Bitcoin Cash Received as a Result of Bitcoin Hard Fork is Included in Gross Income: CCA 202114020

In CCA 202114020, the IRS ruled on the issue of whether a taxpayer who received Bitcoin Cash as a result of the August 1, 2017, Bitcoin hard fork has gross income under section 61 of the Internal Revenue Code (Code)?

The IRS reached the conclusion that, yes, a taxpayer who received Bitcoin Cash as a result of the August 1, 2017, Bitcoin hard fork has gross income because the taxpayer had an accession to wealth under section 61 of the Code. See Revenue Ruling 2019-24. The date of receipt and fair market value to be included in income will be dependent on when the taxpayer obtained.

IRC Sec. 61(a)(3) provides that gross income means all income from whatever source derived, including gains from the sale or exchange of a property. The term "property" includes services and the right to use property, but it does not include money. (Code Sec. 1273(b)(5))

Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the U.S. dollar or a foreign currency. (FAQ 1, Frequently Asked Questions on Virtual Currency Transactions (3/3/2021))

Cryptocurrency is a type of virtual currency that utilizes cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. Distributed ledger technology uses independent digital systems to record, share, and synchronize transactions, the details of which are recorded in multiple places at the same time with no central data store or administration functionality. (FAQ 3, Frequently Asked Questions on Virtual Currency Transactions (3/3/2021))

A "hard fork" occurs when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the existing distributed ledger. A hard fork may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. Following a hard fork, transactions involving the new cryptocurrency are recorded on the new distributed ledger, and transactions involving the legacy cryptocurrency continue to be recorded on the legacy distributed ledger. (FAQ 22, Frequently Asked Questions on Virtual Currency Transactions (3/3/2021))

An airdrop is a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers. (FAQ 22, Frequently Asked Questions on Virtual Currency Transactions (3/3/2021))

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The Tax Gap Could Exceed $1 Trillion - IRS Enforcement is The Answer

According to Law360, the gap between taxes owed each year and those actually paid could be more than $1 trillion, much larger than the most recent estimate of $441 billion, IRS Commissioner Chuck Rettig told the Senate Finance Committee on Tuesday.

IRS Commissioner Chuck Rettig told the Senate Finance Committee on April 13, 2021 that his agency is making the most of its resources, but "we do get outgunned." 

The Ballooning Of The Tax Gap, Rettig Said, Can Be Partly Attributed To The Growth In Popularity Of Cryptocurrency, Which Was Still A Relative Novelty The Last Time The Internal Revenue Service Released An Official Estimate Of The Tax Gap, Which Covered Tax Years 2011 Through 2013.

There are now more than 8,600 virtual currencies with a global market capitalization of about $2 trillion, he said. Rettig added that the estimates for 2011 through 2013 didn't have information about foreign-sourced and illegally sourced income.

"I Think It Would Not Be Outlandish To Believe That
The Actual Tax Gap Could Approach And Possibly Exceed
$1 Trillion Per Year," Rettig Said.

The $441 billion tax gap estimate, according to the IRS, is an average gross yearly estimated tax gap based on data from tax years 2011 through 2013. After late payments and enforcement work are factored in, the estimated net tax gap is $381 billion, according to the agency's website.

Rettig also noted that a recently released report found that the top 1% of all earners fail to report about 20% of their income and that some outside estimates have said the tax gap could exceed $7.5 trillion over the next decade.

The IRS will issue a new estimate next year, Rettig said. Meaningfully reducing the tax gap will take a multifaceted effort, he said.

Rettig said the agency has lost about 17,000 employees in the enforcement area over the last decade. It has about 6,500 frontline revenue agents who now handle the most complex individual and corporate tax matters and substantially all of them are dedicated to the most egregious cases, wealthy individuals or the largest corporations, he said. The IRS is using its resources to the best of its ability, he said, but it needs more.

"We do get outgunned. I mean there's no other way to say it," he said. "We are today able to identify evidence of tax fraud and signatures of tax fraud, if you will, and tax evasion that even two years ago we could not identify. But it's an example of we're heading in the right direction. We need to get there ahead of time."

President Joe Biden's Fiscal 2022 Budget Request Calls For A 10.4% Funding Increase For The IRS.

The request would include an increase of $417 million in funding to improve tax compliance and revenue collection under a multiyear project.

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Tax Evasion is No Longer a Civil Matter According to the DoJ

According to the DoJ, as tax filing season continues, the Department of Justice's Tax Division reminds taxpayers to pay careful attention to their reporting and filing obligations and to timely pay all taxes due. Willfully filing false tax returns or deliberately evading paying taxes are serious criminal offenses. 

“Our criminal prosecutors are prepared for tax filing season too,” said Acting Deputy Assistant Attorney General Stuart M. Goldberg of the Tax Division. “Honest, law abiding taxpayers should know that the Tax Division is aggressively using its resources and expertise to identify, investigate, and prosecute those attempting to defraud and obstruct the IRS.” 

Throughout the past year, the Tax Division, in collaboration with U.S. Attorney’s Offices, other Justice Department litigating offices and the IRS, has investigated and prosecuted a broad array of tax offenses from businesses and white-collar professionals underreporting income to employment tax fraud to identity theft. Enforcement efforts are continually ongoing. Here are a few recent examples: 

Prosecution of Business Owners 

• 
  On Dec. 1, 2020, a New York City restaurateur was sentenced to 24 months in prison for tax
  evasion. Adel Kellel, the owner of Raffles Bistro, diverted business income for personal expenses, including rent for a high-end Manhattan apartment, college tuition payments for his children, and purchases from luxury retailers. As part of his sentence, Kellel was ordered to pay $613,478 to the IRS. 
• On Oct. 20, 2020, two biofuel company owners were sentenced to prison for conspiracy to defraud the IRS and preparing a false tax claim, among other offenses. Ben Wootton, 55 of Savannah, Georgia, was sentenced to 70 months and Race Miner, 51, of Marco Island, Florida, was sentenced to 66 months, after a jury convicted both defendants and their company, Keystone Biofuels Inc., in April 2019. 

Prosecution of White-Collar Professionals & Individuals 

• On Dec. 21, 2020, two Atlanta-area tax professionals pleaded guilty to promoting a syndicated conservation easement tax scheme involving more than $1.2 billion in fraudulent charitable deductions. Stein Agee of Canton, Georgia, and Corey Agee of Atlanta, Georgia, are currently awaiting sentencing for their role in the scheme. 
• On Nov. 2, 2020, a New Jersey man was sentenced to 78 months in prison for conspiring to defraud the United States, filing false claims, and obstructing the internal revenue laws, following his conviction at trial. According to evidence presented at trial, between 2015 and 2016, Kenneth Crawford Jr. and his co-conspirators promoted and sold a “mortgage recovery” tax fraud scheme in which they obtained fraudulent refunds from the IRS for their clients. As a result of Crawford’s scheme, more than $2.5 million in fraudulent refunds were sought from the IRS. 
• On Aug. 21, 2020, a North Carolina risk consultant pleaded guilty to filing a false tax return and illegally possessing a firearm. From 2011 through 2017, Charles Atkins underreported income from several risk consulting businesses, causing a tax loss of more than $800,000 to the IRS. Atkins is currently awaiting sentencing. 4/8/2021 Justice Department Tax Enforcement Already in Gear | OPA | Department of Justice https://www.justice.gov/opa/pr/justice-department-tax-enforcement-already-gear 2/2 Employment Tax Prosecutions 
• On April 7, 2021, the manager of the San Diego Home Cooking restaurant chain was sentenced to 30 months in prison for employment tax fraud. According to court records, from the last quarter of 2014 through 2017, Aleksandar Sreckovic did not file employment tax returns nor pay employment taxes for San Diego Home Cooking, causing a tax loss of over $1.5 million. Instead of paying employment taxes, Sreckovic paid other creditors and his own personal expenses. 
• On March 24, 2021, A Montana businessman pleaded guilty today to employment tax fraud. According to court documents, Thomas O’Connell owned and operated three plumbing businesses, Quality Plumbing and Heating, Orbit Plumbing and Heating, and Orbit PHC, each based in Great Falls. From at least 2005 through 2016, O’Connell did not pay employment taxes for several quarters, despite being obligated to ensure such taxes were paid to the IRS. Instead, he directed payments to other creditors and to his own personal expenses. The total tax loss to the IRS from O’Connell’s conduct is more than $550,000. 

Identity Theft Prosecutions 

• On Oct. 7, 2020, a Las Vegas, Nevada, man was sentenced to 70 months in prison for mail and wire fraud conspiracy, following his jury trial convictions. The trial evidence proved that from January 2009 through April 2011, Terry Williamson and his co-conspirators filed false tax returns with the IRS to fraudulently obtain tax refunds. To facilitate the fraud, they used the names and social security numbers of deceased taxpayers. More than 480 fraudulent tax refund checks totaling almost $2 million were deposited into Williamson’s account. More information about the Tax Division’s enforcement efforts in these and other areas can be found on the division’s website.

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IRS Appeals Now Requires Virtual Conferences For Taxpayers Who Request a Face to Face Conference

The IRS Independent Office of Appeals (“Appeals”) has issued a procedural memo,  AP-08-0321-0009: Memorandum for Required Use of Virtual Conferences, that requires Appeals employees to offer a virtual conference to taxpayers who request an in-person conference that can't be accommodated. Offering a virtual Appeals conference previously wasn't required in this situation. 

Most taxpayers with an active tax controversy can request a conference with Appeals to try to settle their tax controversy. (Code Sec. 7803(e)(4))

This new procedural memo requires Appeals employees to offer taxpayers a “virtual conference” in certain circumstances. 

For example, an Appeals employee is required to offer and conduct a virtual conference if the taxpayer (or their representative) has requested one. In addition, the Appeals employee should offer a virtual conference if the taxpayer (or their representative) has requested an in-person conference, but that request can’t be accommodated by Appeals.

Prior to COVID, Appeals would generally hold an in-person conference if a taxpayer requests one. However, Appeals stopped conducting in-person conferences at the beginning of the COVID-19 pandemic and has not yet resumed holding them. 

Appeals employees are not required to offer a virtual conference when a taxpayer (or their representative) has requested a phone or correspondence conference. In this case, the Appeals employee should use their judgment and experience to determine whether to voluntarily offer a virtual conference to that taxpayer. 

If the taxpayer declines the offer of a virtual conference, then the Appeals employee should continue with normal case processing procedures.

The Memo notes that this procedural deviation doesn't replace in-person conferences when Appeals begins holding them again. Appeals will still hold in-person conferences when Appeals can accommodate them and such conferences are appropriate. 

This guidance is effective as of March 22, 2021and will be incorporated into IRM 8.6.1 within two years of this date.

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Abusive Micro-Captive Insurance Arrangements Participants Are Urged to Exit These Arrangements By The IRS

Internal Revenue Service officials on April 9, 2021 urged participants in abusive micro-captive insurance arrangements to exit these transactions as soon as possible (IR-2021-82). 

The IRS Has Stepped Up Examinations of These Arrangements And Has Recently Won Yet Another Case In U.S. Tax Court
That Such Arrangements Are Not Eligible
For The Tax Benefits Claimed.

On March 10, 2021, the U.S. Tax Court held in Caylor Land & Dev. v. Commissioner, T.C. Memo. 2021-30 (2021), that yet another micro-captive arrangement failed to qualify as insurance for federal tax purposes. This decision follows several earlier Tax Court decisions that also confirmed the IRS’s determinations that certain micro-captive arrangements were not eligible for the claimed federal tax benefits. In Caylor, the Tax Court also sustained the IRS’s determination of accuracy-related penalties and rejected the taxpayer’s claim of reliance on tax advice.

Taxpayers who engaged in abusive micro-captive transactions are once again encouraged to consult an independent tax advisor prior to filing their 2020 tax returns. Taxpayers should consider exiting the transaction and not reporting deductions associated with abusive micro-captive insurance transactions.

“In multiple cases before the courts, judges have held that these ‘fanciful’ and ‘unreasonable’ arrangements don’t add up to insurance in the commonly accepted sense,” said IRS Commissioner Chuck Rettig. “I strongly urge participants in these arrangements to get independent legal advice separate from those who helped steer them into these abusive arrangements.”. 

In Notice 2016-66, the IRS advised that micro-captive insurance transactions have the potential for tax avoidance or evasion. The notice designated transactions that are the same as or substantially similar to transactions that are described in the notice as “Transactions of Interest.” The notice established reporting requirements for those entering into such transactions on or after Nov. 2, 2006 and created disclosure and list maintenance obligations for material advisors.

In March and July 2020, IRS issued letters to taxpayers who participated in a Notice 2016-66 transaction alerting them that IRS enforcement activity in this area will be expanding significantly and providing them with the opportunity to tell the IRS if they've discontinued their participation in this transaction before the IRS initiates examinations. Early responses indicate that a significant number of taxpayers who participated in these transactions have exited the transaction.

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The IRS Independent Office of Appeals - A Closer Look

In the latest issue of A Closer Look, Andrew Keyso, Chief of the Independent Office of Appeals, discusses what taxpayers can do if they disagree with an IRS audit or collection decision. 

“I’d Like To Remind Taxpayers That They Can Have Their Case Reviewed By An Appeals Officer Who Is Independent Of The IRS Compliance Function That Made The Initial Determination In Their Case. I’m A Big Believer In A Strong Appeals Function Within The IRS,” Said Keyso.

Appeals is an independent function within the IRS, completely separate from the compliance functions responsible for collecting and assessing taxes. Appeals provides an informal forum for taxpayers who disagree with an IRS determination. Our job is to resolve tax disputes without litigation, where possible, consider each case fairly and impartially and improve public confidence in the integrity and efficiency of the IRS.

We do this by listening to taxpayers, understanding both sides (taxpayers and IRS compliance), independently evaluating all arguments and available information and identifying appropriate settlement options. 

We Have An Overall Staff Of Approximately
1,240 Employees, Mostly Appeals Officers
And Settlement Officers.

An Appeals Officer typically handles matters involving audit-related issues like penalties or additions to tax. For some complex matters, Appeals Officers may work as a team with other Appeals Officers. A Settlement Officer typically handles matters involving collection matters like whether the IRS followed proper procedures when imposing a lien or proposing a levy for unpaid taxes.

In Appeals, we work with taxpayers informally to settle tax disputes without a formal court hearing and, in most cases, without the need to hire someone to represent them. We provide taxpayers a meaningful opportunity to be heard, regardless of their educational or economic status, background or English language proficiency. In fact, the Taxpayer First Act of 2019 gives taxpayers the right to come to Appeals to dispute most IRS Compliance determinations.

Appeals is unique within tax administration, because we have the authority to compromise the amount of tax owed to resolve a dispute. 

How to Request an Appeal

Typically, appeal rights become available following a compliance action by IRS that could include an audit, penalty assessment or notice of a collection action. If you receive an IRS notice and your case is eligible for an appeal, the notice will explain your appeal rights. At that point, if you disagree with the IRS determination, you can request an appeal. The next step is to write down, either in a formal protest or simple statement, the issues with which you disagree and why. 

It’s important to remember that you should make your appeal request with the IRS compliance person who worked your case. That employee then will be able to send your appeal request, along with your case file, to Appeals. Taxpayers can also come to appeals after filing a petition in the United States Tax Court to dispute the IRS compliance action.

The Appeals Process

Once your case arrives in Appeals, we will assign it to an Appeals Officer or Settlement Officer depending on the type of case. Our goal is to have the assigned Appeals employee contact you by mail or telephone within approximately 30 days of receiving your case; however, it is taking longer these days due to pandemic-related delays and other resource constraints. 

To evaluate your case, the Appeals Officer will fully consider your position and arguments along with the administrative case file from the IRS compliance person who worked your case. You may request to view the non-privileged part of the Compliance file prior to meeting with Appeals. One of the most helpful things you can do is provide all relevant facts, documents and other information supporting your position to the IRS compliance person working your case before it comes to Appeals. 

Appeals Officers and Settlement Officers try to resolve cases after holding a taxpayer conference or by correspondence. But, some complex cases may take more than one conference to resolve. As mentioned earlier, Appeals may also consider the "hazards of litigation" or the probable outcome if your case were to go to court.

The scope and nature of our review depends on the type of case. But in all cases, the Appeals Officer or Settlement Officer will listen to your concerns and review any information or comments you present before making a final decision. 

If your case results in a decision you feel is unfavorable, we will explain the reasons for our decision and any additional options you may have. If you agree to settle your case in Appeals, we may provide you with an agreement form to sign. If you are unable to settle your case in Appeals, you may be entitled to dispute the IRS determination in the Tax Court or another Federal court. 

Recently, for non-docketed examination or collection appeals, the entire process, from the time your case is received in Appeals to the time it is resolved or closed in Appeals, takes on average 7 or 8 months.

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Appeal Court Upholds IRS Summons For Cannabis Business Docs

According to Law360, a Michigan federal court correctly dismissed a suit by cannabis business owners seeking to quash a third-party summons issued by the IRS requesting their companies' records because the summons aided a criminal investigation, the Sixth Circuit said Friday.

A three-judge panel determined that the summons issued to a data software company by the Internal Revenue Service seeking financial records of the various cannabis businesses that Kimberly and Richard Gaetano owned were valid to determine whether they underreported their federal taxes, according to its opinion.

The summons was essential to the agency's criminal investigation into whether the couple owed federal taxes, and the IRS proved that the summons met exceptions to the notice requirement under Internal Revenue Code Section 7609, U.S. Circuit Judge Ralph B. Guy Jr. said in the opinion.

"In sum, because the exception in Section 7609(c)(2)(E) applies, the bar of sovereign immunity remains, and subject-matter jurisdiction does not exist," Judge Guy said.

During the criminal investigation of the couple, the IRS issued a summons to the owners of Portal 42 LLC, a data software company that provides point-of-sale systems for cannabis businesses, of which the Gaetanos were clients. The summons sought the Gaetanos' records held by Portal 42 from the beginning of 2015 to Sept. 1, 2019, according to the opinion, and the couple wasn't notified of the summons by the IRS.

The Gaetanos filed suit against the IRS in 2019, requesting that the summons be quashed because they should have been notified under Section 7609, and argued that the summons was issued in bad faith.

During the lower court proceedings, the couple conceded that Portal 42 wasn't a third-party recordkeeper that required the IRS to notify the Gaetanos under an exception to Section 7609, and the IRS testified that it was investigating whether the Gaetanos underreported their federal taxes for their cannabis businesses.

The Michigan federal court determined that the IRS met the exceptions under Section 7609 that allowed the summons to be issued without notice to the Gaetanos and dismissed the couple's suit. The Gaetanos appealed that ruling, arguing that the criminal investigation conducted by the IRS was invalid because no quarterly tax period ends on Sept. 1, according to court documents.

In Its Opinion, The Sixth Circuit Affirmed That The Lower Court Correctly Determined The Summons Was Connected To The IRS’ Investigation Into Whether The Gaetanos Underreported Their Federal Tax Liability,
Per An IRS Agent’s Affidavit.

The couple also failed to prove how the summons was required to meet a four-factor test established by the U.S. Supreme Court in its 1964 decision in U.S. v. Powell stipulating when a summons is valid.

In its Powell ruling, the Supreme Court stipulated that an agency must state a legitimate purpose for seeking information outside its possession that is relevant to an investigation and proper administrative procedures must be followed.

In the Gaetanos' case, the IRS agent's testimony alone most likely would have satisfied the Powell standard, but the lower court didn't have to address the issue because it correctly dismissed the suit for a lack of jurisdiction under Section 7609, the appeals court said.

"We cannot proceed to the Powell test when Section 7609 does not confer jurisdiction over this action," Judge Guy said. "As such, the Gaetanos have placed the cart before the horse."

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