Archive for the ‘IRS Problems’ Category

It is not uncommon for American citizens that move abroad to unintentionally fall out of compliance when it comes to their tax filing requirements.

Unfortunately, ignorance of the law is not a valid excuse and the IRS will not listen to any excuses (Ok, they will listen to some, but ‘not knowing’ is not one of them. Eventually perhaps they will understand that they make it increasingly difficult for taxpayers to be compliant with their ever growing and convoluted requirements and that printing a fine line on the last page of our passport isn’t really enough).

If your only issue is non-compliance (i.e. not filing your tax returns) you are at least just looking at an administrative issue and you will be back on their good side in no time. If your wages abroad were in excess of the foreign earned income exclusion amounts, or if you have other sources of income which put you in a taxable income situation, then you have the issue of not only having to pay back taxes but also their related penalties and interest. Penalties will be

- Late filing penalty – 5% of unpaid balance for each month or part of a month that the return is late – up to a maximum 25%.
- Late payment penalty – 0.5% the unpaid balance for each month or part of a month, up to a maximum of 0.25%
- Add interest on your balances. Rate fluctuates between 4% and 8% throughout the past 6 years.

Remember that if you pay taxes to a foreign government you can also take advantage of the foreign tax credit – which may eliminate any taxes due to the US.

If you intentionally withheld information from the IRS to evade paying US taxes, then you want to make sure you discuss your situation with a tax attorney, not just a CPA Firm (Tax Planner CPA does have an attorney on staff so we can help).

At this point you are probably upset that in addition to potentially having to pay taxes to the US you will incur tax preparation fees. All I can say is that while I agree that it is probably unfair for a government to put you in a position where you have to pay someone to prepare your taxes because their code is so complicated, at the same time I know that a qualified professional will be able to find tax breaks that will more than offset their fees. This is not always the case, and some taxpayers with less than complicated situations should indeed consider self preparing.

To the point. If you have not filed tax returns, you need to file them as soon as possible. Not filing is a criminal offense, and not paying your taxes is just a civil offense (See http://taxplannercpa.com/WP/foreign-earned-income-exclusion/to-file-or-not-to-file-part-1-criminal-penalties-for-not-filing/ ). So don’t let the fear of a tax bill stop you from complying with your duty. If we are talking about more than 6 years of non filing, you have a set of issues to overcome: Availability of information being the biggest hurdle, potential interest and penalties, and the professional fees you will incur to solve the problem.

It is common IRS practice to look for 6 years back of tax returns. Their immediately available computer records only hold back 6 years, and if you were to call them and ask what to do, they will ask you to file only 6 years back. This is incorrect guidance. You must file a tax return for each year where your gross income was above $4,000 or $400 if self employed (Those figures change historically, but that is a good threshold). If you act on their advice, here are the issues you need to consider:

First and foremost the Statute of Limitations. The Statute of limitations refers to how long the IRS has to inquire about your tax return, audit you, charge taxes, penalties and interest, etc.
If you report all your income, the statute of limitations is 3 years from the time your tax return is due, or the time you actually file – whichever is later. Code section 6501(a).
If you under report your gross income by 25% or more of the amount shown on your return, then the statute of limitation is 6 years.
The statute of limitations does not apply if you file a fraudulent return with the intention to evade taxes (i.e. They can come after you 30 years after you filed said return).

You also have 2 years to claim a tax refund.

Note how the statute of limitations depends on the date when you filed your tax return. If you follow their “advice” (Which will not be on paper, it will simply be an agent’s statement on the phone which you should definitely record their ID number for reasons explained below), you are leaving the door open for the IRS to come asking about your tax returns and issues forever. Sure, it is an attractive option because it resolves the issue of information not being available and decreases the overall professional fees you will incur, but it’s not a good idea to follow this procedure if you expect to owe taxes for years beyond the 6th one.

Note that I do not believe it is a good idea to follow the “6 year back” advice. I think a taxpayer is better suited filing all his tax returns, as the code calls for, and not having to worry about the IRS coming to look for them 20 years later.

Some US Expats have spent a good amount of time researching their situation and have found that the statute of limitations for collection expires in 10 years – that is , the IRS cannot collect and it become bad debt after 10 years. A taxpayer could enter into payment agreements and at the end of 10 years, regardless of the balance left, he would owe the IRS zero. See Section 6502(a)(1) of the Tax Code and section 301.6502-1 of the Tax Regulations. This sounds attractive for some expats, but don’ get too excited: Refer to code section 6503(c)Taxpayer Outside United States.—

The running of the period of limitations on collection after assessment prescribed in section 6502 shall be suspended for the period during which the taxpayer is outside the United States if such period of absence is for a continuous period of at least 6 months. If the preceding sentence applies and at the time of the taxpayer’s return to the United States the period of limitations on collection after assessment prescribed in section 6502 would expire before the expiration of 6 months from the date of his return, such period shall not expire before the expiration of such 6 months.

And if you’re into reading the code, and think that there is some wording that you could interpret to your advantage, note that our analysis has us firmly believe that the statute of limitations on collections does not apply to an expat (Each situation is unique, so please do ask). And if you still think you can find arguments, note that the IRS has more tools: See the internal manual here http://www.irs.gov/irm/part5/irm_05-001-019.html Which pretty much gives them the ability to override the above: “Taxpayers currently in the United States who had previously been outside the United States for at least six consecutive months since the date of assessment will generally have a maximum of five years added to their CSED for prior IRC 6503(c) suspensions” and “International taxpayers who are being reported as currently-not-collectible with closing codes 03 (unable to locate), 06 (International) and 12 (unable to contact) may be subject to ongoing recalculations and updates. Again, a determination of significant collection potential should be made when determining how long the collection statute should be recalculated”

This post does not address the penalties for not filing your TDF 90-221 and 5471 forms. See:

http://taxplannercpa.com/WP/fbar/offshore-activity-related-penalties/

and

http://taxplannercpa.com/WP/fbar/fbar-penalties-if-you-honestly-didnt-know-about-this-requirement/

So let’s say that you have run into some problems with the IRS and have unpaid tax liabilities.  You got that letter in the email and now you have a large sum of money that needed to come up with immediately.   And what if you legitimately do not have the means to pay the amount owed?  One of your options is an offer in compromise (OIC).  An OIC basically allows you to negotiate a deal with the IRS.  Essentially, it’s an agreement between the IRS and the individual taxpayer that allows the taxpayer to settle his or her outstanding liabilities for less that the total amount owed.

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U.S. Court of Appeals Judge Learned Hand, often described as a legal philosopher, and presided in that and similar appointed court positions for over 50 years, is famous for the following quote, taken from the 1934 case of Gregory v. Helvering:

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”

Sidenote: I find it interesting that in that court document ”treasury” is not capitalized like it is in modern usage, but “Courts” is. I chalk it up to signs of the times.

Learned Hand’s apt dissertation is the essence of tax avoidance - take advantage of every loophole left unplugged, all deductions allowed and each and every write-off you’re entitled to under the law. The point is, avoiding paying more tax than you absolutely have to pay is not only legal, but encouraged.

Tax avoidance is encouraged in two ways. First, through the increasing complexity of the U.S. Tax Code. The more convoluted the Code becomes, the less likely those who attempt to “go it alone” concerning tax matters will avail themselves of much benefit. The more an individual, family or business invests in expert CPAs and tax attorneys to assist them in navigating the murky soup of tax regulations, pronouncements, letter rulings and interpretations, the more likely the taxpayer will save more money from the IRS’s collection hat. The second way is achieved through the fact that the more experienced and sophisticated their tax CPA or attorney is, the more likely the client will be steered clear of legal pitfalls, nondefensible tax positions, frivolous tax arguments and IRS audit red flags. These points are especially important for those expatriate Americans, because even more tax law complexities apply to citizens residing in foreign countries.

Tax evasion is just plain illegal. There are two sides to the law, one of which you do not want to find yourself on: following the letter and possibly the intent of the law (tax avoidance), and placing yourself in harm’s way (tax evasion). There are civil tax penalities leveled against tax evaders for tax fraud, failure to pay, failure to file, accuracy-related penalties, and penalties relating to certain foreign persons, among many others. This does not include court fees, attorney fees and interest on unpaid portions of assessed tax liability. There is also the criminal prosecution process that can lead to indictment and possible incarceration.

Remember, Al Capone was only imprisoned due to being found guilty of criminal tax evasion. Among all of the horrible things he did, why is it that he was only prosecuted for tax evasion? Because it is often easier to prove than other felonious activities. Paper trails are a lot cleaner to follow than those evidence trails left behind after other crimes, from a forensic standpoint. Also, tax evasion often occurs over the course of many years, making the probability of successful prosecution much higher, since the evidence is spread across a greater span of years. If an IRS auditor or other forensic accounting detective for the prosecution can’t find what they’re looking for in a specific year, they move on to other years with which they might have luck.

Don’t want to subject yourself to being imprisoned at “The Rock” like Scarface (Capone)? Then make sure your tax CPA and/or tax attorney with domestic and international tax expertise keeps you on the safe side of the Great Divide of Tax Evasion vs. Tax Avoidance.