for the IRS to prevent individuals and corporations from hiding money overseas.

Personal Impact

Of course, that's the big picture. To an individual person, the net effect is there is now a very painful cost-benefit analysis to be performed if you have any meaningful amount of unreported cash or accounts offshore. Because almost every financial institution in the world is complying with FATCA, it's essentially only a matter of time before you're caught and penalties are assessed.

Fortunately, the IRS has also restarted the Offshore Voluntary Disclosure Program (OVDP), a program that allows both individuals and corporate entities to voluntarily report money held overseas in exchange for a (significant) reduction in penalties assessed in response to the discovery of those funds. Don't think the information they get from FATCA means you can skip filing your Foreign Bank and Accounts Report (FBAR); it's still a vital part of the reporting process along with several other forms.

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