Find out if you qualify for Earned Income Tax Credit EITC / EIC

EITC, the Earned Income Tax Credit, sometimes called EIC is a tax credit to help you keep more of what you earned. It is a refundable federal income tax credit for low to moderate income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

To qualify, you must meet certain requirements and file a tax return, even if you do not owe any tax or are not required to file.

Do You Qualify for EITC?

To qualify for EITC you must have earned income from employment, self-employment or another source and meet certain rules. Also, you must either meet the additional rules for workers without a qualifying child or have a child that meets all the qualifying child rules for you.

Earned Income Tax Credit Rules for Everyone

To qualify for Earned Income Tax Credit or EITC, you and your spouse if married and filing a joint return, must meet all of the following rules:

  1. Have a Social Security Number that is valid for employment
  2. Have earned income from employment, self-employment or another source
  3. Cannot use the married, filing separate filing status
  4. Must be a U.S. citizen or resident alien all year or a nonresident alien married to a U.S. citizen or resident alien and choose to file a joint return and be treated as a resident alien
  5. Cannot be the qualifying child of another person*
  6. Cannot file Form 2555 or 2555-EZ (related to foreign earned income)
  7. Your Adjusted Gross Income and earned income must meet the limits shown on the Income Limits, Maximum Credit Amounts and Tax Law Updates Page
  8. Your investment income must meet or be less than the amount listed on the Income Limits, Maximum Credit Amounts and Tax Law Updates Page

After you meet the EITC rules for everyone, you must also meet the rules for either workers without a qualifying child or have a child that meets the *qualifying child rules.

Find out if you are eligible for the EITC by answering a few questions and providing basic income information, using the IRS’s online EITC Assistant web tool. The assistant also helps determine if your child meets the rules for a qualifying child and estimates the amount of your credit.  Find the English EITC Assistant here or o haga click aquí para seleccionar la Versión en Español del Asistente.

Special EITC Rules

There are special EITC rules for members of the military, ministers, members of the clergy and those receiving disability benefits. Find out more about the special EITC rules.

Rules for those Without a Qualifying Child

If you and your spouse, if filing a joint return, meet the EITC Rules for Everyone and you do not have a qualifying child, you may be eligible for EITC. Find the rules for those without a qualifying child here.

EITC Income Limits, Maximum Credit Amounts and Tax Law Updates

See the EITC Income Limits, Maximum Credit Amounts and Tax Law Updates for the current year, previous years and the upcoming year.

Special EITC Rules

Special EITC rules for members of the military, ministers, members of the clergy, those receiving disability benefits and those impacted by disasters. Read more about the special rules.

Disability and EITC

Many persons with disabilities or persons having children with disabilities qualify for the Earned Income Tax Credit or EITC. Find out more about Disability and EITC.

Please contact Chicago CPAs at 773-728-1500

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Filing and Paying Your Business Taxes

Business Taxes

The form of business you operate determines what taxes you must pay and how you pay them. The following are the four general types of business taxes.

Income Tax

All businesses except partnerships must file an annual income tax return.  Partnerships file an information return.  The form you use depends on how your business is organized. Refer toBusiness Structures to find out which returns you must file based on the business entity established.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year.  An employee usually has income tax withheld from his or her pay.  If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax.  If you are not required to make estimated tax payments, you may pay any tax due when you file your return.  For additional information refer to Publication 583.

Estimated tax

Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. For additional information, refer toEstimated Taxes.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves.  Your payments of SE tax contribute to your coverage under the social security system.  Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Generally, you must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

  • If your net earnings from self-employment were $400 or more.
  • If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization.

Note: There are Special Rules and Exceptions for aliens, fishing crew members, notary public, State or local government employees, foreign government or international organization employees, etc.

Employment Taxes

When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file.  Employment taxes include the following:

  • Social security and Medicare taxes
  • Federal income tax withholding
  • Federal unemployment (FUTA) tax

For additional information, refer to Employment Taxes for Small Businesses.

Excise Tax

This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following.

  • Manufacture or sell certain products.
  • Operate certain kinds of businesses.
  • Use various kinds of equipment, facilities, or products.
  • Receive payment for certain services.

Form 720 – The federal excise taxes reported on Form 720 (PDF), consist of several broad categories of taxes, including the following.

  • Environmental taxes.
  • Communications and air transportation taxes.
  • Fuel taxes.
  • Tax on the first retail sale of heavy trucks, trailers, and tractors.
  • Manufacturers taxes on the sale or use of a variety of different articles

Form 2290 – There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Report the tax on Form 2290 (PDF). For additional information, see the instructions for Form 2290 .

Form 730 – If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. Use Form 730 (PDF), to figure the tax on the wagers you receive.

If you have questions regarding above, please contact Chicago Accountants at 773-728-1500!!

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IDENTITY THEFT ISSUES

The IRS, in conjunction with the Justice Department and other Federal, state, and local agencies, has intensified their efforts at preventing, detecting, and resolving identity theft and refund fraud.

The identity theft and refund fraud effort has involved 734 enforcement actions involving 389 individuals. The effort included 109 arrests, 189 indictments and complaints, and 47 search warrants.

In addition, the IRS began a special compliance effort that began on
January 28, 2013. IRS auditors and criminal investigators will visit 197 money service businesses to help make sure that these businesses are not assisting identity thieves or refund fraud when cashing checks.  These compliance visits took place in 17 high-risk areas identified by the IRS which included: New York, Philadelphia, Atlanta, Tampa, Miami, Chicago, Houston, Phoenix, Los Angeles, San Diego, El Paso, Tucson, Birmingham, Detroit, San Francisco, Oakland, and San Jose.

As part of this effort, the IRS has made a significant increase in the number and quality of identity theft filters in their processing system for the 2013 Filing Season. These filters are designed to spot fraudulent tax returns before the refund is issued.

Also, by late 2012, the IRS has more than doubled the number of IRS employees that are devoted to identity theft related issues.  They have also trained 35,000 employees that work with taxpayers to recognize identity theft indicators and help people victimized by identity theft.

If you have been a victim of identity theft and have not contacted the IRS about this, you should  contact the IRS Identity Protection Specialized Unit at 1-800-908-4490. Once you contact them, the IRS will ask you to complete Form 14039 (IRS Identity Theft Affidavit).

If you receive a notice from the IRS indicating that you might have been the victim of identity theft, you should follow the instructions on that notice.

For more information on what the IRS is doing to help prevent and combat identity theft and what a taxpayer should do if they might have been a victim, see the following:

If you have any questions we, Chicago Accountants are here to help you 773-728-1500!!

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What to Expect for Federal Refunds for the 2013 Filing Season

It is important to set your  expectations for when the IRS will be sending refunds during the upcoming 2013 Filing Season and beyond.

Due to the increase in fraud and identity theft, the IRS is increasing their fraud filters during the processing of all individual returns. This means that a larger number of returns will be reviewed therefore, processing will take longer and the refund will be sent out later for these returns.

The IRS messaging for refunds for the upcoming filing season will be that refunds will be sent to the taxpayer within 21 days from the time the return has been accepted. This message will be the same on the IRS website, “Where’s My Refund?” page, and when a taxpayer calls the IRS help desk.

The refund cycle chart has been eliminated.

You will also notice the following changes to the “Where’s My Refund?” tool for the upcoming filing season:

  • The expected date of when the refund will be sent will no longer be given when the return begins to be processed.
  • The refund status will be presented by way of a status bar as follows:
    • Return Received – From the time the return is received until the refund has been approved the message will be that the return is being processed and that the refund will be sent in less than 21 days.
    • Refund Approved – A date the refund is scheduled to be sent to the bank will be given.
    • Refund Sent – The date the refund was sent.
  • The taxpayer will be able to see the status of their return within 24 hours after their return has been accepted.

The IRS has also begun sending out an additional message to taxpayers that they should not be making major purchases during the holiday season solely on the expectation of when they will receive their refund before the bills arrive.

To learn more see the following:

Please call us, the CPAs in Chicago, at 773-728-1500 if you need help with your individual or corporate tax return.

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How to Deduct Auto Expenses

The Internal Revenue Service frequently audits deductions for auto expenses, and the documentation requirements are fairly complex. This should not discourage you from taking all the deductions to which you are entitled, however, since we have had great success at defending auto expense deductions in IRS audits. What is important is to keep the necessary records then you have nothing to fear.

The proof of your auto expense is straightforward, but you need to document it:

  • Car ownership Registration and/or purchase contract
  • Your total miles driven, repair bills from the beginning and end of year showing odometer readings, and
  • Your business miles driven contemporaneous records listing business appointments, etc., and the mileage incurred.

The above items are sufficient to claim the “standard mileage” deduction which is set at regular intervals by the IRS (55.5 cents per mile for the year 2012). If you elect to use the “actual expense” method, you must also document:

  • The cost of your vehicle or value when you placed it in business use To calculate the depreciation deduction allowed by the IRS
  • Gas, oil, repairs, registration, insurance, payments, and any other vehicle expenses. The actual expense method is appropriate for a relatively expensive vehicle that is not driven a lot of miles during the year. The standard mileage method is more appropriate when an inexpensive car is driven a lot. If you want to elect the standard mileage method in any year you use your car, you must use it in the first year. Then you can use either method in the subsequent years.

There’s a simple way to maintain all the necessary documentation:

  • Have your car serviced in December or January of each year to prove odometer readings.
  • Write all your appointments in your calendar, even business shopping trips, trips to workshops and classes — all driving that is business related. Record the addresses of the place you go.
  • Periodically look up all the addresses on Yahoo Maps or MapQuest and record the mileage in your calendar. We suggest doing this once a month.
  • Use the same credit or debit card for all your automobile-related expenses. Add up the totals from your monthly statements (and then save them for 3 years). Do not pay cash for gas because you might miss the deduction.

Note: Business driving is defined as mileage between business locations. Unless you have a home office, driving to the first place of work is not deductible. If you are not self-employed have your employer require you to maintain an office-in-home as a condition of employment, and get a letter proving the requirement. Then on days when you legitimately work at home before or after going to the office or to a client, you can deduct the mileage from/to your home.

Please call us, Accountants in Chicago at TaxCutters 773-728-1500!!

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Don’t Forget Those Nominee 1099s

At the beginning of a new year clients reach out for my CPA advice and I am always being questioned about 1099 forms and who should issue such forms and what the deadline is.

For tax purposes, if you receive income in your name that actually belongs to someone else, you are also a nominee. Being a nominee means that you must file a 1099 form with the IRS appropriate to the type of income you received and give a copy of the 1099 to the actual owner of the income. However, if the other person is your spouse, no 1099 filing is required.

One of the most commonly encountered nominee situations is having a joint bank account or brokerage account with someone other than your spouse and all of the income from those accounts being reported under your SS number. You will need to provide the IRS and your joint account owner with a 1099 reporting the co-owner’s share of the income under his or her SS number. Then, when you file your return, you need to show all of the income but back out the co-owner’s share as “nominee amount.”

The type of 1099 to file depends upon the type of income: 1099-INT for interest, 1099-DIV for dividends, and 1099-B for the proceeds from selling stocks and bonds.

Forms 1099-INT and 1099-DIV issued by you as a nominee are supposed to be provided to the recipients by January 31, while the deadline for providing forms 1099-B to the other owner(s) is February 15. In order to avoid penalties, copies of the 1099s need to be sent to the IRS by February 28.

If you have questions about filing 1099s as a nominee, please call us 773-728-1500.

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File your taxes, even if you cannot pay V.S not Filing at all

During the tax season we all realize sometimes that you might owe taxes and you do not have the cash to pay it.  As a CPA a lot of my clients come and they say “I don’t have money right now to pay the taxes that I owe” and their question is:

What should you do in this case??

The worst thing you could do is to put off filing your return because you are afraid of the bill.  The Internal Revenue Service penalties for not filing are more punitive than the ones for not paying.

The failure-to-file penalty runs to approximately 5% per month of the balance due, up to 25%.The failure-to-pay penalty is just 0.5% per month of the unpaid tax at April 15th, and even that is cut to half for taxpayers who set up a formal installment plan with IRS. Either way you will also owe interest, currently at 3% per year.

To make it more easy we, the Accountants in Chicago at TaxCutters will give you the following example:

  • Let’s consider the case of a taxpayer who owes $2,000 and does not have the money to pay until the end of June;

Case 1if the taxpayer decides to file a tax return or file an extension by April 15th the total penalties and interest due would be around $50, according to Accountants in Chicago at TaxCutters analysis considering the above rates;

Case 2: if the taxpayer puts off filing until June 30th and pays then, the penalties and interest that he would end up paying would be around $320 according to Accountants in Chicago at TaxCutters.

There are options out there; taxpayers could easily file for a six-months extension using Form 4868. As long as you have paid around 90% of the taxes that you owe by April 15th, the taxpayer will not owe the late-payment penalty. He will however owe interest on any unpaid taxes.

If you have the cash but have run out of time to deal with the paperwork, you can send in an estimated amount in order to avoid some or all of that interest.  Similarly if you owe, you could send in a partial payment to cut the interest and penalties.

While the standard advice is to pay the IRS first, that may not make sense. A tax installment payment plan, even with penalties, cost about 6% per year.  An installment plan will put your payments on a monthly schedule and cut your penalty on unpaid taxes in half to 0.25%.  To set up an installment plan the taxpayer will have to file Form 9465 and pay an application fee of between $40-$110, depending on your income level and weather you are willing to pay through automatic deductions from your checking account or paycheck.  However, IRS can reject an installment agreement, but acceptance is guaranteed if you owe less than $10.000, request a payment period of three years or less, you have paid all your taxes for the last five years and the “IRS determines that you cannot pay the tax owed in full when it is due” according to IRS’s rule on installment agreements.  For larger tax liabilities, the process gets more complex.

Please call us if you need any help to schedule your taxes for the upcoming dead line, you can reach us at: 773-728-1500!!

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1099’s forms and due date!!

Everybody heard about  Form 1099, but most of my clients ask for my professional opinion as a CPA to tell them if they have to issue 1099’s at the beginning of the year.  If you useindependent contractors to perform services for your business or rental and you pay them $600 or more for the year, you are required to issue them a Form 1099 after the end of the year to avoid facing the loss of the deduction for their labor and expenses.  The 1099s for 2012 must be provided to the independent contractor no later than January 31st of 2013.

It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later and have the total for the year be $600 or more.  As a result, you overlook getting the information needed to file the 1099s for the year.  Therefore, it is good practice to always have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services.  Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.

IRS Form (W-9, Request for Taxpayer Identification Number and Certification) is provided by the government as a means for you to obtain the data required to file the 1099s from your vendors. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor complete the Form W-9 prior to engaging in business with them. The form can either be printed out or filled onscreen and then printed out. The W-9 is for your use only and is not submitted to the IRS.

In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by the last day of February. TaxCutters prepares 1099s for submission to the IRS with the 1096 submittal form.

Please attempt to have the information to our office by January 20, so that the 1099s can be provided to the service providers by the January 31st due date.  Call us, Chicago Accountants if you have any questions 773-728-1500!!

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Short Sale or Foreclosure – the Income Tax Consequences

We are CPAs in Chicago and provide the following summary for the benefit of Taxpayers in Chicago and surrounding suburbs.

These days a lot of home owners or real estate investors are encountering numerous questions about the tax consequences of these situations. That’s why it’s more important than ever for real estate owners to understand the basics of how the IRS views tax forgiveness.

How does the IRS view a short sale or foreclosure?

short sale is the discount a mortgage holder may allow in order to sell the property, even though doing so will short or discount the note. This generally results in a benefit to the debtor because the mortgage is reduced.

The process, of course, is different in a foreclosure, but the result is essentially the same.  The mortgage holder forecloses on the property, takes possession or sells the property on the courthouse steps, and will probably end up losing on the original mortgage. In effect, the borrower usually doesn’t have to pay the full mortgage, and whatever the lender can get for the property reduces the mortgage amount and the lender will often take a loss on the rest.

IRS frankly doesn’t care if a property is going through a short sale or foreclosure. The IRS is going to determine if Forgiveness of Debt took place and if it should be taxed to the taxpayer. Keep in mind though that the lender does not always forgive debt in a foreclosure or short sale. If the lender gets a deficiency judgment or comes after the homeowner for the unpaid amount, there is no debt forgiveness and thus no taxable income.

However, for situations where the lender does forgive the debt, determining what should be taxed can be a complicated question with lots of variations based on the facts and circumstances.

Keep in mind that, in almost every situation, the IRS boils the transaction down to the analysis of four questions:

.Question 1: Was the property sold for less than the mortgage or mortgages on the property?

Easy to calculate, simply add up all of the debt on the property (first and second mortgages included), and subtract it from the final sales price. If the result is a negative number, then there is a presumption the seller or prior owner is facing Forgiveness of Debt Income.

In case of foreclosure, it’s a little more difficult to determine the amounts in the equation above, because sometimes the bank/mortgage holder hasn’t sold the property yet; they simply took possession of the property in the foreclosure. Essentially, the calculation can’t be completed until the lender sells the property and their loss is determined.

Question 2: Was the mortgage or mortgages considered recourse or non-recourse debt?

If there is a presumption of debt forgiveness as determined in Question 1, the taxpayer next has to find out if the debt is recourse debt. This simply means the debtor signed personally guaranteeing the debt, or in other words, is personally obligated to pay the mortgage. This is actually an easy fact to determine.

A quick document review by an attorney can help the homeowner determine if the debt is recourse or not. The good news is if they aren’t personally liable, then they don’t have to pay the debt and they don’t have Forgiveness of Debt Income.

            Question 3: Is there Forgiveness of Debt Income after the basis on the property and any loss is calculated?

Often taxpayers overlook this aspect of the analysis.  Assuming there is recourse debt, and hence Forgiveness of Debt Income, taxpayers shouldn’t forget to calculate their loss on the property as a whole. This loss can offset any Forgiveness of Debt Income.

In this more complicated equation, the taxpayer would start with the sales price of the property and then subtract the adjusted basis on the property (i.e., the net cost for the property after adjusting for various items like depreciation or home improvements). This process will tell the homeowner if there is a gain or loss on the property. In sum, a loss would be deductible against the Forgiveness of Debt Income. Note, however, that a primary residence is going to be treated differently during this stage of the analysis (see below).

If there is Forgiveness of Debt Income from recourse debt and the loss on the sale doesn’t wipe out the gain, or it isn’t a primary residence, then the taxpayer’s only option to avoid being taxed on the forgiveness is to qualify under the insolvency or bankruptcy rules provided by the IRS. Essentially, these rules require the taxpayer’s total liabilities to exceed total assets, whether married or single (the details of which are discussed in IRS Publication 4681).

One final option that doesn’t allow the taxpayer to discharge the income but permits deferring the tax over time is to reduce the basis on other real estate owned by the taxpayer by using Form 982.

Question 4: Was the property in question the primary residence of the taxpayer?

The rules have been changed when it comes to principal or primary residences. Congress passed and President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007 to provide relief to families who were going through a short sale or foreclosure on their primary residence through the end of 2012. This law essentially wipes out any acquisition indebtedness (not second mortgages unrelated to the purchase) and is a specific election made on a tax return. (Note there is a limit of $2 million of interest and debt for married couples and a lower limit for single individuals). Taxpayers should consult with their tax advisor regarding the specifics of this exception and they qualify.

Finally, I would be remiss to not mention loan modifications and the impact they may have on a tax bill. Rest assured, most loan modifications don’t create taxable income as they simply modify the terms of a loan to help a debtor better make his or her payments. However, if a lender actually reduces the principal amount of the loan, sometimes called a cram down, then the debtor better expect a 1099 for Cancellation of Debt Income and speak with a tax advisor.

Make sure your Tax Advisor knows how to apply correctly the tax deductions that are allowed.

In summary, if you going through a loan modification, short-sale, foreclosure, or deed in lieu, please know that, we at TaxCutters can help you through the tax paperwork process.  Please give us a call at: 773-728-1500.

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Foreign Financial Accounts / Signature / Authority over foreign financial accounts

As a CPA in Chicago, I had received a lot of calls regarding the issue of Foreign Financial Accounts.  Apparently, this was a hot topic last year.  Every U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts (including bank, securities and other types of financial accounts in a foreign country), if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report those relationships to the U.S. government each calendar year.

The government uses this reporting mechanism as a means to uncover hidden foreign accountsand ensure that investment income earned in foreign countries by U.S. taxpayers is included on their U.S. tax returns. The Treasury Department has placed a new emphasis on foreign accounts, and taxpayers with a financial connection to a foreign country should determine whether they have a reporting requirement.

Reporting is accomplished by filing a Report of Foreign Bank and Financial Accounts form—more commonly referred to as the FBAR—which must be received by the IRS at its Detroit office on or before June 30 of the succeeding year. Thus, the FBAR filing for the 2012 year must be received by the IRS no later than June 30, 2013. This report is filed separately from the taxpayer’s income tax return, and no extensions of time are available for filing this form. In addition, taxpayers generally are required to answer “yes” or “no” to questions related to foreign bank and financial accounts on their tax returns.

Penalties for failing to comply can be draconian. For non-willful violations, civil penalties of up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. A reasonable cause exception to the penalty is available for non-willful violations but not for willful violations.

Overlooked Accounts – Many taxpayers overlook the fact that they have a reporting requirement in situations such as the following:

  • Family Accounts – Recent immigrants to the U.S. may still have parents or other family members residing in the “old” country, and those relatives may have included them on an account in the foreign country. This is common practice for some ethnic groups. The taxpayer does not really consider the account his or hers, but it falls under the reporting requirement if he or she has signature or other authority over the account and the value exceeds $10,000.
  • Inherited Accounts – Inherited accounts in a foreign country fall under the FBAR reporting requirement even if the funds are subsequently transferred to the U.S. The FBAR rules state that reporting is required if at any time during the year the foreign account exceeds $10,000.
  • Business Accounts – An officer or board member may have signature authority over a business account held in a foreign country and overlook the need to meet the FBAR reporting requirements.

In addition to including any reportable foreign income on his or her tax return, the taxpayer must ensure that the foreign account questions are completed correctly on the tax return and that the FBAR is filed when required.

 

Please call us at 773-728-1500 if you have questions regarding Individual or Corporation Income tax and Foreign Financial Accounts.

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