Comprehensive Review of Your Rights to a Collection Due Process Hearing Before the IRS

Under certain circumstances and upon the Internal Revenue Service issuing certain collection notices, you have the right to request a Collection Due Process Hearing. Requesting and holding a Collection Due Process Hearing before the IRS Appeals Office can be a very beneficial tool in resolving an outstanding tax liability. The article below provides detailed information relating to a Collection Due Process Hearing.

What is a Collection Due Process Hearing?

A Collection Due Process Hearing is a right afforded to a taxpayer when the IRS has proposed a levy or enforcement action to collect on a tax debt. The hearing allows the taxpayer to work with an impartial appeals officer towards a collection alternative to resolve the debt as opposed to the proposed levy action by the IRS.

When Can a Taxpayer Request a Collection Due Process Hearing?

The most common time a taxpayer has the right to request a Collection Due Process Hearing is upon the IRS issuing a Final Notice of Intent to Levy. A Final Notice of Intent to Levy is also known as Letter 11 (L 11) or Letter 1058 (L 1058). A taxpayer has 30 days from the date on the Final Notice of Intent to Levy to request the hearing.

How Does a Taxpayer Request a Collection Due Process Hearing?

The taxpayer makes the request by filing Form 12153 with the service center or revenue officer who issued the Final Notice of Intent to Levy. Form 12153 is completed with the taxpayer’s general information, the tax periods of which the Final Notice of Intent to Levy was issued upon or included on the notice, the reason the hearing is being requested, and the proposed collection alternative. The hearing request can be faxed and/or mailed to the appropriate party within the IRS.

What Are the Benefits or Potential Benefits of Requesting a Collection Due Process Hearing?

While there are many benefits to requesting a Collection Due Process Hearing, perhaps the biggest or most advantageous benefit is the stay or hold on enforcement action that is afforded the taxpayer when a timely hearing request is filed. When a taxpayer timely requests a collection due process hearing, there is an automatic hold on IRS collection actions such as bank levies, wage garnishments, and other asset seizures. Please note that the automatic stay on enforcement action may not apply when the taxpayer owes 941 employment taxes and the taxpayer is not in compliance with the current quarter. This stays on enforcement, which allows the taxpayer time free of levies and seizures to prepare for the hearing and make a proposal to resolve the outstanding tax liability based upon their current financial circumstances.

Once a Collection Due Process Hearing is Requested, What Can I Expect?

Generally, the taxpayer will receive a notice from the IRS Appeals Office within 30-60 days from requesting the hearing that their hearing request has been received, and an appeals officer will contact the taxpayer once assigned to the case. Thereafter, the taxpayer will receive a notice from the appeals officer assigned calling an initial hearing or conference date. The initial hearing or conference date can be adjusted by the taxpayer, but the taxpayer must contact the appeals officer to reschedule the hearing date. The notice from the appeals officer will generally request additional information the taxpayer wishes to present and produce during the hearing relating to the resolution proposal the taxpayer is proposing. This information could be financial statements and information relating to an installment agreement, an offer in compromise, or perhaps a request that the liabilities be placed in a currently non-collectible status.

What is the Procedure or Process of Working With the IRS Appeals Office?

First, the appeals officer will verify that the IRS has taken all required and legal steps towards a collection of the debt and that the taxpayer has received their proper due process. Further, the appeals officer verifies that they have had no prior involvement with the applicable case or taxpayer and are a true impartial party to the matter. Upon establishing the hearing or conference date, the taxpayer will need to compile the necessary information, documents, and statements to submit to the appeals officer along with their proposal to resolve the tax liability. If the taxpayer was an individual and owed individual income tax, they would draft an individual collection information statement, also known as Form 433A, and compile all of the necessary attachments such as W-2s, income statements for self-employment income, bank statements, current statements for stocks, bonds, 401(k)s, mortgage statements, etc., to verify the income, expenses, and assets stated on the financial statement. If the taxpayer was a business or the applicable individual owned a business, the taxpayer would also need to compile Form 433B, which is a collection information statement for businesses. The taxpayer would use the financial statements and documents to propose an installment agreement or request their liabilities be placed in a non-collectible status. A taxpayer can also request a settlement, known as an offer in compromise, through the hearing process. If a taxpayer requests an offer in compromise through the hearing process, the offer will be submitted by the appeals officer (usually) to the IRS Offer in Compromise Unit, and the appeals officer will maintain the file while the IRS Offer in Compromise Unit makes an initial determination on the offer. If the determination on the offer needs to be appealed to the appeals office and the taxpayer appeals the initial offer determination, the appeals officer will then have control or jurisdiction of the appeal. Inevitably, through the appeals hearing process, the appeals officer will make a determination relating to a resolution of the liabilities.

What Are the Potential Outcomes of Holding a Collection Due Process Hearing?

The outcome or determination issued by the appeals officer through the hearing process may be dictated by the resolution proposed by the taxpayer. If the taxpayer has proposed an installment agreement and the appeals officer and taxpayer agree on the terms and conditions of an installment agreement, the appeals officer will issue a determination that an installment agreement has been reached, and thus, the levy action proposed by the IRS is not sustained. In short, if the taxpayer and appeals officer come to a collection alternative, then the appeals officer will issue their determination stating the agreement that has been reached and that collection action is not sustained. However, if an agreement or resolution cannot be agreed upon with the appeals officer, the determination made by the appeals office will state that the proposed levy action by the IRS is sustained, and thus, the taxpayer is open to enforcement such as levies once the file or case is returned to IRS Collections or the IRS revenue officer.

What if I am Unable to Establish a Formal Agreement Through the Collection Due Process Hearing?

If you cannot come to an agreement with the appeals officer, it does not mean an agreement is not possible. You are still able to enter into an installment agreement or submit an offer in compromise through the IRS Offer Unit, but you would do so outside of the context of the appeals hearing or appeals office. The key would be to work on formalizing or proposing an agreement as quickly as possible after the appeals hearing concludes because, technically, once the matter is back before the IRS Collections Department or the revenue officer, you are subject to enforcement because there is no longer a stay or hold on enforcement.

Comprehensive Review of an IRS Final Notice of Intent to Levy

Receiving any notice from the Internal Revenue Service is enough to make most people’s heart
skip a beat. However, one notice in particular that is issued by the Internal Revenue Service, the
Final Notice of Intent to Levy may strike the most fear and concern in taxpayers and rightfully
so. This article provides detailed information relating to a Final Notice of Intent to Levy and
your rights as a taxpayer.

What is a Final Notice of Intent to Levy?

When a tax liability or tax debt is owed, whether individual income tax or business-related
taxes, the IRS issues a series of notices. The first notices issued by the IRS act more to provide
notice of the liability and request for payment. If the liability is not paid in full or an agreement
reached with the IRS, the IRS will continue to issue notices and the notices increase in severity
eventually leading to the Final Notice of Intent to Levy. The Final Notice of Intent to Levy is the
IRS’ means to provide the taxpayer notice due process and that the government intends to levy
the taxpayer’s property such as bank accounts, wages, sources of income, and even real estate or
other assets if the tax liability is not paid or certain agreements with IRS are not formalized or
proposed. The Final Notice of Intent to Levy issued by the IRS allows the taxpayer 30 days to
make the proper arrangements or proposal to prevent levy or enforcement action. If certain
agreements or proposals are not reached within these 30 days from the issuance of the Final
Notice of Intent to Levy, the taxpayer is then open to levy and enforcement action from the IRS
to collect on the tax debt.

When and How is a Final Notice of Intent to Levy Issued by the IRS?

After the IRS has issued multiple notices regarding the tax liability and the tax liability is not
paid or a proper agreement formalized or proposed with the IRS, the IRS will eventually issue a
Final Notice of Intent to Levy. The timing of issuing the Final Notice of Intent to Levy can
differ depending upon whether the tax liability is with IRS Automated Collections or if the tax
liability has been assigned to an IRS Revenue Officer. If the tax liability is with automated
collections, it may take longer for the Final Notice of Intent to Levy to be issued, and the notice may be
issued from an IRS collection service center. If the tax liability has been assigned to an IRS
Revenue Officer, generally one of the first actions taken by the revenue officer is to issue the
Final Notice of Intent to Levy. While the issuance of the Final Notice of Intent to Levy does not
necessarily mean the revenue officer will immediately levy if they are legally able to, but rather
the IRS wants to have the ability to levy and enforce collection of the tax if necessary and thus
one of the primary reasons the revenue officer will usually issue the notice relatively quickly
once they have been assigned to collect on the tax. In short, the enforcement action available to
the IRS can be used if the revenue officer deems it necessary instead of waiting to find out if the
final notice has not been issued.

What is a Levy Under the Context of a Final Notice of Intent to Levy?

Under this context, a levy is a taking property by the IRS to collect on the underlying tax debt.
This means the IRS takes or seizes your property to satisfy all or a portion of the tax bill. A
common levy for the IRS would be a bank levy or a levy of your wages or income. Under the
context of a bank levy, the IRS will issue a notice of levy to the bank or banks they know or feel
the taxpayer may have a bank account. Upon receipt of the levy notice, the bank is to “freeze” or
hold all of the funds in the bank account or accounts held by that bank up to the amount of the
levy. The bank is to hold these funds for 21 days and then release all of the funds over to the IRS
after the 21 day period unless the bank levy is released or other instructions are provided to the
bank by the IRS. Bank levies can cause problems beyond the taking of the money if the taxpayer
has written checks or other auto payments scheduled as the bank is likely to not honor these
payments and the checks will bounce or payments not go through. The bank levy is generally a
one-time levy, meaning the bank will not continuously hold funds and turn them over to the IRS,
but rather only hold and pay over the funds in the account the day the bank received
and processed the levy. In comparison, a wage levy is generally a continuous levy.
Under the context of a wage levy, the IRS issues a levy notice to your employer and the
employer then withholds a portion (a relatively large portion) of your wages and pays the funds
over the IRS. This wage levy is usually continuous meaning that with each payroll period, your
employer will withhold the levied funds until the levy is either released or the terms of the wage
levy are adjusted by notice from the IRS.

What can be done to Prevent an IRS Levy Once I Have a Received a Final Notice?

Once a taxpayer has received a Final Notice of Intent to Levy from the IRS they are definitely
under the gun to take action to prevent enforcement. Paying the liability in full or establishing a
formal payment installment agreement with the IRS will prevent enforcement such as bank or wage
levies. Formally proposing an offer in compromise that is deemed processable will prevent
levies as well. In addition to the above, the Final Notice of Intent to Levy provides the taxpayer
with what can be a very useful tool of due process, which is the right to request a Collection Due
Process Hearing. The Request for a Collection Due Process Hearing acts as a hold on any
enforcement action on the tax periods included within the Final Notice of Intent to Levy if the
request is filed within 30 days from the date of the Final Notice of Intent to Levy. Upon
requesting a Collection Due Process Hearing, your file or the tax liabilities are sent to the IRS
Appeals Office and a hearing or conference will be scheduled to discuss collection alternatives as
opposed to levies to collect or resolve the tax liability. There is an automatic stay or hold on
enforcement until you have been able to conduct a hearing and communicate with an appeals
officer regarding a resolution to the tax liabilities. If an agreement is reached with the appeals
officer through the hearing, this will act as a hold on enforcement. If an offer in compromise is
submitted through the appeals officer, this will also act as a hold on enforcement until a
determination is reached regarding the offer. If you are unable to reach or propose any collection
alternative with the appeals office that acts a hold on enforcement, the IRS Appeals Office will
issue a determination sustaining the levy action proposed by the IRS and your case will either go
back to general collections or the revenue officer and you will be subject to or “open” to levy and
enforcement, which is not preferred and what you are trying to avoid. It is important to note that
even if you do not request a Collection Due Process Hearing within 30 days from the date of the

final notice, you still have the right to request a hearing called an equivalent hearing with the
appeals office. The biggest difference between the equivalent hearing and collection due process
hearing is that the equivalent hearing does not necessarily act as or guarantee you a hold on
enforcement action, which may be problematic if you request the equivalent hearing and the IRS
moves forward with levy and enforcement action.

Can a Bank Levy or Wage Levy be Released?

The good news is, yes. If the IRS has issued a bank levy or wage levy, you may be able to have
the levy released or partially released. If the IRS has levied your bank account, under certain
circumstances (generally those showing an economic hardship has been created) the IRS can
agree to a full or partial release of the levy. If the IRS agrees to any type of release of the bank
levy, the IRS will issue a notice to the bank either providing for a full levy release or releasing a
portion of the funds the bank is holding pursuant to the bank levy. If the IRS is levying your
wages, the IRS can agree to release the wage levy in full, or the wage levy can be
adjusted/lowered to an amount that you are able to show does not create an economic hardship.

Does the Release or Adjustment of a Levy Mean the IRS Will Not Levy Again?

Not necessarily. If the IRS releases a levy but you fail to fully resolve the tax matter with a
payment agreement or settlement, you could be open to another levy in the future. Generally, if
the IRS is forced to levy again, they may be less likely to release the levy given the prior release
and fact the underlying issues leading to the need to levy have not been resolved.

Receiving a Final Notice of Intent to Levy from the IRS means that you have a tax liability that
needs immediate attention. If you are unable to resolve the tax liability immediately after
receiving the final notice, it is highly recommended you speak with a tax attorney to discuss the
facts and circumstances of your case, your options to resolve the tax matter and the necessary
procedural steps to resolve the matter without enforcement action from the IRS.

Contact The McGuire Law Firm to discuss your tax issues with a tax attorney.

You may have heard the ads on the radio, maybe seen them on TV, or companies
have even called you about receiving tax relief by settling your tax debts through the IRS Offer
in Compromise Program. Are these ads true?

Can you settle your tax debts with the IRS through an offer in compromise?

The answer is – maybe. The IRS Offer in Compromise Program may allow you to settle your tax debt, but your financial circumstances and other circumstances must make you eligible for the OIC Program. The information below provides a comprehensive look at settling your tax debts through the IRS Offer in Compromise Program.

What is an IRS Offer in Compromise?

In short, this is a tax settlement. You offer the IRS an amount of money to settle your tax debt. Upon payment of the settlement amount, your tax debts
are cleared, tax liens are released, and you owe no tax.

Who is Eligible to Participate in the Offer in Compromise Program?

Technically, anyone can submit an offer in compromise to the IRS. However, the taxpayer must comply for the IRS to process an offer in compromise. Compliance means that all tax returns required to have been filed are actually filed and that any tax payments due have been paid in full. If you are not compliant, the IRS will return your offer in compromise. Additionally, to have a good chance of the IRS accepting your offer in compromise, your recent and current financial circumstances must be in an overall position where the IRS would agree to a settlement.

How Much Will it Take for the IRS to Settle my Tax Debt?

Your IRS offer in compromise, or “settlement amount” is based more on your ability to pay than the total amount of tax you owe. To calculate your offer in compromise amount, the IRS will look at your income and expenses, and your equity in assets. Generally, the IRS will only accept an offer in compromise when, based on your income and expenses and equity in assets, you cannot satisfy your tax liability. There are exceptions and conditions whereby the IRS may accept an offer in compromise even if you have the ability to pay the tax debt in full. These exceptions are discussed in greater detail below.

IRS will initially calculate your offer amount using the following equation: Your disposable income multiplied by 12 or 24 plus your equity in assets. Let’s look at equity in assets first. All of your assets from homes and cars to retirement accounts and bank accounts (and other assets) are considered when the IRS looks at your ability to pay. When considering equity, the IRS will allow reductions of the fair market value of assets and debts on assets. For example, the IRS allows for a 20% reduction when calculating the equity in your home. Thus, if your home had a fair market value of $350,000 and you owed $250,000 on the mortgage for your home, you would have $30,000 in equity for purposes of the offer in compromise calculated as follows: $350,000 x .8 = $280,000 – $250,000 (mortgage) = $30,000 in equity. You also receive a reduction of 20% in the fair market value of retirement accounts, investment accounts, and other assets when calculating the equity for purposes of the offer. Your disposable income is calculated by totaling all income from all sources and subtracting your allowable expenses. Thus, you would include income such as wages, interest, dividends, business income distributions, and other sources in your total income.

Your allowable expenses (also referred to as the national standard for allowable living expenses) are set by the IRS and can be found on the IRS website. The allowable living expenses are dictated primarily by where you live and the number of individuals in your household. Allowable living expenses include food, clothing, housing, utilities, car payments, car operating expenses, and out-of-pocket healthcare expenses. You can claim your actual healthcare expenses if your allowable out-of-pocket healthcare expenses exceed the allowable standard. Once you have calculated your total income and all allowable expenses, the difference is your disposable income, and the figure is multiplied by either 12 or 24 and then added to your equity in assets for the offer in compromise amount. For example, if your disposable income was $600 per month and the only equity you had was in your house per the example above, your over amount would be $37,200, calculated as $600 x 12 + $30,000.

What Forms and Documents Do I need to Submit with my Offer in Compromise?

The IRS has specific forms you need to submit when proposing an offer in compromise. As an
individual, you would complete Form 433A OIC, which is the financial statement whereby you
provide your asset, income and other financial information. In addition to Form 433A OIC, you
would submit Form 656. Form 656 is the form whereby you state your personal information, the
tax years or liabilities you are proposing to settle and the offer in compromise terms (offer
amount and payment terms). The attachments and documents you need to submit with the offer
in compromise will be determined by the items and issues on your financial statement primarily
and perhaps whether or not you are claiming any extenuating circumstances on your offer. For
example, you need to provide your most recent bank statements for all bank accounts, current
statements for any retirement account or investment accounts, current mortgage statement for
any real estate you own, current statement for any vehicle payment showing the monthly
payment and total loan amount and documents such as pay stubs or profit and loss statements to
verify your income. Please note, if you own a business, you may have the requirement to submit
a business financial statement on Form 433B and attach related documents and substantiation for
the business.

Once I Submit My Offer in Compromise What is the Process?

Generally, you will receive a notice from the IRS that the offer has been received and that you will receive contact within 90 days. However, it usually takes about 6 months for an IRS offer examiner to make contact with you with anything material. When the offer examiner does contact you, they may make a request for additional documentation and have a list of questions or issues to discuss to with you. Eventually, the examiner will provide a determination with an equity in asset table and an income and expense table. The equity in assets table will list each asset, the fair market value applied to the asset, the reduction to fair market value (if any), any loan or encumbrance on the asset, and then the equity allocated to the asset. Then all of the equity amounts are totaled. The income and expense table will state the income you claimed and the income as allocated by the IRS, and then all of the expenses you claimed on the 433A OIC financial statement versus the expenses allowed by the IRS to thus calculate your disposable income. The equity in assets and the disposable income are then applied to provide your offer amount.

What Determinations Can The IRS Make on My Offer?

Based upon the figures in your equity in asset table and income & expense table, the IRS can accept the offer as you submitted, reject the offer amount you offered but agree to accept an increased offer amount or reject the offer because your equity in assets and disposable income show that you can full pay the liability. If the IRS does reject your offer, you have the right to request an appeal of the rejection and work with the IRS Appeals Office to see if an agreement on a settlement can be reached.

What Happens When I Appeal The Offer Rejection?

When the offer rejection is appealed, you are assigned an appeals officer to consider the items and issues you disagree with. The appeals officer assigned to your case will send you a notice calling for an initial conference. You are allowed to provide additional information and documentation to the IRS Appeals Officer and the appeals officer will consider all information and make a determination to accept an offer or sustain the IRS’ rejection of your offer. Many offers are accepted through the appeals process and thus one should not lose hope if their offer is initially rejected by the IRS offer examiner.

If the IRS Accepts My Offer in Compromise What Other Obligations Do I Have?

Beyond paying the agreed-upon offer amount, the IRS requires that you remain in compliance by timely filing all returns and paying all taxes for the five years after the offer. If you fail to remain in compliance, the IRS can default the offer and settled liabilities would be due and owed again.

If you have any questions about your offer in compromise, please get in touch with a tax attorney at The McGuire Law Firm or schedule a Free Consultation with one of our 24/7 live agents.

What is the FBAR?

The U.S. government requires individuals to file a document called the Foreign Bank Account Report (FBAR) with the Financial Crimes Enforcement Network (FinCEN). It is designed to ensure that foreign assets and income are correctly reported, helping the Department of Treasury track the activities of U.S. citizens, residents, and businesses and ensure that foreign income is accurately taxed in the United States.

Who Must File an FBAR?

A U.S. person, which includes citizens, residents, corporations, trusts, partnerships, limited liability companies, and estates, must file an FBAR under certain circumstances. This situation occurs when a person in the US has a financial stake in or control over a financial account located outside of the country, and the combined worth of all the foreign accounts is over $10,000 (in US dollars) at any point during the year.

It’s important to note that the foreign financial account does not need to generate income or taxable income for the account to trigger the need to file the FBAR. If the balance of all foreign financial accounts exceeds the $10,000 threshold, each foreign account or asset must be reported, regardless of whether you received income from the foreign account and no matter how small or low the account’s value may be.

FBAR Compliance and Filing

Ensuring compliance with FBAR filing requirements is crucial. The FBAR report must be submitted annually by April 15th for the previous year. In case you miss the due date, you can get an extension until October 15th without having to make a request for it. There’s no need to file for an extension separately for the FBAR.

The FBAR is not filed with your individual tax return. Instead, you file the FBAR electronically through FinCEN’s E-filing system. You may be able to paper file the FBAR, but to do so, you must receive an exemption to E-filing from FinCEN. You are allowed to have a third-party file your FBAR on your behalf.

To properly file your FBAR, you will need the following information:

• The taxpayer’s name, address, date of birth (if an individual), social security or employer identification number
• Name on the foreign account
• Name and address of the foreign bank or financial institution
• Account number or identifying number for the foreign account
• Type of account or foreign asset
• The maximum value in U.S. dollars of the account during the year.

All foreign financial accounts are generally reported on one FBAR, even if the accounts are held only by you or jointly.

While the law does not require any specific record-keeping for the FBAR, it is highly recommended that you keep all of your forms or statements to verify the information stated on the FBAR and the exchange rate you used if you converted foreign currency into U.S. dollars.

Penalties for Non-compliance

Failure to comply with FBAR filing requirements can lead to severe penalties. Both civil and criminal penalties can apply when an FBAR is not timely filed.If you fail to file the FBAR, you may be penalized up to 50% of the account or asset value that was not reported.This means you could lose up to half of the value of your foreign account or asset by not filing the FBAR.

Other Foreign Compliance Forms

If you are reporting foreign assets on the FBAR, you may also have the requirement to report these assets elsewhere. If you have a foreign bank account, there are boxes on Schedule B that may need to be checked. Additionally, you may have income to report on your Schedule B. Other common forms to report foreign assets include Form 8938, Form 3520 or Form 3520A, or Form 5471. The specifics surrounding your foreign asset reporting will dictate the form or forms you need to file and how and where the forms need to be filed.

What If I Have Failed to File FBARs for One Or Multiple Years?

If you have not filed your FBARs and are not already under an investigation by the Department of Treasury, you may be able to file your FBARs and other foreign compliance forms and unreported foreign income through specific programs with a lesser penalty. These programs include the Streamlined Offshore Voluntary Disclosure Program (Streamlined OVDP), and the IRS has a Delinquent International Information Return Submission Program. These programs differ, and weighing your options and potential outcomes with your specific facts and circumstances is essential.

Taxation on Foreign Income from FBAR Accounts or Assets

Foreign income is taxable and would be included on the appropriate form or schedule on your tax return and thus subject to U.S. tax. For example, interest from a foreign bank account would be reported just like interest from a U.S. bank and subject to ordinary income tax.

What If I Have Already Paid Tax To A Foreign Country?

If you paid taxes to a foreign country, you might be eligible for the foreign tax credit. This credit allows you to apply all or part of the tax you have already paid to your total tax bill. Form 1116 is completed to claim the foreign tax credit.

FBAR Updates

As of July 1st, 2013, the electronic version of the FBAR is currently available and must be filed electronically. This is part of FinCEN’s efforts to streamline the filing process and make it more efficient.

In addition, FinCEN has provided some relief to victims of recent natural disasters, allowing them more time to meet their FBAR filing obligations. This is a reminder that the government considers extraordinary circumstances that may affect taxpayers’ ability to file on time.

Conclusion

If you have any questions about whether you have an FBAR filing requirement or have the FBAR filing requirement and have not filed, it is highly recommended that you speak with a tax professional, preferably one specializing in international tax compliance, to determine your compliance requirements and options. FBAR compliance is critical and can lead to hefty civil and criminal penalties.

Form 5471 is an information reporting form the must be filed with a taxpayer tax return when they meet certain ownership amounts of foreign corporations.

Broadly speaking, the form reports who owns the foreign corporation, the current year financial information of the foreign corporation, information related to subpart F and GILTI inclusions (discussed below), and the characterization of earnings impact of the corporation on the U.S. Shareholders.

Who has to file form 5471:

Generally speaking, U.S. Shareholders have to file form 5471. The annual filing requirements depend on how much of the foreign corporation is owned. There are instances where a person who owns no interest in a foreign corporation must file a form 5471, for that discussion, see Category 2 filer below.

Who is a U.S. Shareholder?

A U.S. Shareholder is a U.S. Person (individual, corporation, partnership, trust, estate) who owns 10% or more of the voting rights of a foreign corporation and/or who owns 10% or more of the value of a foreign corporation.

There is a separate rule when the foreign corporation is an insurance company. In that instance, a person will be a U.S. Shareholder if it owns ANY shares of the foreign corporation.

Do all U.S Shareholders have to file a form 5471?

The fast and terrible answer to this question is: it depends.

The form 5471 is required when a person (again individual, corporations, partnership, trust, estate) meets the requirements of one of several categories of filers for form 5471.

The current form 5471 category filers are broken out into the following categories:

• Category 1a, 1b, 1c
  • Dealing with persons who are U.S. Shareholders of foreign corporations who were a Section 965 specified foreign corporation during the tax year including instances of constructive ownership.
• Category 2
  • Dealing with U.S. individuals who are officers or directors of a foreign corporation in a year when a U.S. Person acquires 10% of the foreign corporation or acquires enough shares to exceed the 10% ownership threshold to become a U.S. Shareholder (as defined above).
  • Notably, the director or officer does not have to own any interest in the foreign corporation for the filing obligations to exist and mee the requirements of a Category 2 filer.
• Category 3
  • Dealing with U.S. persons when they acquire or dispose of shares in a foreign corporation such that that person becomes a U.S. Shareholder, stops being a U.S. Shareholder or adds 10% to their current holdings. It also covers when someone owing 10% or more becomes a U.S. person.
• Category 4
  • Dealing with U.S. persons who are in control of a foreign corporation. That means they own, directly, indirectly or constructively 50% or more of the foreign corporation.
• Category 5a, 5b, 5c
  • Dealing with U.S. persons who are U.S. Shareholder of a controlled foreign corporation. This includes certain constructive owners of controlled foreign corporations.

A U.S. person can fall into multiple categories per year.

There is a larger discussion of the category filers in this article (Link to other 5471 article) that also discusses constructive ownership rules.

There are several exceptions to the form filing obligations, so ensure you are taking those into account when making filing determinations.

If you meet one or more category filers, do you have to file every year you own the interest in the foreign corporation?

Not all U.S. Shareholders will need to file a form 5471 every year they are U.S. Shareholders. In any year that you meet the requirements of any of the Category filers, you will likely have a filing obligation if you don’t meet any of the exceptions.

As an example, in year 1 you (a U.S. individual) bought 15% of a foreign corporation. You are the only U.S. person who owns shares in the company. You are not related to any other shareholders. Since you now own more than 10% of the foreign corporation you are a U.S. Shareholder. In year 1 you have a form 5471 filing obligation as a Category 3 filer.

In year 2, you have not bought any more shares, and all the shareholders are the same. In year 2 you do not meet any of the category filer requirements and do not have a form 5471 filing obligation.

In continuation of the above example, if in year 3 you purchase an additional 15% of the foreign corporation (brining your total ownership to 30%) AND two other U.S. persons each bought 15% of the foreign corporation (30% total), you become a Category 1a, 3 and Category 5a filer. Thus, you will have a form 5471 filing obligation in year 3.

If in year 4 none of the facts change and the foreign corporation has three U.S. shareholders owning a collective 60%, the entity is considered a controlled foreign corporation and the form 5471 is required to be filed by U.S. Shareholders.

The important point to remember when owning shares in a foreign corporation is that you must review your holdings and the holdings of other shareholders annually to determine if you have a form 5471 filing requirement.

Why do you have to file form 5471?

The form 5471 is required to be filed as outlined in the U.S. tax code. The information provided allows the IRS to make determinations on a U.S. persons offshore investments and if any income should be included in the taxpayer U.S. tax base.

Broadly speaking, the form 5471 and the requirement to file the 5471 has no direct impact on a U.S. taxpayers taxable income. That being said, the form does require the taxpayer to report their proportionate share of Subpart F income and tested income.

What is Subpart F income and what is the point of computing tested income?

A detailed discussion of Subpart F income and tested income are beyond the scope of the article, but each play a key role with respect to form 5471.

Subpart F income is income earned by the controlled foreign corporation (Category 5a, b, c filing for U.S. Shareholders) that is not able to be deferred from U.S. income inclusions by U.S. shareholders. Very loosely, it is passive types of income and income earned in a company whereby that company hasn’t done any of the work to earn that income. Net earnings and profits of that type is required to be treated as if it were earned by the U.S. shareholders directly and is included in the U.S. shareholder taxable income.  When a controlled foreign corporation has this type of income, it needs to be reported on the form 5471 and allocated appropriately to the U.S. Shareholders. Subpart F income is reported on Schedule I, J, P, and Q of the form 5471.

Tested income is used in computing the U.S. Shareholder amounts of Global Intangible Low Tax Income (GILTI). GITLI is another anti-deferral mechanism that prevents the earnings of a controlled foreign corporation from not being included in U.S. Shareholder taxable income. GILTI broadly treats all income of a controlled foreign corporation as if it were earned by the U.S. Shareholders directly and thus includable in their taxable income. Tested income is computed on Schedule I-1 of the form 5471.

Subpart F and GILTI are complicated topics that deserve their own discussions. There are numerous rules that impact the calculation and requirements of each. Suffice to say, if the entity you own an interest in is a controlled foreign corporation and you are U.S. Shareholder, careful attention must be paid to Subpart F income and GILTI income.

Do you have to file form 5471 if the entity you own is inactive or loses money?

Yes, mere ownership of the entity creates the filing obligation.

How do you file form 5471?

If you meet one of the categories of filers for the form 5471, you will need to complete the sections that are required of that specific category filer and attach it to your timely filed tax return. The form will be considered timely filed if it attached to your tax return which was timely filed including extensions. The form 5471 will need to be substantially complete to be considered timely.

If you fall into multiple category filer status, you need to file just one form 5471 per entity reporting all the information for each category you meet.

What happens if you don’t/didn’t file form 5471 or you file it late?

Failure to file form 5471 is subject to penalty. There is a monetary penalty of $10,000 for failure to file the form 5471. With this form, late filing is considered failure to file and subject to penalty. There is an additional $10,000 penalty for failure to file form 5471 Schedule O as well.

If you have not filed form 5471 and are required to do so you should contact our firm to discuss your options and the application of any penalties. We work with clients on their delinquent filings to assist with preventing or abating the penalty on late filings of form 5471.

Other considerations?

If you have a form 5471 filing obligation you may have other information reporting forms to file as well. Additional filings that may apply could be:

• Foreign Bank Account Reporting (FBAR)
• Form 8938 foreign financial asset reporting
• Form 8865 foreign partnership reporting
• Form 926 contributions to foreign corporations
• Form 8858 foreign branch and disregarded entity reporting
• Form 8992 GILTI reporting
• Form 8621 Passive Foreign Investment Company (PFIC) reporting

Updates on Form 5471

In recent years, there have been some updates to Form 5471 that are worth noting. The IRS has made revisions to the form and its instructions to ensure that they remain current and accurate. These changes are designed to make the form easier to understand and fill out, and to ensure that it accurately reflects the current tax laws and regulations.

One of the key updates is the revision of Form 5471 and its separate Schedules E, G-1, H, I-1, and M in December 2021. The separate Schedules J, P, Q, and R were revised in December 2020, and the separate Schedule O was revised in December 2012. These revisions are part of the IRS’s ongoing efforts to keep the form and its schedules up to date with the latest tax laws and regulations.

Another important update is the requirement to report all information in functional currency in accordance with U.S. generally accepted accounting principles (GAAP). Each amount must also be reported in U.S. dollars translated from functional currency using GAAP translation rules. This change is designed to ensure that all financial information reported on Form 5471 is accurate and consistent.

The IRS has also updated the instructions for Form 5471. These instructions provide detailed guidance on how to fill out the form and its schedules. They include information on who needs to file Form 5471, what information needs to be reported, and how to report it. The instructions also provide examples to help taxpayers understand how to fill out the form correctly.

It’s important to note that these updates are part of the IRS’s ongoing efforts to improve the tax filing process and ensure that all taxpayers are reporting their foreign investments accurately. If you’re a U.S. person with ownership in a foreign corporation, it’s crucial to stay up to date with these changes to ensure that you’re meeting your tax reporting obligations.

Form 926 is required to report transfers by U.S. persons to foreign corporations in an exchange described as a non-recognition transaction.  IRC Section 6038B gives rise to the reporting requirement for Form 926.

The nonrecognition transactions that apply are:

• IRC Section 332 – Complete liquidation of corporate subsidiary,
• IRC Section 351 – Transfer to corporation controlled by transferor,
• IRC Section 354 – Exchanges of stock and securities in certain reorganizations,
• IRC Section 355 – Distribution of stock and securities of a controlled corporation,
• IRC Section 356 – Receipt of additional consideration, and 
• IRC Section 361 – Nonrecognition of gain or loss to corporations; treatment of distributions.

The Form 926 is largely required to keep track of U.S. persons sending property outside the U.S. and determining of there should be tax on any built-in gain on the transfer. It appears the IRS also cares about transfers of cash as they want to know what U.S. shareholders end up owning. 

Who has to file Form 926?

U.S. persons who transfer property to a foreign corporation in a non-recognition transaction have to file Form 926. The property can be largely anything, but it is most often cash in exchange for shares in a foreign corporation under a Section 351 transfer. 

The taxpayer needs to understand if the entity it is transferring property to is a corporation for U.S. tax purposes. To do so, the taxpayer should understand how the U.S. determines if an entity is an association taxable as a corporation or if any check-the-box elections have been made in the U.S. with respect to the entity. 

With respect to a cash transfer, the U.S. taxpayer must report cash transfers of $100,000 or more or if the taxpayer owns 10% or more of the corporation after the transfer. With respect to transfers of other property there is no threshold limit, and any transfer will require reporting. 

There are a number of exceptions to filing. One exception relates to exchanges described in 354 and 356 being part of a recapitalization or is an asset reorganization. The second exception relates to a domestic corporation distributing stock under section 355. The third exception applies to instances where a U.S. person transfers stock and securities under Section 367(a) and the person meets certain other requirements. The exceptions are fairly limited and they should be carefully considered before assuming they will apply.

Transfers by a partnership:

An important point to note is that if a partnership transfers property to a foreign corporation, the partners will be responsible for any Form 926 filing if they meet the filing thresholds, not the partnership. Most often the partnership will provide a schedule K-1 for making Form 926 determinations.

How do I know I have to file Form 926?

Ideally, you will be told. Form 926 reporting is often referred to in a Schedule K-1 when a partnership makes contribution. The taxpayer will apply the filing rules to the information presented in the K-1 to determine if they have to file the Form 926. Otherwise, the taxpayer has to make the determination if a Form 926 should be filed. This includes determining what was transferred during what periods, and if the entity is, in fact, a foreign corporation. Any time a U.S. person makes a contribution to a foreign corporation in exchange for stock, Form 926 filing considerations should be made.

What are the most common reasons to file Form 926?

The Form 926 requirement most often occurs when a taxpayer forms a foreign corporation or transfers cash to a foreign corporation in exchange for stock. 

Liquidations of U.S. corporations into a foreign parent corporation also require filing a Form 926.

What should I pay attention to?

• Taxpayers should make note of the chain of ownership when it comes to following the transfer and Form 926 filing. This means understanding what the partnership or lower tier partnership has transferred.

• Paying close attention to what was transferred is helpful as well. If appreciated assets are transferred Section 367 could apply to deny the non-recognition of gain. There may be options for the taxpayer filing a gain recognition agreement to preserve the non-recognition.

• When considering if a Form 926 is required to be filed for cash transfers, the taxpayer needs to determine the sum of cash that was transferred during the 12 months leading up to the latest transfer of cash. Those 12 months could span two tax filing periods. If the amount of transfers over the 12 months is $100,000 or more, there will be a Form 926 filing even if some of the transfers were made during the prior tax period of the taxpayer.

• It is also important to ensure that all transfers to a specific foreign corporation are accounted for. There can be instances where a taxpayer has made investments into several different partnerships, and those partnerships have made investments into the same foreign corporation. Taxpayers need to aggregate their contributions into each foreign corporation to determine their Form 926 filing obligations.

What happens if I don’t file Form 926?

Taxpayers who fail to file or late file the Form 926 are subject to penalty. The penalty is 10% of the fair market value of the property at the time of transfer. The penalty is limited to $100,000 unless the failure to file was due to intentional disregard. Note, the IRS may take a position that if the Form 926 is filled out incorrectly, then the taxpayer has not timely filed the form.

The penalty does not apply if the failure to file is due to reasonable cause and not willful neglect. The reasonable cause standard appears to be a moving target within the IRS.

What do I do if I filed Form 926 late or didn’t file Form 926?

First the taxpayer should consider its options for compliance. The taxpayer may be eligible for Streamlined filing compliance procedures or the taxpayer may have reasonable cause for the failure to file. If the taxpayer didn’t timely file the Form 926 (either for one period, or several periods) the taxpayer should amend their tax returns to include the Form 926 through the Streamline program or using a reasonable cause argument. 

The Form 926 is not usually a very difficult form to complete or file. The primary nuance with the form is knowing when it is needed. The penalties for failure to comply with Form 926 filing are high so ensuring proper compliance is important. Our firm has extensive expertise in this area and helps taxpayers and their advisors make the required determinations with respect to Form 926 and helps taxpayers get, and stay, compliant with their current and past Form 926 filing obligations. Please reach out to John McGuire or Christopher Stroh with any questions or needed assistance.

John McGuire J.D & LL.M (taxation)

john@jmtaxlaw.com

720-833-7705

Christopher Stroh J.D & LL.M (taxation)

chris@jmtaxlaw.com

720-784-3296

This is an article that covers the highlights and most common reporting occurrences for Form 926. Please keep in mind that the topic can get very nuanced and detailed. This article does not address all aspects that relate to Form 926. Perhaps the day will come when we produce THE definitive article on Form 926, but that day is not today.

The U.S. government is very interested in knowing what its taxpayers are up to, and that counts double for investments made outside of the U.S. As such, the U.S. Congress enacted laws that compel certain information form reporting when taxpayers have certain outside U.S. interests. These forms generally have no direct tax impact on the taxpayer, but they are required to be reported with failure to do so being subject to stiff monetary penalties. That begs the question, how on earth would a NP organization have investments made outside the U.S.?

Why would a nonprofit have to file an international informational tax form?

The primary way a NP organization makes investments in entities outside the U.S. is through its investment portfolio, most often with hedge funds, private equity funds and investment partnerships. Either the hedge fund or private equity fund is structured as a foreign corporation/partnership or the domestic partnership the NP has invested in, or owns an interest in, has invested in foreign entities. Thus, the NP investment in a foreign entity could be either a direct or an indirect investment, and depending on the circumstances, could require filing international informational forms.

It is also possible the NP organization has set up an entity outside the U.S. itself to help further its mission. In that instance there is a far greater chance the informational forms will be required.

How would a nonprofit know if they must file an international form?

A NP should conduct a thorough review of their investments and work with the companies they invest in to determine if the investments will give rise to any of the later discussed international informational reporting forms. Understanding the type of entity the NP has invested in and how the U.S. treats that entity is critical to getting the filings correct. Beyond just knowing the type of entity, the NP should clearly understand how much of the entity (by voting rights and value) is owned at the beginning of the tax year and the end of the tax year. The NP should keep good records of the contributions made to the foreign entities per year as well. 

On occasion, the NP will receive documents from its investment company or foreign entity that will help determine if any filing obligations are necessary. Items to pay attention to include:

• A Passive Foreign Investment Company (PFIC) statement. That should key the NP that there is an investment in a foreign corporation and some attention should be given to its reporting obligations.
• Form 926 statements. These statements also indicate an investment in a foreign corporation, and something may need to be reported with respect to the investment.
• If the NP has invested in a domestic or foreign partnership, they should be receiving a Schedule K-1 and/or Schedule K-3. Each of these Schedules could provide information needed by the NP to make international informational form filing assessments. As a note of caution, just because a NP does not receive a K-1 or K-3 from one of its investments, doesn’t mean it does not have any international informational filing obligations. Additional due diligence should be conducted to ensure the NP is compliant with all of its U.S. filing obligations.
• A 5471 statement and attachment. Occasionally a NP will receive a copy of the actual form it needs to file. Don’t discard this form as it likely indicates it needs to be filed with the tax return. 

What kind for international informational forms might a nonprofit have to file?

Foreign Bank Account Reporting (FBAR)

The FBAR is a form that needs to be reported through the Financial Crimes and Enforcement Network (FinCEN). Per the IRS, and through the Bank Secrecy Act, every year, a U.S. person must report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the Treasury Department and keep certain records of those accounts. The filer reports the accounts by filing a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114.

The NP could have an FBAR reporting obligation if it directly controlled a foreign bank account or if it controls (more than 50% ownership) an entity (foreign or domestic) that has a foreign bank account. Further, U.S. individuals that have signature authority over the foreign bank account may have a separate filing obligation.

There is a threshold for filing the FBAR when the collective balance of the foreign accounts is USD 10,000 or more at any point during the calendar year.

The penalty for failure to file the FBAR is $10,000 per year. Failure to file is deemed to occur when the forms have not been filed or when they are filed late. As of the writing of this article, there is split legal authority as to whether the penalty applies on a per form or per account basis.

Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations:

The Form 5471 may be required to be filed by the NP if the NP meets certain ownership thresholds of a foreign corporation. Generally, when a NP owns 10% or more of a foreign corporation, consideration should be made to filing the Form 5471. 

Determining if the entity is a foreign corporation may not be a simple or straightforward process. Local country and U.S. tax options may come into play for the analysis. Determining how much is owned may not be very straight forward. Ownership considerations for direct, indirect or constructive ownership scenarios apply when determining how much of the entity the NP is considered to own for U.S. tax reporting purposes. An annual analysis should be conducted to determine the Form 5471 filing obligations.

The penalty for failure to file the Form 5471 is $10,000 per form per year. In certain circumstances there could be an additional $10,000 penalty if certain category filers should have filed and did not. Failure to file is deemed to occur when the forms have not been filed, when they are filed late, or when they are filed with insufficient information.

Form 8858 Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)

Form 8858 is used to report the activity of a foreign branch or disregarded entity. Most often, a NP will have a form 8858 filing if it owns a foreign corporation which then owns a foreign branch or disregarded entity.

The Form 8858 also has a $10,000 penalty when it should be attached to a Form 5471, but was not.

Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships

Similar to a foreign corporation, a NP may have a Form 8865 filing obligation if it meets certain ownership thresholds of a foreign partnership or if it makes certain contributions to a foreign partnership. In general, if a NP owns more than 10% of a foreign partnership, it should make further inquiry to its filing obligations. In addition, if a NP contributes $100,000 or more in cash or other property to a foreign partnership during its tax year, it will have a Form 8865 filing obligation.

The penalty for failure to file the 8865 is $10,000 per form per year.  If you are a category 3 filer, the penalty is 10% of the amount contributed to the foreign partnership up to $100,000. Failure to file is deemed to occur when the forms have not been filed or when they are filed late.

Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation

Form 926 is required when a U.S. taxpayer transfers certain property to a foreign corporation. Similar to Form 5471, there are certain qualifications and requirements to be met when determining if a Form 926 needs to be filed. Generally, when a U.S. taxpayer transfers property (including cash) to a foreign corporation in a non-recognition exchange for shares, the Form 926 may be required. The most common requirement occurs when a U.S. person contributes $100,000 cash. The threshold is removed for non-cash contributions of property, but there are exceptions for NP organizations.

The penalty for failure to file is 10% of the amount contributed up to $100,000. Failure to file is deemed to occur when the forms have not been filed or when they are filed late.

Form 8621 Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

The Form 8621 is required when U.S. persons own an interest in a Passive Foreign Investment Company (PFIC). A PFIC is a foreign corporation (again that determination may need to be made) whose activity is considered primarily passive (income of interest, dividends, rents, royalties or when the assets give rise to passive income). Often, the NP will be notified if it has invested in a PFIC either directly or through Schedule K-1 or K-3, but not always. Work should be done to determine if the NP has invested in PFICs.

Generally, a NP does not have to file Form 8621 for an investment in a PFIC, unless the PFIC generates UBI. It is sometimes very difficult to determine if a PFIC generates UBI, often to the point that you can’t make the determination. A risk-based approach may be warranted for filing.

Most often, the PFIC notice comes from either Sch. K-1 or Sch. K-3, but it could arise otherwise if owned directly.

How does a nonprofit file the required international information forms?

The FBAR is filed on its own with FinCEN. The other forms are attached to a tax return. If the NP does not otherwise have a filing obligation, they will need to file a Form 990-T and attach the required forms.

What should the nonprofit do if it discovers it didn’t file these forms, but should have?

If the NP finds they are late in filing the any of the above listed forms, the organization should amend its prior year returns and file the forms. There is a good chance the NP will receive a penalty notice for late filing those forms. The penalties may be abated by the IRS if the NP has reasonable cause for failure to file those forms timely. The amended returns should be filed with a reasonable cause statement, but there is no certainly the IRS will review the reasonable cause statement at that time. 

If the NP has failed to file or failed to timely file its international information reporting forms, it should seek the help of a qualified advisor to assist with penalty abatement avenues.

The international informational tax forms required by the IRS can be challenging. Even knowing if you must file the forms can be challenging. Our firm has extensive expertise in this area and helps nonprofits make the required determinations with respect to international informational tax forms and helps organizations get, and stay, compliant with their current and past international informational tax filing obligations. Please reach out to John McGuire or Christopher Stroh with any questions or needed assistance.

John McGuire J.D & LL.M (taxation)

john@jmtaxlaw.com

720-833-7705

Christopher Stroh J.D & LL.M (taxation)

chris@jmtaxlaw.com

720-784-3296

Denver Business Lawyers You Can Trust

If you’re looking for Denver business lawyers that you can rely on to look after your best interests, Mcguire Law Firm is here to help. Mcguire Law Firm has an experienced and trustworthy team of legal professionals dedicated to meeting their client’s needs. Our team will honestly assess your situation and guide you through the legal process with timeliness and accuracy. We understand how crucial it is to have experienced and dependable legal representation when making decisions that could affect the rest of your life, so our team is committed to providing exceptional service tailored to each client’s individual circumstances. Mcguire Law helps ensure entrepreneurs, start-ups, and established businesses in Denver can access quality advice from a reliable legal resource.

What is the purpose of a business attorney?

Mcguire Law Firm is dedicated to providing its clients with experienced, personalized legal representation and advice regarding their business needs. A business attorney from Mcguire Law Firm can offer a wide range of services to support a company’s success. This could include everything from forming contracts and assisting with acquisition deals to helping protect intellectual property and staying compliant with the law. The Mcguire Law Firm’s team of attorneys will ensure that all matters are handled quickly, efficiently, and in a way that helps promote the interests of the client. With Mcguire Law Firm on your side, you can rest assured knowing your ventures are free of legal complications – allowing you to focus on growing your business.

Why a small business needs a lawyer?

Every business, small or large, can benefit from consulting a business lawyer. A business lawyer can effectively guide business owners through the legal complexities of business operations and transactions. This may include providing counsel for aid in business formation, protection of business interests, mitigating risks, and communication with relevant regulatory agencies. A business lawyer’s extensive knowledge of setting up business entities, such as limited liability companies (LLCs) and corporations, can be invaluable in ensuring that business assets are adequately protected against potential liabilities. Subsequently, this creates an environment where a business can operate confidently and with peace of mind. Taking on the services of a well-respected business lawyer is a wise decision that every small business should make.

Unique Problem Solving for Our Clients

We understand that business lawyers are faced with an array of challenges when representing their clients. That’s why we specialize in providing unique problem-solving strategies tailored to business lawyers’ needs. We recognize the importance of creative thinking to drive business success, and we are dedicated to providing our business lawyer clients with innovative solutions to complex legal issues. We work alongside our business lawyer clientele throughout the entire process, so they can be confident that the best interests of their business are being taken into consideration every step of the way.

Our business lawyer clients depend on us to provide creative and innovative problem-solving solutions. We have years of experience in business litigation, contract negotiations, incorporations, business counsel services, and more to provide our business lawyer clients with the best possible outcome. At Mcguire Law Firm, we strive to use a holistic approach while integrating legal expertise with business acumen to ensure that our business lawyer clients feel heard and supported throughout their journey with us. As the business environment continues to evolve, so do the problems that need resolving — which is why we stay abreast of the latest trends in business law. This ensures that our business lawyer clients are always receiving up-to-date legal advice from a leading provider of business lawyer services.

Colorado’s Top Businesses Choose Us for Their Legal Needs

Mcguire Law Firm offers premier legal services to top businesses in Colorado and beyond. We are proud of our longstanding reputation as the go-to law firm for many of the state’s leading business sectors. Our extensive experience in commercial contracts, corporate formations, estate planning, and tax, labor & employment issues, and litigation put us uniquely positioned to offer guidance and expertise tailored to our client’s specific needs and desired outcomes. Mcguire Law Firm is trusted by companies throughout the region, as evidenced by their continued loyalty when it comes to their legal needs.

Reliable Denver Business Lawyers

Mcguire Law Firm is one of Denver’s most trusted business law firms. We specialize in providing our clients with the most reliable, highly skilled, and experienced legal guidance for an array of complicated matters such as corporate governance disputes, copyright infringements, contract negotiations, and more. Our attorneys strive to keep up-to-date on the ever-changing legislative environment to ensure our clients get the best guidance. Mcguire Law Firm guarantees comprehensive and personalized solutions to help your business succeed. Whatever your business law needs are, we’ll provide you with top-notch counsel so you can rest easy knowing you’re well cared for by Denver’s best business lawyers. Contact Mcguire Law today to learn more about how we can handle all your business legal needs.

Avoid Risk with McGuire Law: Business Legal Services

As a business owner, you know how important it is to protect yourself and your investments. You’re always looking for ways to reduce the risk associated with running a business. That’s why you should look no further than McGuire Law when it comes to legal matters. Our team of experienced legal professionals is here to provide comprehensive business legal services to help you avoid unnecessary risk and protect your investments.

Business Formation Services

At McGuire Law, we understand how intimidating it can be to start a business. That’s why we offer comprehensive business formation services that will help guide you through the process from start to finish. Our team will assist in selecting the proper structure for your new venture and walk you through all the paperwork needed to get your business up and running as quickly as possible. We’ll also prepare contracts, agreements, and other documents required for day-to-day operations—all designed to keep you protected from potential liabilities and lawsuits down the line.

Contract & Agreement Drafting

No matter what type of business you run, there are always contracts and agreements that need to be signed by everyone involved. At McGuire Law, our team will draft these documents for you to keep things simple while still protecting your interests. We’ll ensure that everything is clearly outlined so that both parties understand their rights and obligations under the contract or agreement—and if anything changes or needs clarification down the line, we’ll be there every step of the way.

Risk Management Services

The last thing any business owner wants is a lawsuit or other legal issue hanging over their head. That’s why McGuire Law offers risk management services designed specifically for businesses of all sizes. From employee handbook reviews to compliance audits, our team has the experience and expertise to ensure that your entire operation runs smoothly without any surprises waiting around the corner.

Professional Guidance For Your Business

Starting and running a business can be filled with exciting opportunities, but it’s also full of complex legal issues. Navigating the legal landscape alone can be challenging, so professional guidance is essential. Having the right support can help you make sure your business is in compliance with all applicable laws and also give you advice on how to work through any legal issues that arise. Let’s look at some areas where professional guidance can make all the difference for your business.

The Benefits of Professional Guidance

Having a reliable source of professional guidance is essential for businesses of all sizes. Here are just a few ways it can benefit your business:

• Protection from Legal Liability: One of the most significant benefits of having professional guidance is that you will have an experienced advisor who can help you stay within the boundaries of the law. This means that if you ever find yourself in court, you will have someone who knows how to defend your interests and protect your rights.

• Advice on Tax Issues: Tax laws are constantly changing, which makes them difficult for many business owners to keep up with. Professional guidance can provide expert advice on how to stay compliant with current tax regulations and how to maximize your tax savings.

• Help With Contracts: Writing contracts is one area where having an experienced professional by your side is invaluable. A good contract should be tailored to fit the specific needs of each situation, so it’s vital to seek out someone who knows what they’re doing when it comes to writing contracts that are legally binding and enforceable.

• Impartial Third-Party Opinion: Many business disputes arise because an impartial third party isn’t involved in negotiations or mediation. Having an experienced lawyer or other types of professional advisor present during these types of discussions can help ensure both parties receive fair treatment and reach a resolution that works for everyone involved.

What Services Does a Business Attorney Provide?

When running a business, it is crucial to have an attorney who can provide the legal advice and help you need. A business attorney offers services that range from helping you form your business entity to ensuring that your contracts and agreements comply with the law. Here is a closer look at what services a business attorney near you can offer.

Business Formation Services

A business attorney can help you decide which type of business suits your particular circumstances. This may include selecting the right type of entity or deciding between different entities. A lawyer will also help you create a partnership agreement or articles of incorporation and file them with the state’s secretary of state office. Additionally, they can assist in obtaining any necessary licenses or permits needed to operate your business legally.

Contracts and Agreements

Businesses need to have clearly written contracts and agreements in place with customers, vendors, partners, employees, and other parties. Business attorneys can help draft these documents and review existing ones to ensure they comply with federal, state, and local laws. Your lawyer can also provide guidance on how best to protect yourself in case of disputes or litigation later on down the line.

Intellectual Property Protection Trademarks, copyrights, and patents—are all intellectual property rights that businesses must protect to maximize their profits and prevent competitors from infringing upon their work. An experienced lawyer can guide you through the process of registering trademarks and copyrights as well as filing patent applications when applicable. They can also advise on how best to enforce these rights against those who violate them without your permission.

Benefits of Hiring Experienced Business Attorneys

As an entrepreneur, you understand that running a business requires attention to detail and ensuring everything is done correctly. But what do you do when you come across legal issues that require experienced and knowledgeable advice? This is where hiring experienced business attorneys comes in. Experienced business attorneys are a valuable asset to any business. They provide the expertise and knowledge needed to navigate legal matters, ensuring your business runs efficiently and complies with applicable laws. Let’s take a closer look at how experienced business attorneys can benefit your business.

Experienced Business Attorneys Help You Avoid Legal Issues

One of the most important benefits of having experienced and knowledgeable business attorneys on hand is that they help you avoid potential legal issues. Good attorneys will be able to identify and address potential problems before they become serious issues that could cost your company time, money, or worse—its reputation. Experienced lawyers know how to craft contracts that protect both parties involved and anticipate any potential issues that may arise from a contract before it is even signed.

Experienced Business Attorneys Can Help Resolve Disputes

When disputes arise between parties involved in a contract or transaction, it’s essential to have an experienced attorney on your side who can help resolve the issue quickly and efficiently while protecting your interests. Experienced lawyers not only have knowledge of the law but also understand how to negotiate effectively so that all parties involved reach an agreeable solution in a timely manner. A good lawyer understands how to assess the situation objectively and find solutions that work for everyone involved without sacrificing their clients’ rights or interests.

Experienced Business Attorneys Provide Valuable Advice

Having experienced lawyers on your team can also provide invaluable advice regarding potential investments or ventures. Experienced lawyers will be able to identify any risks associated with certain investments or opportunities so that you are better equipped to make informed decisions about how best to move forward with them. They can also provide guidance on navigating complex regulations or other legal matters related to running a successful business. With their help, you’ll be better positioned to make sound financial decisions while avoiding costly mistakes down the road.

The Role of a Business Attorney in Business Protection

Understanding the value of having an experienced business attorney on your team is important. A good business lawyer can help protect your business from potential liabilities and ensure that you comply with all laws, regulations, and industry standards. Let’s take a closer look at how a business attorney can help protect your business.

Advising on Legal Structure

A reputable business lawyer can advise you on the best legal structure for your company. Depending on the type of company you own, there may be certain legal requirements that must be met before you can operate legally. For example, if you own a corporation, you may need to register with the state and file articles of incorporation. A knowledgeable lawyer will be able to explain the specific requirements for your type of company and help ensure that all necessary paperwork is completed and filed correctly.

Providing Legal Advice

A skilled business attorney can provide valuable advice on various critical legal matters related to running your company. They can review contracts and other documents to ensure they are written correctly and up-to-date with current laws and regulations. They can also advise on specific issues such as compliance with employment laws, intellectual property rights, taxation rules, etc. In addition, they can assist in negotiating contracts or resolving disputes between parties involved in transactions with your company.

Drafting Contracts & Agreements

A competent lawyer will also have the experience to draft contracts that protect your interests while ensuring compliance with applicable laws and regulations. When creating contracts or agreements between yourself and another party, they must be written clearly so that both parties understand their obligations under the agreement. An experienced lawyer will have extensive knowledge regarding contract law and can draft documents that ensure both parties’ rights are protected while still being easy to read and understand by non-lawyers.

Conclusion:

Having an experienced business attorney on your side is essential for protecting your company from potential liabilities or costly mistakes due to a lack of knowledge about applicable laws or regulations. A competent attorney can provide invaluable advice on legal matters related to running a successful business as well as drafting contracts or agreements between parties involved in transactions with your company. Ultimately, having an experienced lawyer on hand when making decisions about important legal matters related to running your business could save you time and money down the road by helping protect you from costly mistakes or liabilities associated with those decisions.

purchase or stock purchase, the underlying agreement, and the obligations of the seller or the buyer to close on the transaction are likely to be contingent upon certain conditions.

The timing of these contingencies to occur may be before, at, or within a certain period from the transaction’s closing date.  Many transactions will have an effective date whereby the seller and purchaser execute the agreement, but the closing date may be set to occur in the future.  For example, the effective date may be January 20th, with the closing set for March 15th.  During this interim period, the purchaser may conduct certain due diligence items, working on the financing or loan to purchase the business or other matters.  Regardless, having the proper contingencies established in the purchase agreement with the appropriate language depending upon the circumstances can be critical.  Below are certain contingencies that you may find in a purchase agreement.  Please remember that this article is informational and should always discuss your circumstances directly with your business attorney.

Financing or Lending

It is pervasive for a business acquisition agreement to have a contingency that the transaction’s closing is contingent upon the buyer receiving the appropriate financing.  While this may seem obvious, as how would most buyers have the cash to pay the purchase price without financing or lending from a bank, this contingency allows the buyer to have an “out” and perhaps terminate the agreement if they cannot obtain funding.  Well, maybe not so fast for the buyer if the seller’s counsel has properly negotiated the deal.  If a buyer has a financing contingency, the seller will want to protect themselves but include language such that the buyer may need to terminate the agreement due to this contingency on or before a specific date or that the buyer must use reasonable and good faith efforts to obtain financing.  Thus, the buyer may be unable to completely walk away from the transaction by turning down suitable financing offered from a bank or simply not even attempting to obtain funding if they get “cold feet” after the effective date.  While the seller may not be able to legally force the buyer to close and pay over the agreed-upon purchase price, the failure to complete may allow the seller to receive deposited funds or recover damages due to a breach of contract.

Assignment of Lease or Purchase of Real Estate

Suppose the seller has been leasing the premises whereby the business has been operating. In that case, it is common for the buyer to have a closing contingency whereby the seller’s lease must be assigned to the buyer on or before closing for the transaction to complete.  This contingency would protect the buyer from purchasing the business but finding themselves in a situation whereby they had no location to operate the business properly.  Furthermore, the company’s site may be pertinent to the overall operations. Thus, the buyer would want to continue using the exact location via an assignment of the lease instead of finding themselves in a situation where they had to relocate the business.  This same contingency may hold if the seller owns the real estate or location whereby the business is operated, and the buyer wishes to purchase the real estate in addition to the company.  Under these circumstances, the closing of the business acquisition would be contingent upon the parties or their related entities entering into a contract to purchase real estate, which would generally coincide with the business purchase and closing. Finally, suppose the seller of the business did own the real estate, whereby the company operated but did not wish to sell the real estate. In that case, you may again find yourself in a situation whereby the lease of the real estate with the seller as landlord and the buyer as the tenant would be a contingency to close on the transaction.  Again, as a seller, you would want language within this contingency that controlled the circumstances whereby the buyer could terminate the agreement.

General Due Diligence

Many acquisition agreements may have a general and broad due diligence contingency.  This due diligence may be related to the finances of the target business and other business matters, such as business relationships with customers or vendors, the condition of the business assets, or any material business issue under inspection by the buyer.  Because this contingency is generally more subjective than the others, you are more likely to see a time constraint or objection deadline for the buyer to notify the seller if the buyer wishes to terminate the agreement because of their due diligence.  For example, the buyer only has 15 days from the effective date to properly complete the deal due to the due diligence.

Permits and Licenses

Depending upon the permits or licenses required to operate the applicable business, a buyer will want the closing contingent upon receiving such permits or licenses.  For example, if the target business is a restaurant and bar, the buyer would like to ensure they have obtained a liquor license before closing.  Again, the seller would wish to appropriate language requiring the buyer to act in good faith to acquire these licenses and permits and/or need an objection deadline before the closing date for the buyer to terminate the agreement properly.   

Assignment of Contracts

The value of many businesses lies within the inherent value of the businesses’ contracts with third parties.  Thus, in acquiring the contracts via an asset purchase or stepping into the shoes of the target via a stock purchase agreement, the buyer should require that the proper assignment or enforceability of the contracts (or a certain percentage) act as a contingency for the buyer to close.  It is important to note that this issue considers the specific terms and conditions of the contracts the buyer hopes to acquire or become a party to, such as the assignability of the agreement or change in control provisions.  

The above are just a few contingencies to consider when entering into an acquisition, but perhaps some of the more common. Therefore, it is essential to consider which contingencies apply to the facts and circumstances surrounding your transaction and the specific language within each, as well as how such contingencies factor into the remaining provisions of the purchase agreement.  

In an acquisition, a representation is a statement (almost an unconditional promise) from the seller or buyer that some set of facts and/or circumstances is true, correct, and/or accurate about the business or a party to the agreement and this fact or circumstance is likely to be very influential to the other party to enter into the agreement.  The warranty further assures the buyer that the assets or stock being purchased are free from defects and is a legally binding commitment.  Thus, a representation and warranty is a promise to the other party that certain facts and circumstances about the assets, stock or business are true and correct.  Below are examples of common representations, warranties, and information on why a party to an acquisition would likely find the issue important.  These examples and the reasoning should help in your understanding of why parties to an agreement will find the representations and warranties so important and why these sections are some of the most heavily negotiated issues in a business transaction or acquisition.  

Authority

Generally, the seller or sellers in an acquisition will represent and warrant that the individuals executing the purchase agreement on behalf of the company or seller have the corporate or partnership authorized to execute the purchase agreement.  So, why would a buyer care?  As the buyer, you need to ensure that an individual or individuals with the appropriate authority based upon the selling company’s bylaws, operating agreement and/or other internal documents has the requisite authority to bind the seller and/or company to the terms with the purchase agreement and the other ancillary documents to the transaction.  For example, say you are purchasing ABC, LLC, and Joe Smith states he is the managing member of ABC, LLC and will execute the purchase agreement on behalf of ABC, LLC.  Upon your review of the operating agreement of ABC, LLC, the operating agreement does not allow for the managing member to sell all or substantially all of the assets of ABC, LLC, and the sale of all or substantially all of the assets of ABC, LLC outside of the ordinary course of business requires unanimous consent of all members.  If Joe Smith is not the sole and 100% owner of ABC, LLC, Joe cannot technically bind ABC, LLC to the transactions contemplated in the purchase agreement and perhaps the ancillary documents to the transactions.  If Joe were the only party of ABC, LLC to execute the purchase agreement, other members of ABC, LLC could later argue that the transaction is unenforceable and void because Joe never had the necessary authority to unilaterally enter into the transaction.  Thus, although a representation and warranty related to the authority of those binding a company may seem “boilerplate,” it can be a very important representation and warranty.

Financial Statements

Generally, the company being sold and/or the sellers who own the company will represent and warrant that the financial statements provided to the buyer are true, accurate, and correct.  Financial statements are likely to include the prior year tax returns, income statements (profit & loss statements), balance sheets, and other financial information disclosed to the buyer.  This may be more obvious as to why the buyer would care, but generally if a buyer is purchasing the assets of a business or the stock of an individual, the financial status and success of the business have been a significant and influential factor in the buyer’s decision to purchase.  Further, in addition to gross income and net income, which a buyer can use to calculate discretionary earnings, which generally play a large role in the underlying value of the business, the financial statements of the business should provide information such as debts and liabilities, which can be indicative of normal operating costs of the business that the buyer must consider to operate at a profit, or even show debt that could be evidenced by a lien and thus be encumbering the assets.  Thus, for this reason, and many others that are not detailed, the financial representation and warranty made by the seller and/or company are essential to the buyer.

Debts, Liens & Encumbrances

In addition to representing and warranting the financial statements, a buyer will generally want the seller to represent and warrant that the assets or stock being purchased are free and clear from any liens, encumbrances, or other third-party rights such that the buyer is acquiring the assets with assets or stock with free and clear title.  This being said, it is not uncommon in an asset purchase for there to be certain debts of the company that do encumber some of the assets being purchased.  This issue is generally worked out through the asset purchase agreement with the debts being disclosed and then either satisfied before closing, with the closing proceeds, or the buyer assuming the liabilities encumbering the assets.

Litigation or Legal Proceedings

Another common representation and warranty a buyer is likely to request would be that there are not current or pending claims or legal proceedings against the business selling the assets or the individual selling their stock.  Furthermore, it is not uncommon to see a representation or warranty that the company or seller of stock is also unaware of any fact or circumstance that could lead to some form or claim, litigation or legal proceeding.  A claim or legal proceeding whether ongoing, pending, or known, would be important for a buyer to know, especially in a stock purchase because such claim could lead to a judgment that the buyer could be responsible for and eventually a third party right, claim or encumbrance to the assets of the business etc.  Although, a buyer may be able to come across current litigation in their due diligence of the company or seller and/or disclosures from the seller, it can be very hard to always ascertain what potential claims may be looming but have yet to be filed or threatened, of which may need to be defended.

Tax Compliance & Legal Compliance

A seller should represent, and warrant that they are in compliance with all federal, state and local tax laws and regulations and that all returns and tax payments that would have been due prior to closing have been filed and paid.  A buyer does not want a taxing authority to have any claim against the assets or stock purchased and some taxing authorities may have a priority lien on the underlying assets purchased if certain taxes were due at the time of closing.  The same issue and potential exposure would hold true for general legal compliance in that the seller has been in compliance with all laws and is unaware of any lack of compliance.

The Catch-All

While the above representations and warranties are very common in an acquisition agreement, there are also many more that are likely to be found.  That being said, it is not uncommon to have a “catch-all” representation and warranty.  Generally, this representation and warranty would state that all of the documents and information provided by the seller are true, accurate, and correct and there has been no omission of a material fact that would cause any representation or warranty to be inaccurate or misleading.  Although, this may not be a full proof manner to bind a seller or company, it can certainly strengthen the potential for a breach of contract claim if the buyer or purchaser finds or begins to see that certain representations and warranties made by the seller are incorrect or inaccurate and perhaps materially so to the point the buyer is incurring material financial damages or other damages.

The above examples of representations and warranties you may find in an asset purchase agreement or stock purchase agreement are just a few, but in my opinion are some of the most important.  If you are involved in the sale or purchase of a business, whether via an asset sale or stock purchase, it is highly recommended you have representation from a business attorney to handle the matter and prevent unnecessary exposure as much as possible depending upon the circumstances.  You can contact The McGuire Law Firm to discuss any related acquisition issues or questions with a business attorney.