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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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clock, statute of limitations, Chicago Tax AttorneysIt recently came to your attention that you made a mistake on the tax return you filed a couple of years ago.  Do you still need to worry about it?  And if so, for how much longer?  What if you discovered this tax controversy because the IRS sent you a letter pointing out your mistake and telling you that you now owe them more money then you believed at the time?

Without the Letter

If the IRS hasn't alerted you to a problem with your taxes, they must "assess" any additional tax within 3 years from either the due date of the return or the date the return was actually filed (if filed late). There are two exceptions:

  • If the error involves an omission of 25% or more of the gross income reported on the return, they get 3 additional years.
  • If the IRS can prove that you filed a false tax return, a fraudulent tax return, or failed to file any return at all.  In such cases, the statute of limitations goes out the window and they can come after you at any time (i.e., no statute of limitations period on making an additional assessment).

With the Letter

If you've received a letter from the IRS telling you that you owe more taxes for a particular year, this generally means you have already been assessed , so you are now dealing with the "collection" statute of limitations.  

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U.S. Tax Court, tax law, Chicago Tax Lawyers"I guess you will have to go to jail. If that is the result of not understanding the Income Tax Law I shall meet you there. We shall have a merry, merry time, for all of our friends will be there. It will be an intellectual center, for no one understands the Income Tax Law except persons who have not sufficient intelligence to understand the questions that arise under it." Senator Elihu Root, commenting on the complexity of the very first income tax law in 1913. The U.S. Tax Court began its existence as the Board of Tax Appeals in 1924, when it was still a part of the Executive branch. In 1942, an act of Congress renamed it "The Tax Court of the United States," but it was still a part of the Executive branch and existed in the same building as the IRS. It wasn't until 1969 that a second act of Congress converted it into a 'legitimate' Court - part of the Judicial branch - and renamed it (again) as the "U.S. Tax Court."  

In 1974 the U.S. Tax Court finally got its own building in the heart of Washington D.C. Despite its centralized location, the Tax Court  "travels", hearing cases in cities all over the country.  In the major metropolitan areas (Los Angeles, New York, Chicago), the Court will visit and hear cases mostly every month, while in less populous locales, the Court will visit once or twice a year (Billings, Anchorage, Knoxville).

Two Kinds of Cases

If the IRS claims that you owe money, but there is no single year for which you owe $50,000 or more, you can elect for your case to be heard under the 'small' tax case procedures of the Court.  As with the non-small ("regular") cases, you'll generally be required to pay a $60 fee when you file your "petition", which is the document on which you make the small case procedure selection. What is the difference between small case and regular Tax Court procedures? In small tax cases, the Court "relaxes" the rules of evidence, so that if it is not economical for you to hire an attorney (i.e., the amount at issue doesn’t warrant legal fees or you simply do not have the resources to pay a representative), you will not be held to the same strict rules of evidence that would otherwise apply.  However, small tax cases, by statute, cannot be appealed; whatever the judge decides, ends the matter with finality. Regular tax cases are, therefore, a much more formal affair.  But, there is no rule that requires you to hire a lawyer, even in a regular tax court case.  Note that the Tax Court has no equivalent of the 'public defender;' if you cannot afford an attorney, one will

Stipulations

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litigation hazard, tax appeals, Chicago Tax Attorneys"A fair and impartial resolution is one which reflects on an issue-by-issue basis the probable result in event of litigation, or one which reflects mutual concessions for the purpose of settlement based on relative strength of the opposing positions where there is substantial uncertainty of the result in event of litigation." - Internal Revenue Manual section 8.6.1.3(2). When you've sent a Letter of Appeal to the IRS asking for an administrative review of a decision that was made by the Examination function regarding your tax dispute, the IRS assigns an Appeals Officer to determine of there is a possibility for settling the issue. The mission of the Appeals Officer is to resolve your case in a way that:

  • Avoids litigation;
  • Is "fair and impartial";
  • Will encourage voluntary compliance;
  • Represents the integrity and efficiency of the IRS.

Because the Appeals Officer's mission explicitly includes the objective of avoiding litigation, they'll generally begin the discussion by going over the various ways in which you could settle out-of-court by reaching a compromise that fully embraces any hazards to the government of litigating the issue.

Hazards of Litigation Defined 

What the Appeals Officer is actually determining is a quantitative analysis of:

  • The likelihood that, if the case goes to Tax Court on the liability issues, what are the chances the government will prevail, and what are the chances that the taxpayer will prevail.
  • The cost of litigation to the government is simply not an issue.

Application of the Hazards of Litigation Standard

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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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summons, IRS appointment, Chicago Tax LawyersIt is rarely a good idea to ignore IRS audit correspondence "inviting" you to an examination of your tax return. If the Service sends you a letter unilaterally scheduling a meeting for an office audit, confirm (or reschedule) the appointment, get professional help to prepare you, and show up.  Perhaps the only time you might want to second-guess the audit participation, is after you and your representative conclude that there are potential criminal implications, which justify a strategy of silence.  But this is certainly not the norm. What if the time for the scheduled first meeting has come and gone, and you didn’t go, out of fear, lack of preparation, or simple inadvertence?

IRS Responses to Examination "No-Shows"

Normally, the IRS will send a second letter, allowing for a rescheduling of the appointment.  But, anticipating another "no-show", the Service will generally take two simultaneous steps:  First, the auditor will start examining the return without you – securing records from third party sources (i.e., bank accounts, customer records, etc…); and 2) you may very well receive an administrative "summons" requiring your attendance at a compelled interview (and also demanding that you bring with you to the interview certain identified documents).

Failure to Obey an IRS Summons

When you fail to obey the summons, it's not the IRS that ultimately forces your compliance - it's a federal district court.  If you fail to appear in response to the summons, the IRS will typically seek the assistance of the Department of Justice to "enforce" the summons, by obtaining an order from the court. If you have a good reason for not complying, you can present your defense to the court in response to the government’s motion to enforce the summons. Or, you can be more proactive and on your own file a "Motion to Quash" the summons with the district court, seeking a ruling that the IRS has exceeded its authority in asking you for particular records or seeking your submission to an interview. Unfortunately, there are not a lot of good reasons for failing to obey the summons. As long as the IRS has complied with the statutory procedural steps in issuing the summons, and so long as the information being sought is relevant, for a legitimate purpose, and not already in the government’s possession, you are pretty much stuck. You do have the legal right to attempt to quash a summons initiated by the IRS, but that's a failure-wrought legal avenue that you probably shouldn't attempt. Failure to comply with the Court order could subject you to an order finding you in contempt of court; i.e., possible time in the federal lock-up.

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fatca, reasonable cause, Chicago Tax LawyersThe Foreign Account Tax Compliance Act (FATCA) requires every taxpayer with certain amounts of money in a foreign bank account or foreign investment vehicle to report that money to the Internal Revenue Service (IRS) each year. The deadline for filing your Foreign Bank Account Report (FBAR) for 2015 will be June 30th, 2016. If you file late, the penalties for doing so can be severe; especially if it is determined that you did so "willfully."

For most people, however, filing late is not a matter of willfulness; it's a matter of unfortunate circumstance. The IRS recognizes this, and as such they have created what is known as the "Reasonable Cause" Exception IRM 4.26.16.4.3.1 (07-01-2008). Under the "Reasonable Cause" Exception, someone that shows a good faith effort to file in a timely fashion can ask to have their circumstances examined by the IRS to determine whether or not they exercised what the IRS calls "ordinary business care and prudence" in meeting their obligation to file. If they did, and they failed through no fault of their own, they can have their penalties abated.

What is "Reasonable Cause"?  

Unfortunately, there is no hard-and-fast answer to the question of what exactly constitutes "Reasonable Cause." The IRS will examine your specific situation, including the precise events that led to you missing the deadline and your general background to help define what "ordinary business care" would look like for you as an individual. They will, in particular, inquire about:

  • Why you failed to file your FBAR on time;
  • What exact circumstances you consider 'beyond your control' that contributed to your failure to file on time;
  • How many times you have failed to keep up with your tax burdens in recent history; and
  • How long it took you to become compliant the last time you fell behind on your obligations to the IRS.

Ignorance of the Law

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innocent spouse, tax law, Chicago Tax AttorneyYour ex-husband, either accidentally or deliberately, failed to report income and the IRS caught it.  Now, you have a letter demanding that you owe the Service several thousand dollars in tax, penalties and interest, even though you had no income of your own that year and have since divorced the bum.  Is there any relief for spouses who had nothing to do with the issue that has now blown into a full-fledged tax controversy?  Perhaps.

Joint-and-Several Liability

When you file a joint tax return with your spouse, each one of you is "jointly and severally" liable for any understatement or underpayment of tax in connection with that return.  This means that each taxpayer is responsible for paying the

When you file a joint tax return with your spouse, each one of you is "jointly and severally" liable for any understatement or underpayment of tax in connection with that return.  This means that each taxpayer is responsible for paying the entire tax debt (though the IRS cannot collect more than the total amount of the liability).  Even if you had nothing to do with the preparation of the tax return, with the omission of the income or the overstated deduction, or even with the IRS audit, both you and your spouse are on the hook for the whole thing.

Innocent Spouse Relief

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tax help, LITC, Chicago Tax LawyersLow Income Taxpayer Clinic (LITC) is exactly what it sounds like; a place where people with IRS disputes who cannot afford a private tax lawyer's fees can go to get the help they need for no charge. If they qualify, these taxpayers can get assistance with IRS (and related state) audits, appeals, collections and tax litigation. LITCs are also frequently resourced for taxpayers who speak little to no English, and in some locations for those who communicate primarily or exclusively through sign language.

Who Pays For LITCs?

The Federal Government provides a matching grant (up to $100,000) for each dollar spent by the LITC in its normal operations.  The grant is administered by the Taxpayer Advocate Service of the IRS.

Can You Use The Services of a Low Income Taxpayer Clinic?

Basically, you have to have an active dispute with the IRS, and have gross household income below the annually-established threshold.  This threshold is specifically set at 250% of the government established poverty level. Currently, this means:

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