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The truth about
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LLC INFORMATION CENTER

Ask our CPAs your questions:

Arik Rozen, CPA

What is the incorporation process step by step?

Step 1 : 1 hour CHAT with CPA (charted accountant):

after you sign up to our Premium Incorporation service - first step is one hour discussion with a CPA on the following issues:


The entire process of opening US company:

·       Company types

·       State of Incorporation

·       EIN – Employer ID number

·       How long it takes

·       Taxation

·       Banking options

·       Annual filing


Step 2 : Company name

We check name and let you know if it's available and legal

Step 3 : Company formation

·       We send you incorporation documents to sign and return to us via email

·       We open the company and get it approved (5-6 business days)

Step 4 : EIN

·       EIN = Employer ID number, that's the company official ID number.

·       Once we get the company certificate (2-3 days more) we send you the EIN application to sign. 

·       We submit the EIN application to the IRS for approval and processing (10-12 business days)

·       Once we get the EIN Confirmation letter from the IRS, we can start with the bank process.

Step 5  : Bank account / Merchant account process:

·       We introduce you to 5 US banks and payment solution providers

·       Then we will learn from you what are you banking needs

·       We will explain to you what each bank's requirements from non US residents

·       And suggest which banks to apply with first

·       We will help you with the applications, documents, and information that you have to submit

·       We help with the banks's due-diligence  process to verify and identify your US company, and any actual owner.

·       We will help you reply to any bank inquiry and additional information request

·       If first bank rejects your application, we will continue to next bank

F.A.Q

Advantages of LLC          

 

Limited Liability of the owners is the first and most important one.
Members of a LLC benefit from the 'limited liability' characteristic of this legal entity and are protected from personal liability for business disputes that arise between the LLC and a third party. This means that if the LLC incurs debt or is sued, members' personal assets are usually exempt. This is similar to the liability protections afforded to shareholders of a corporation.

 

Less Formalities. LLC's laws in most states require much less formalities and Less Recordkeeping compared to a corporation. As such, there is less registration paperwork and there are smaller start-up costs.

 

Profits distribution. Members can distribute profits with much less restrictions than in a corporation. Ownership ratio can be different than profit distribution ratio and not necessarily tied up to each member's investment.              

                     

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Disadvantages of LLC 

Limited Life. In many states, when a member leaves an LLC, the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business. The remaining members can decide if they want to start a new LLC or part ways. However, you can include provisions in your operating agreement to prolong the life of the LLC if a member decides to leave the business.

 

Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and Social Security. The entire net income of the LLC is subject to this tax.         

                                 

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LLC tax treatment      

     

LLC can be treated  by the IRS as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity", depending on elections made by the LLC and the number of members. 

 

Single Member LLC. LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.

 

Multi Member LLC. LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation.

                                 

                                 

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Federal income tax        

The U.S. has two separate income tax systems: Federal and State. The Federal tax is administrated by the IRS (Internal Revenue Service) and imposed by the IRC (internal Revenue Code) on net taxable income (gross income minus tax deductions).

Tax Rate--Single Taxpayers--2019


      Taxable income:                   Tax:

Over       But not over         Tax            %        On amount over            

$      0       $  9,700                 $    0.00   10       $      0
   9,700       39,475                   970.00   12          9,700
  39,475       84,200               4,543.00   22         39,475
  84,200      160,725            14,382.50   24         84,200
 160,725      204,100           32,748.50   32        160,725
 204,100      510,300           46,628.50   35        204,100
 510,300      .......                153,798.50   37        510,300

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State tax             

State income tax comes in addition to any Federal income tax imposed by the IRS and it is administrated by each state Tax or Revenue Department. There are Seven states that have no income tax:

Alaska

Florida

Nevada

South Dakota

Texas

Washington

Wyoming

Two states have a limited income tax on individuals.  These states tax only dividend and interest income:

 

Tennessee

New Hampshire

Here's a listing of each state's highest income tax rate and how much income you'll have to make to pay that rate.

 

Alabama: 5% on income over  $3,000

Alaska: No income tax

Arizona: 4.54% on income over $150,000

Arkansas: 7% on income over  $32,600

California:10.55% on income over $1 million

Colorado: flat 4.63% of federal taxable income

Connecticut: 6.5% on income over $500,000

District of Columbia: 8.5% on income over $40,000         

Delaware: 6.95% on income over $60,000

Florida: No income tax

Georgia: 6% on income over $7,000

Hawaii: 11% on income over $200,000

Idaho: 7.8% on income over $26,418

Illinois: flat 3% of federal AGI with modifications

Indiana: flat 3.4% of federal AGI with modifications

Iowa: 8.98% on income over $63,315

Kansas: 6.45% on income over $30,000

Kentucky: 6% on income over $75,000

Louisiana: 6% on income over $50,000

Maine: 8.5% on income over $20,150

Maryland: 6.25% on income over $1 million

Massachusetts: flat 5.3% on all income

Michigan: flat 4.35% of federal AGI with modifications

Minnesota: 7.85% on income over $74,780

Mississippi: 5% on income over $10,000        

Missouri: 6% on income over $9,000

Montana: 6.9% on income over $15,400

Nebraska: 6.84% on income over $27,000

Nevada: no income tax

New Hampshire: 5% on interest and dividend income.  Wages are not taxed.

New Jersey: 8.97% on income over $500,000

New Mexico: 4.9% on income over $16,000

New York: 8.97% on income over $500,000

North Carolina: 7.75% on income over $60,000

North Dakota: 4.86% on income over $373,650

Ohio: 5.925% on income over $200,000

Oklahoma: 5.5% on income over $8,700

Oregon: 11% on income over $250,000

Pennsylvania: flat 3.07% on all income

Rhode Island: 9.9% on income over $373,650

South Carolina: 7% on income over $13,700

South Dakota: no income tax

Tennessee: 6% on interest and dividend income.  Wages are not taxed.

Texas: no income tax 

Utah: flat 5% on all income

Vermont: 8.95% on income over $373,650

Virginia: 5.75% on income over $17,000

Washington: no income tax

West Virginia: 6.5% on income over $60,000

Wisconsin: 7.75% on income over $225,000

Wyoming: no income tax

 

                                 

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LLC with non US members & no US operation      

Taxable income generated by LLC that elects to be treated as disregarded entity for tax purposes, may be considered 'not effectively connected with US trade or business' and as such not be subject to US taxation, if all LLC members are non US residents and living outside of the US and the LLC has no US presence or operation.

 

If members of the LLC live in the US while they performing services on behalf of the LLC, the LLC taxable income could be then considered as 'effectively connected with US trade or business' and as such be subject to US taxation.

 

Generally, when a foreign person engages in a trade or business in the United States, all income from sources within the United States connected with the conduct of that trade or business is considered to be Effectively Connected Income (ECI). This applies whether or not there is any connection between the income, and the trade or business being carried on in the United States, during the tax year. Generally, you must be engaged in a trade or business during the tax year to be able to treat income received in that year as ECI. You usually are considered to be engaged in a U.S. trade or business when you perform personal services in the United States. Whether you are engaged in a trade or business in the United States depends on the nature of your activities. Deductions are allowed against ECI, and it is taxed at the graduated rates or lesser rate under a tax treaty.

The following categories of income are usually considered to be connected with a trade or business in the United States.

 

You are considered to be engaged in a trade or business in the United States if you are temporarily present in the United States as a nonimmigrant on an "F," "J," "M," or "Q" visa. The taxable part of any U.S. source scholarship or fellowship grant received by a nonimmigrant in "F," "J," "M," or "Q" status is treated as effectively connected with a trade or business in the United States.

 

 

If you are a member of a partnership that at any time during the tax year is engaged in a trade or business in the United States, you are considered to be engaged in a trade or business in the United States.

 

 

You usually are engaged in a U.S. trade or business when you perform personal services in the United States.

 

 

If you own and operate a business in the United States selling services, products, or merchandise, you are, with certain exceptions, engaged in a trade or business in the United States. For example, profit from the sale in the United States of inventory property purchased either in this country or in a foreign country is effectively connected trade or business income.

 

 

Gains and losses from the sale or exchange of U.S. real property interests (whether or not they are capital assets) are taxed as if you are engaged in a trade or business in the United States. You must treat the gain or loss as effectively connected with that trade or business.

 

 

Income from the rental of real property may be treated as ECI if the taxpayer elects to do so.

 

                                 

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LLC with non US members & US real estate        

LLC that owns real estate in the U.S. can generates rental income (or loss) from renting out the properties and collecting rent from tenants and capital gain (or loss) from the sale of such proeprties. Since both incomes are related to assets and operation physically located in the US, they will both be subject to US taxation.

 

The income will be subject to Federal tax and to the state tax in which the property is located. For example if you have a Delaware LLC, with property in New York and property in California, you will be subject to Federal tax on income from both properties, New York tax on the property located in New York, and California tax on the income generated from the property in California.          

                                 

                                 

                                 

                                 

 LLC with non US members & US operation         

Income generated by LLC with US operation may be considered as 'effectively connected with US trade or business' and as such be subject to US taxation, even if all LLC members are non US residents and living outside of the US.

 

The income will be subject to Federal tax and to the state tax in which the US operation is located. For example if you have a Delaware LLC, with office and  employee in NY and another office and employee California, you will be subject to Federal tax on income from both properties, New York tax on the portion of the taxable income associated with New york (normally it will be calculated as follows : New York wages / Total wages x Total taxable income), and California tax  on the portion of the taxable income associated with California (normally it will be calculated as follows : California  wages / Total wages x Total taxable income).   

                                 

                                 

                                 

                                 

Which income tax returns does LLC file 

LLC filing requirements depend on the entity election to be treated as corporation or disregarded entity and the number of owners.

 

LLC elected to be treated as corporation will have to comply with all the filing requirements impose on a General Corporation, known as C. Corporation. This includes IRS from 1120 and all related statements and schedules. If the company had trading and or business activities it must disclose its income statement and balance sheet. 

 

Single Member LLC. If a single-member LLC does not elect to be treated as a corporation, the LLC is a “disregarded entity” and the LLC’s activities should be reflected on its owner’s federal tax return. If the owner is an individual, the activities of the LLC will generally be reflected on:

Form 1040 Schedule C, Profit or Loss from Business (Sole Proprietorship) (PDF)

Form 1040 Schedule E, Supplemental Income or Loss (PDF)

Form 1040 Schedule F, Profit or Loss from Farming (PDF)

An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship.

 

If the single-member LLC is owned by a corporation or partnership, the LLC should be reflected on its owner’s federal tax return as a division of the corporation or partnership

 

 

Multi Member LLC. If the LLC is a partnership, normal partnership tax rules will apply to the LLC and it should file a Form 1065, U.S. Return of Partnership Income (PDF). Each owner should show their pro-rata share of partnership income, credits and deductions on Schedule K-1 (1065), Partner’s Share of Income, Deductions, Credits, etc. Generally, members of LLCs filing Partnership Returns pay self-employment tax on their share of partnership earnings.

 

                                 

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When does LLC must file its income tax return  

LLC filing deadlines depend on the entity election to be treated as corporation or disregarded entity and the number of owners.

 

LLC elected to be treated as corporation. Form 1120 or Form 7004 (Application for Automatic Extension of Time To File form 1120).   These forms are due on the 15th day of the 3rd month after the end of the LLC's tax year.  Form 7004 is used to request an extension of time to file Form 1120 . Timely filed form 7004 allows the LLC to file its annual tax return by the 15th of the 9th month after the end of the LLC's tax year. Estimated tax payments are due on the 15th day of the 4th, 6th, 9th, and 12th months of the LLC's tax year.

 

Single Member LLC. Single-member LLC that does not elect to be treated as a corporation is a “disregarded entity,�?and the LLC’s activities should be reflected on its owner’s federal tax return - Form 1040 or 1040NR (if the owner is a non US resident).  This form is due on the 15th day of the 4th month after the end of your tax year. Form 4868 is used to request an extension of time to file Form 1040. Timely filed form 4868 extends the filing deadline by 6 months. Estimated tax payments (Form 1040-ES). Payments are due on the 15th day of the 4th, 6th, and 9th months of your tax year and on the 15th day of the 1st month after your tax year ends.

If the single-member LLC is owned by a corporation or partnership, the LLC should be reflected on its owner’s federal tax return as a division of the corporation or partnership

 

 

Multi Member LLC. Form 1065.   This form is due on the 15th day of the 4th month after the end of the partnership's tax year. Provide each partner with a copy of Schedule K-1 (Form 1065) or a substitute Schedule K-1. Timely filed form 7004 allows the LLC to file its annual tax return by the 15th of the 9th month after the end of the LLC's tax year.               

                                 

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Can I get more time to file the tax returns?         

There are three ways you can request an automatic extension of time to file a U.S. individual income tax return: (1) you can electronically file Form 4868 or Form 7004(PDF), Application For Automatic Extension of Time To File U.S. Individual Tax Return; (2) you can pay all or part of your estimate of income tax due using a credit or debit card or by using the Electronic Federal Tax Payment System (EFTPS); or (3) you can file a paper Form 4868 or 7004 by mail.

 

If you file your Form 4868 or 7004 electronically you will receive an acknowledgement or confirmation number for your records and you do not need to mail in Form 4868 or 7004.

 

If you need to pay additional taxes when filing Form 4868 or 7004 electronically, you may do so through the outside service provider or through e-file. You can refer to your tax software or tax professional for ways to file electronically using e-file services. Several companies offer free filing of Form 4868 or 7004 through the Free File program that you can access on the IRS.gov website. If you wish to file electronically, be sure to have a copy of last year's tax return. You will be asked to provide the adjusted gross income (AGI) from the return for taxpayer verification.

 

A second way of requesting an automatic extension of time to file your individual income tax return is to pay part or your entire estimate of income tax due by credit card or debit card or by using EFTPS. You may pay by phone or Internet through one of the service providers listed on Form 4868 or 7004. Each service provider will charge a convenience fee based on the amount of the tax payment. At the completion of the transaction, you will receive a confirmation number for your records.

 

Finally, you can request an automatic extension of time to file your individual income tax return by completing paper Form 4868 or 7004 and mailing it to the appropriate address provided on the form. Please be aware that an extension of time to file is NOT an extension of time to pay.

 

Extracted from the IRS at: http://www.irs.gov/taxtopics/tc304.html       

                                 

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Do I need to submit audited financial statements?          

Audited financial statements mean financial statements on which an independent auditor has expressed an opinion, whether qualified, unqualified, disclaimed, or adverse, under GAAP, IFRS, or another country-specific accounting standard, including a modified version of any of the above (for example, modified GAAP). Compiled or reviewed financial statements are not audited financial statements. 

 

There is no requirement to file audited financial statements with form 1120, 1040 or 1065. The only requirement is to disclose the income statement, balance sheet and equity / capital accounts, but they can be un-audited financial statements.

 

                                 

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What is my tax year?     

The IRS recognizes two main types of taxable or tax years—a calendar tax year and a fiscal tax year.  Your business structure and cycle will help determine whether a calendar or fiscal tax year is appropriate.  

 

Calendar tax year.  A calendar year is twelve consecutive months, running from January 1st and ending December 31st.  Most small businesses use a calendar year as their tax year. 

 

Fiscal tax year.  A fiscal tax year is twelve consecutive months ending on the final day of any month other than December (i.e. July 31st).  Alternatively, a fiscal tax year may also be a 52 to 53 week tax year that does not end on the last day of a given month.  Under a 52 to 53 week fiscal year, your tax year always concludes on the same day of the week when it lasts occurs in that calendar month (i.e. the last Wednesday in March) or falls nearest to the last day of that month. 

 

Once you have established your LLC’s taxable year, be aware that you must follow it in subsequent years and it can be difficult to change your taxable year in the future.  However, you may be able to vary your LLC’s tax year if there is a valid business reason for the modification, such as making an adjustment for a seasonal or cyclical business.  But you must formally request and receive IRS approval in advance to change your tax year.  The IRS wants to avoid situations in which changing your tax year may result in lost or distorted revenues.         

                                 

                                 

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Do I need to sign the tax returns?           

You are required to sign your tax return. By signing the return, you are declaring under penalty of perjury that your tax return is accurate. You must not cross out, put a line through, or white out the perjury statement just above the signature line. If you do so, the IRS will consider your tax return "frivolous" and assess a $500 civil penalty.

 

You are required to date your tax return. The date must be the day you actually signed the tax return. Giving the IRS your occupation and telephone number is optional, but highly suggested.

 

Paid Preparer's Use Only If you have paid a tax professional to prepare your return, the preparer must fill out this section of the tax return. He or she must sign and date the return, must write down their Social Security Number or Preparer's Tax ID Number, and provide other information about the tax firm. Do not let your preparer leave this area blank. If someone is helping you to prepare your tax return, such as a friend, relative, or volunteer, they do not need to fill in this information if they are not being paid to help you.      

                                 

                                 

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How do I submit the tax returns?  

          

After you sign your return, you will have to simply post it to the IRS using the address listed on the return. You can use your country Postage service, Fedex, UPS, DHL or any other courier service that provides shipping to the US with tracking.

 

We highly recommend that you only use traceable postage service, either 'Register' or 'Certified' mail, to make sure you have ‘proof of mailing‘ of the return. This means that if for some reason, the IRS misplace, loose, disregard or do not process your return for any other reason, you will not be subject to any actions due to non-filing. The mailing receipt you have serves as proof of filing.            

                                 

                                 

                           

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Do I get filing confirmation?     

  

The IRS does not send letter of confirmation after receiving your return. The mailing receipt you hold from the courier is your proof of filing.  

 

If you wish to verify that your return has been received and processed by the IRS, you can order “Transcript” of your account or your tax return.  

 

A tax return transcript shows most line items from your tax return (Form 1040, 1040A or 1040EZ) as it was originally filed, including any accompanying forms and schedules. In most cases, your transcript includes all the information a lender or government agency needs. It does not show any changes you, your representative or we made after you filed. Ask your financial institution to be sure a return transcript will meet their requirements. The tax return transcript is generally available for the current and past three years.

 

The IRS can also provide a tax account transcript. The tax account transcript, which is also free, shows basic data from your return, including marital status, type of return filed, adjusted gross income and taxable income. It also includes any adjustments you or we made after you filed your return. Like the tax return transcript, the tax account transcript is generally available for the current and past three years. Order Your Transcript You can now order your transcript(s) using our new Order a Transcript application. Or you can fill out our new Short Form Request for Individual Tax Return Transcripts, (Form 4506T-EZ). This streamlined form will help you get your return information quickly and easily. If you or your business needs information from other IRS forms, such as Form W-2 or Form 1099, you can use Form 4506-T, Request for Transcript of Tax Return, to get it. You can download these forms from the links on the right side of this page or order them from the IRS's self-service line at 1-800-908-9946.

 

If you order form(s) by phone, follow the prompts and select 3, then 1 to quickly complete your order. Once you get your transcript order form, complete it, sign it and send it to the address listed in the instructions. Either way, you can expect to get your transcript within 5 to 10 days from the time we receive your signed request.       

                                 

                                 

                                 

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How long should I keep records?             

The length of time you should keep a document depends on the action, expense, or even the document records. Generally, you must keep your records that support an item of income or deductions on a tax return until the period of limitations for that return runs out. The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax.

 

The below information contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.

Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.

 

You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.

You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.

You file a fraudulent return; keep records indefinitely.

You do not file a return; keep records indefinitely.

You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.

You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.

Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

 

Are the records connected to assets? Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition.  You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property. Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the bases of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. What should I do with my records for nontax purposes? When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes.  For example, your insurance company or creditors may require you to keep them longer than the IRS does.

 

Extracted from the IRS at: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-long-should-I-keep-records    

                                 

                                 

                                 

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Can my return be examined or audited?  

            

When returns are filed, they are compared against “norms for similar returns”. The “norms” are developed from audits of a statistically valid random sample of returns. These returns are selected as part of the National Research Program which the IRS conducts to update return selection information.

 

The return is next reviewed by an experienced auditor.  At this point, the return may be accepted as filed, or if based on the auditor’s experience questionable items are noted, the agent will identify the items noted and the return is forwarded for assignment to an examining group.

 

Upon assignment to a group, the return is reviewed by the manager.  Items considered in assigning a case are:  factors particular to the area such as issues pertaining to construction, farming, timber industry, etc. that have specific factors and rules that apply.  Based on the review, the manager can accept the return or assign the return to an auditor.  The assigned auditor again reviews the return for questionable items and either accepts it as filed or contacts the taxpayer to schedule an appointment.

 

Where will the audit be held?

It depends on the type of audit being conducted.

 

Audits by Mail/Correspondence Audit:  Some audits are conducted entirely by mail. If the audit is conducted by mail, you will receive a letter from the IRS asking for additional information about certain items shown on the tax return such as income, expenses, and itemized deductions.

 

In-Person Audits are audits conducted either at a local IRS office or at your business location.

 

Can you request the audit be conducted at the IRS office instead of at your place of business?

If the audit has been scheduled to be conducted at your location, it will generally be conducted where the books and records are located.  Requests to transfer the audit to another location, including an IRS office, will be considered but may not be granted. Treasury Regulation 301.7605-1(e), Time and place of audit, discusses the items considered when a request for a change in location is made.

 

Can the audit be transferred to another IRS office?

You can request a transfer of an audit if you have moved.  Several factors will be considered such as your current location, the location of the business and where the books and records are maintained.

 

If the audit is by correspondence, you can request a face-to-face audit because the books and records may be too voluminous to mail.

 

How long should the records related to a business or other long-term asset be kept?

In the case of an asset, records related to the asset should generally be kept for as long as you have the asset plus three years.  If the asset was exchanged, the basis for the new asset may include the exchanged asset so the records for both assets will need to be retained until the new asset is disposed plus three years from the file date of the tax return for the year of disposition.

 

How long should payroll records be kept?

In general, payroll records should be kept for six years with a review of the file to see if any items relating to current employees should be retained with current records.

 

After an auditor completes the audit, will the case be reviewed to ensure the audit results are correct?

All cases may be reviewed by the auditor’s manager either during the audit or upon completion. If errors are noted by the manager, the auditor will contact you to advise you about the proposed correction and what impact this may have on the amount of tax due.

 

It's time for my appointment and I'm not ready. What do I do?

If you do not have all the information requested, contact your auditor at the number reflected in the notification letter to discuss what information is currently available.  It may be possible to begin the audit with the information available rather than postpone the appointment.  The quicker the audit begins, the quicker it can be resolved.  In addition, if the initial appointment is scheduled beyond 45 days from the initial action, managerial approval is required.

 

How far back can the IRS go to audit my return?

Generally, the IRS can include returns filed within the last three years in an audit.  Additional years can be added if a substantial error is identified.  Generally, if a substantial error is identified, the IRS will not go back more than the last six years.

 

The IRS tries to audit tax returns as soon as possible after they are filed.  Accordingly most audits will be of returns filed within the last two years.

 

If an audit is for an older year, you may be requested to extend the statute of limitations for assessment of your tax return.  The statute of limitations limits the time allowed to assess additional tax.  The statute of limitations is generally three years after a return is due or was filed, whichever is later.  There is also a statute of limitations for making refunds.

 

If the audit is not resolved and the statute of limitations date is nearing, you may be asked to extend the statute of limitations date.  This will allow you additional time to provide further documentation to support your position, request an appeal if you do not agree with the audit results, or to claim a tax refund or credit. It also allows the IRS time to complete the audit and provides time to process the audit results.

 

You do not have to agree to extend the statute of limitations date.  However, if you do not agree, the examiner will be forced to make a determination based upon the information they currently have.  Therefore, the examiner may not be able to consider additional adjustments, such as expenses, that could lower the amount of tax due.

 

More information related to extending a statute of limitations can be obtained in Publication 1035, Extending the Tax Assessment Period, or from your auditor.

 

Extracted from the IRS at: http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/IRS-Audit-FAQs

 

                                 

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Which information is required to prepare the tax returns?          

               

To prepare your returns we will ask for the following information:

 

 

 

Information about your US company.

 

1.       Entity type

 

2.       Full legal name

 

3.       EIN (employer ID number)

 

4.       Full legal address

 

5.       Full business address

 

 

 

Officers, Directors and Managers

 

1.       Title

 

2.       Full legal name

 

3.       Full address

 

 

 

Shareholders and Owners

 

1.       Full legal name

 

2.       Full address

 

3.       % of ownership

 

 

 

General questions                         

 

Did you have any trading? or business activities?                              

 

Business description                    

 

Did you prepare Balance sheet and Income statement?

 

Did you have any US employees?                              

 

If yes, in which States?                                  

 

Did you have any physical office in the US? 

 

If yes, in which States?                                      

 

 

 

Financial Statements

 

1.       Income statement

 

The income statement is the one of the three major financial statements. The other two are the balance sheet and the statement of cash flows. The income statement is divided into two parts: the operating and non-operating sections.

 

The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations. For example, if a business creates sports equipment, then the operating items section would talk about the revenues and expenses involved with the production of sports equipment.

 

The non-operating items section discloses revenue and expense information about activities that are not tied directly to a company's regular operations. For example, if the sport equipment company sold a factory and some old plant equipment, then this information would be in the non-operating items section.

 

 

 

Download Excel sample: http://office.microsoft.com/en-001/templates/results.aspx?qu=income+statement&ex=1&origin=TC010073876#ai:TC102803409|

 

Extracted from http://www.investopedia.com/terms/i/incomestatement.asp

 

 

 

2.       Balance sheet

 

A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

 

The balance sheet must follow the following formula:

 

Assets = Liabilities + Shareholders' Equity

 

 

 

It's called a balance sheet because the two sides balance out. This makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders' equity).

 

Each of the three segments of the balance sheet will have many accounts within it that document the value of each. Accounts such as cash, inventory and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by company and by industry, as there is no one set template that accurately accommodates for the differences between different types of businesses.

 

 

 

Download Excel template: http://office.microsoft.com/en-001/templates/balance-sheet-TC010073876.aspx

 

 

 

Extracted from: http://www.investopedia.com/terms/b/balancesheet.asp

 

 

 

3.       Equity / Capital

 

A firm's total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity represents the amount by which a company is financed through common and preferred shares.   Shareholders' Equity Also known as "share capital", "net worth" or "stockholders' equity". Shareholders' equity comes from two main sources. The first and original source is the money that was originally invested in the company, along with any additional investments made thereafter. The second comes from retained earnings which the company is able to accumulate over time through its operations. In most cases, the retained earnings portion is the largest component.

 

 

 

Download Excel sample: http://office.microsoft.com/en-001/templates/results.aspx?qu=Shareholders%27+Equity&ex=1#ai:TC104099167|

 

Extracted from: http://www.investopedia.com/terms/s/shareholdersequity.asp

                 

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What happen if I am late with my filing?               

               

Late filing may result in large penalties. Some returns are subject to $10,000 in penalties.

 

Here are eight important points about penalties for filing or paying late.

 

A failure-to-file penalty may apply if you did not file by the tax filing deadline. A failure-to-pay penalty may apply if you did not pay all of the taxes you owe by the tax filing deadline.

 

The failure-to-file penalty is generally more than the failure-to-pay penalty. You should file your tax return on time each year, even if you’re not able to pay all the taxes you owe by the due date. You can reduce additional interest and penalties by paying as much as you can with your tax return. You should  explore other payment options such as getting a loan or making an installment agreement to make payments. The IRS will work with you.

 

The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.

 

If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.

 

If you timely requested an extension of time to file your individual income tax return and paid at least 90 percent of the taxes you owe with your request, you may not face a failure-to-pay penalty. However, you must pay any remaining balance by the extended due date.

 

If both the 5 percent failure-to-file penalty and the ½ percent failure-to-pay penalties apply in any month, the maximum penalty that you’ll pay for both is 5 percent.

 

If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

 

You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time.

 

 

Extracted from the I: http://www.irs.gov/uac/Newsroom/Eight-Facts-on-Late-Filing-and-Late-Payment-Penaltieshttp://www.irs.gov/uac/Newsroom/Eight-Facts-on-Late-Filing-and-Late-Payment-Penalties

 

 

                                 

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What happen if I don't file at all?              

               

You may not have filed your federal income tax return for this year or previous years. Regardless of your reason for not filing a required return, file your tax return as soon as possible. The law allows the IRS to impose extremely high penalties for not filing returns and in some cases even take legal actions (criminal & civil).

 

 

 

If your return was not filed by the due date (including extensions of time to file), you may be subject to the failure to file penalty, unless you have reasonable cause for your failure to file timely. If you did not pay your tax in full by the due date of the return (excluding extensions of time to file), you may also be subject to the failure to pay penalty, unless you have reasonable cause for your failure to pay timely, or the IRS has approved your application for extension of time for payment of the tax due to undue hardship (refer to Form 1127 (PDF), Application for Extension of Time for Payment of Tax Due to Undue Hardship). Additionally, interest is charged on taxes not paid by the due date, even if you have an extension of time to file. Interest is also charged on penalties.

 

 

There is no penalty for failure to file if you are due a refund. But, if you wait to file a return or otherwise claim a refund, you risk losing a refund altogether. An original return claiming a refund must be filed within 3 years of its due date for a refund to be allowed in most instances.

 

 

After the expiration of the three-year window, the refund statute prevents the issuance of a refund check and the application of any credits, including overpayments of estimated or withholding taxes, to other tax years that are underpaid. However, the statute of limitations for the IRS to assess and collect any outstanding balances does not start until a return has been filed. In other words, there is no statute of limitations for assessing and collecting the tax if no return has been filed.

 

 

Extracted from the IRS: http://www.irs.gov/taxtopics/tc153.html

 

 

                                 

                                 

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Do I need to file the tax returns in my home country?   

               

In general, you must comply with tax laws and regulations imposed on you by your country of residency in addition to the US tax laws. This means that if you are a resident of a country which tax laws require you to report and pay tax on income generated outside of that country, you may be obliged to report the income you have generated by your US company.

 

We highly recommend that you consult with a local tax advisor in your home country, one that specializes in international taxation and has the right experience in reporting foreign income on to your local government.    

                                 

                                 

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Will the US government send copy of the return to my government?    

 

The US government has tax treaties with numerous countries. These tax treaties govern the exchange of information between with IRS and other governments. So, in short, if you reside in a country that signed a tax treaty with the US, and your government sends the IRS information request, the IRS may respond with the information to comply with the treaty.

 

If information is needed by a foreign country with which the United States has a tax treaty, a request is submitted by the foreign competent authority to Deputy Commissioner (International), LMSB.

 

Disclosure of information by the IRS to foreign tax authorities must be authorized by the Deputy Commissioner (International), LMSB.

 

Certain automatic or "routine" exchanges (such as transmission of reports of taxes withheld from income paid to nonresident aliens) are handled through the Exchange of Information Team in the National Office.

 

The Deputy Commissioner (International), LMSB, generally forwards requests for information to the LMSB Program Manager, Exchange of Information and Overseas Operations; Tax Attachés; Revenue Service Representative; or Director, Joint International Tax Shelter Information Centre (JITSIC).

 

When the requested information is received from the IRS offices, the Deputy Commissioner (International), LMSB, staff (Exchange of Information Teams, Tax Attachés, Revenue Service Representative, or Joint International Tax Shelter Information Centre (JITSIC)) prepares a document for the transmittal of the information to the foreign competent authority. For requests pertaining to the Simultaneous Criminal Investigation Program, the Deputy Commissioner (International), LMSB, has the authority to authorize any disclosures.

 

For treaty partner requests pertaining to the Simultaneous Examination Program or Industrywide Exchange of Information, the Deputy Commissioner (International), LMSB, will:

 

Forward the request to the International Territory Manager for action; and

 

When the information is received, transmit it to the treaty partner competent authority.

 

For Spontaneous Exchanges of Information, the Deputy Commissioner (International), LMSB staff, (Exchange of Information Teams, Tax Attachés, Revenue Service Representative, or Joint International Tax Shelter Information Centre (JITSIC)), will transmit U.S.-based information to the treaty partner competent authority.

 

Generally, returns are not furnished to foreign tax authorities pursuant to tax treaties.

 

If it should become necessary to issue a summons to obtain the requested information, the summons will be prepared for the staff of the Deputy Commissioner (International), LMSB, and forwarded to Branch 7, Associate Chief Counsel (International) for review prior to issuance.

 

Return information that may potentially identify a confidential informant or otherwise seriously impair an IRS tax investigation is generally not disclosed to foreign tax authorities.

 

Information which would reveal business or trade secrets is excepted from the exchange of information provisions of the treaties. See IRM 4.60.1.2.5.3, Trade Secrets, for further procedures.

 

Disclosures to foreign tax authorities made pursuant to tax treaties must be accounted for in accordance with IRC §6103(p)(3) and the Privacy Act of 1974. See IRM 11.3.37, Recordkeeping and Accounting for Disclosures, for further information.

 

Information disclosed to U.S. Territories under FedState agreements is governed by IRC §6105. Tax information disclosed pursuant to these agreements under IRC §6103(d) is also subject to the administrative provisions of IRC §6103(p)(3) and IRC §6103(p)(4). Unauthorized disclosures and inspections of tax information exchanged pursuant to U.S. Territory agreements may result in criminal sanctions under IRC §7213 and §7213A and civil damages under IRC §7431.

 

 

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Nontreaty Disclosures to Foreign Countries

Although IRC §6103(k)(4) generally provides the authority for disclosure of tax information to foreign tax authorities, other provisions of IRC §6103 permit limited disclosures to foreign countries or individuals of foreign countries in certain situations. These disclosures can be made regardless of whether the United States has a tax treaty or TIEA with the country. However, when a tax treaty or TIEA is in force, information must be exchanged under the tax treaty or TIEA to the extent possible.

 

Return information may be disclosed by IRS employees to individuals of foreign countries in accordance with IRC §6103(k)(6). See IRM 11.3.21, Investigative Disclosure.

 

Returns and return information may also be disclosed to individuals of foreign countries designated in writing by a U. S. taxpayer to receive such information under IRC §6103(c) and (e).

 

Example:

Pursuant to a written taxpayer request and consent for disclosure, IRS may certify to a tax treaty country that taxes were paid in the United States to enable the taxpayer to receive a credit for the taxes on a foreign return.

 

                                 

               

United States Income Tax Treaties - A to Z

The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Most income tax treaties contain what is known as a "saving clause" which prevents a citizen or resident of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income.

 

If the treaty does not cover a particular kind of income, or if there is no treaty between your country and the United States, you must pay tax on the income in the same way and at the same rates shown in the instructions for the applicable U.S. tax return.

 

Many of the individual states of the United States tax income which is sourced in their states. Therefore, you should consult the tax authorities of the state from which you derive income to find out whether any state tax applies to any of your income. Some states of the United States do not honor the provisions of tax treaties.

 

This page provides links to tax treaties between the United States and particular countries. For further information on tax treaties refer also to the Treasury Department's Tax Treaty Documents page.

 

            

Extracted from the IRS: http://www.irs.gov/irm/part11/irm_11-003-025.html    

                                 

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Do I pay tax twice, once in the US and again in my home country?

     

The short answer is no, you do not pay income tax twice. The long answer is that many countries, recognized any tax you pay in the US as credit / payment toward your local tax imposed on the US income.

 

Example: you are a UK resident with a US LLC. Your US Company generates $100,000 in profits and you paid $20,000 to the IRS on that income. You then report the $100,000 profits to your UK government. The UK tax on it is $22,000. The UK will offset the $20,000 US tax you have already paid against the $22,000 UK tax liability, and so, you will only be liable for the remaining balance of $2,000.

 

We highly recommend that you consult with a local tax advisor in your home country, one that specializes in international taxation and has the right experience in reporting foreign income on to your local government.

 

 

 

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