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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

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  • Not withdrawn (by you) before: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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Form 1099-K, IRS, Chicago Tax LawyerBusiness tax preparation is becoming increasingly complicated each year.

According to a recent initiative by the IRS, all businesses that take credit card payments must now complete Form 1099-K: Payment Card and Third Party Network Transactions. This requires businesses to list, month by month, how much receipts they brought in through third-party payment methods, such as  credit cards, debit card swipes, and PayPal invoices. If the IRS believes, after analysis, that the amounts you are reporting on Form 1099-K are too small relative to your industry or business size, they will contact you and ramp up the inquiries.

Analyzing a 1099-K

Of course, there doesn't seem to be a lot to analyze in a form that essentially asks you for a monthly total of your third-party payments and little else, but the IRS is, of course, a step ahead.  For example, they have created a massive database of Taxpayer Identification Numbers (TINs) and real names, which is used in the analyzing process. A business owner submits his company’s transaction records (which include records of the names on each card swiped/payment made) and those records are potentially 'matched' with the receipts turned in under each of those individual TINs.

The idea here is that, by comparing what you're reporting as your income vs. what each individual customer is reporting as their outflow, the IRS will be able to more accurately determine who is misreporting and who is not. Of course, it's not as black-and-white as that for a number of reasons - the most obvious being that transaction records don't keep track of how much of a debit card transaction was 'cash back' that didn't actually provide any income to the business.

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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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idr, audit, Chicago Tax AttorneysThis is one of the more often-asked tax controversy questions.  I’ll  just state the obvious first: simply ignoring the IRS is never going to get you the result you want. The chances of the agency forgetting about you or letting your case "slip through the cracks" is about …nil.

But, let's look at the actual IRS audit process to more fully answer this question:

The Audit Information-Gathering Process

  1. Your return is reviewed, and one or more "red flags" regarding it pop up (or, very rarely, it's chosen for a "random audit" which goes in deep and potentially takes apart your  whole return).
  2. The agent conducting the review determines which documents you (should) possess, that would most effectively answer the questions they have or substantiate the subject deduction claimed.
  3. The agent creates an Informal Document Request (IDR) that asks you (or a third party such as a tax preparer) to provide the documents, or to instead provide a valid reason why those documents are being withheld.
  4. If you don't respond to the IDR in time, the agent will consider sending an administrative Summons, compelling you to appear before him with the documents and submit to an interview.
  5. You can attempt to have the Summons legally "quashed" by filing a motion in federal district court (a very difficult maneuver; only 6 cases out of 117 in 2013 ended without a complete victory on the IRS' part).  You will need to present one or more  compelling reasons why the Summons was issued in error or for an illegal purpose.
  6. If you don't respond to the Summons in time, the agent directs the case to an IRS lawyer, who will decide whether or not to ask the Department of Justice to  enforce the Summons. If they don't, the audit will proceed anyway, the agent typically obtaining the documents he wants from third parties (banks, customers, etc…).

In short, it's rarely to your benefit to ignore an IDR – and it can definitely put you on the agent's bad side, which obviously is not a good thing. If the agent does decide to issue a Summons, its best to consult a professional to determine the scope of your response.

IRS audits can be a scary thing and it is important to have all your ducks in a row in order to emerge from the process successfully, or at least minimize the potential damage At Chicago-Kent Tax Clinic, we offer low-cost audit representation from professionals with in-depth experience working both for the IRS and in private practice. For a free consultation with one of our skilled Chicago tax lawyers, contact our office today at 312-906-5041.

interest abatement, tax penalties, Chicago Tax AttorneysSo you've been unable to pay your taxes for a legitimate reason, and your taxes have accrued both interest and penalties because of the delay. I wrote last week about how to get the penalties abated for various types of 'reasonable cause’. Today, I’ll talk about getting the interest abated. In short: it probably ain't gonna happen.

Internal Revenue Manual Section 20.2.7.1 explicitly contains this warning in bold: "reasonable cause is never the basis for abating interest". In other words, it doesn't matter if you were evacuated from the hospital (where you were recovering from a stroke) due to a bomb threat and emotionally devastated because your mother passed away a day earlier and you're dead broke and need every cent you have to feed your three children and your financial advisor told you not to worry about it; you still owe the interest from your late payment. There's not even an option under the law for an IRS agent to have pity on you - the interest is due no matter what.  Why?  Its all bout the "time value of money", Congress’ justification for requiring interest accruals on all outstanding tax debts.  The idea is that you have had the government’s money all along, since the due date, and it could have been earning interest in the bank…

Unless…

Nevertheless,  there are six very limited circumstances in which the IRS is given the statutory authority to abate the interest on an account, as follows:

  1. The interest itself was assessed illegally or in error;
  2. The interest accrued as a result of "unreasonable error or delay" on the part of an IRS officer;
  3. The interest accrued on an erroneous refund;
  4. The interest accrued on a deficiency that the IRS didn't identify within its own time limits (generally speaking, 12 months);
  5. The taxpayer is living in a Federally-acknowledged disaster area;
  6. The taxpayeis participating in an active war zone.

"In Error"

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abatement, penalty abatement, Chicago Tax LawyersThe IRS, naturally, does not like to remove a penalty it has assessed. No matter how unfair these penalties may seem, you will still have to put in some work to get a civil penalty abatement to stick. That said, there are a fair number of reasonable causes upon which you can base a compelling argument:

Ordinary Business Care and Prudence

This category of abatement justification simply means "you did your best to pay your taxes, but couldn't for reasons beyond your control." Generally speaking, if you're not already a regular and conscientious taxpayer, you will not get the IRS to agree to this basis for abatement. But if you really did do everything in your power, and you've been compliant with your filing and payments for the past several years, you may be able to convince them that they should eliminate the penalty…this time.

Death, Serious Illness, or Unavoidable Absence

The "medical causes prevented me from paying" argument, if it's provable and true, is probably the most successful form of abatement request. It applies to individuals exactly like you'd expect, but it can also apply to businesses and institutions if there's only one person in charge of taxes, and if the businesses exercised 'ordinary business care and prudence' to try to get the taxes paid anyway and failed.

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tax audit, challenging an auditThere is actually such a thing as a "simple audit"; these are so-called "correspondence audits," where the IRS sends you a document inquiring about a single aspect of your return. You send the form back with an answer, they adjust your return as necessary, and you move on with life. About three quarters of all audits are of this variety, and professional tax audit representation is often not needed in such instances.

But correspondence audits are not what most people have in mind when they talk about "getting audited." To most taxpayers, an IRS audit means you've been called into their office to answer questions, and you'd better be prepared. If you did something wrong, you pay. If you made a mistake, you pay. If you don't have the proper records to back up your claims, you pay. Of course, because these "field audits" generally happen at least two years after your return is filed, producing the necessary documentation is not always easy…

By far, the biggest way to make a field audit into a nightmarish travail is to challenge the IRS on their assertion that you owe more money. There's a predictable set of steps you will go through if you disagree with the IRS audit findings:

  • First, you'll talk to the agent you believe made a mistake in your audit;
  • Next, you'll try to convince the agent and/or hismanager of the mistake;
  • If the manager disagrees, you can try the IRS Appeals process ;
  • Finally, if the appeals officer doesn’t settle with you, you can take your case to Tax Court.

Generally speaking, moving beyond the managerial level is going to get very difficult, very quickly. Contrary to popular belief, the IRS doesn't like to do audits - they typically lose money on the audits they perform. This means, however, that if you're going to make them spend even more time and money on your case, they may be inclined to do anything they can to make their effort worthwhile.

How? This is most commonly accomplished by expanding their examination of your return to different issues and different timeframes - even going so far as to include previous or subsequent returns into the case if they think they can make it profitable to do so. In other words, what you thought was going to be a look at the home office deduction you took in 2013 becomes a numerical colonoscopy of every business expense you've claimed since 2010. Suddenly there's so much more at stake than the one $1,000 error you're pretty sure the return preparer made.

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