At IRSMedic, we like to say that knowledge is power. Understanding how the IRS works and what rights taxpayers have can turn a bad outlook into a positive resolution. “Jonathan” hired our firm to help him with years of unfiled FBARs and unreported foreign income. Wanting to stay in compliance with the IRS, he had always filed his returns, but he was never aware that he needed to include all his foreign investments and their gains as well. Jonathan was very worried about criminal charges, even though we didn’t feel he needed the full protection of OVDP and could make a streamlined submission. Yet, and you can’t blame him for being worried, Jonathan felt differently.
Jonathan had many different investments in India; rental investments, stocks & bonds, and PFIC investments. When I was assigned to Jonathan’s case, we discussed his returns and the amendments that we needed to make. Although he had always disclosed his domestic investments, he was worried how much his foreign income would change his tax liabilities. Also, going back eight years would mean just as many years of interest that he would owe for the oldest amended return.
Jonathan fully accepted and was ready to pay the 27.5% miscellaneous offshore penalty. But, what was really bugging him was his tax bill, which we still did not have a handle on. Taxes on foreign income are incredibly difficult due to the reality that they are the most complicated thing in the history of the world. While the IRM (Internal Revenue Manual) is — without a doubt — the most complicated tax manual in the world, the rules it contains on foreign taxation make sure it will remain that way forever. Jonathan kept on asking me, every time I spoke with him, “How much will this increase my liability?” “How much will this change my case?” Seeing how intricate the rules can be, answering questions like those is rarely a simple matter.
Now, Jonathan’s fears were normal. Additional income reported on a tax return will generally yield a higher balance due. But, as we revised and amended his returns, we noticed something out of the ordinary – Jonathan had many domestic mutual funds that had been invested in foreign companies. Because of this, he was allowed to use the foreign tax credit.
But it doesn’t stop there. Jonathan used the foreign tax credit previously on some foreign income that he did report; he had claimed the credit as a deduction (which is allowed). However, a credit is always worth more as a credit than a deduction! So we amended the return to accurately reflect both his foreign and domestic investments, but instead of using the foreign tax credit as a deduction, we were able to use it to his benefit as an actual credit. The proper use of this credit, along with the additional credits available, turned Jonathan’s return from one where he would owe money to one that yielded him a refund!
We continued to amend returns for the entire eight-year OVDP period. We used the credit properly on IRS Form 1116 with all the amendments and were able to file accurate returns that appropriately reflected tax liabilities and the need to issue a refund!
Many times the taxpayer is not fully aware of all the appropriate uses of credits on a tax return. This lack of knowledge made Jonathan pay far more than he should have. Seeing how complicated the tax code is, you can’t blame anyone for not knowing the best ways to use credits and deductions. It takes years of experience and study to get to the point where you can accurately find the best way to complete a return or settle a tax debt. Luckily for Jonathan, we were able to find this important information and save him a substantial amount of money. And now, going forward, this little bit of knowledge will save him thousands of dollars per year, which will help him make up for the 27.5% offshore penalty he had to pay.
Note: Had Jonathan not wanted to make a full OVDP, he could have made a submission under the informational & amended return procedures that were announced on August 6, 2015. The process provided is even easier than the streamlined process. However, Jonathan was afraid that he was at risk for prosecution, even though there were no facts to support such a prosecution against him. For him, what was most important was to remove as many worries as possible, which came at a financial cost. However, when you’re living a life of worry and stress, a decision like Jonathan’s is easy to understand and makes a good deal of sense.
If you find yourself in a position similar to that of Jonathan, take a minute to relax. It’s difficult to not be stressed, but it’s important for you physical and mental health that you remain calm. Credits, deductions, and especially foreign taxation can be incredibly confusing. If you find yourself overwhelmed, don’t hesitate to reach out to someone who can help. Proper representation can help you get rid of your stress and find the best possible resolution to your taxation case. If you need assistance, contact us. We can help.
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