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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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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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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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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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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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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.

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