Friday, December 21, 2018

Disregarded Entities Are Not Always Disregarded

Under the check the box rules, entities owned by one person can often be disregarded for federal tax purposes. Such entities are referred to as "disregarded entities." 
As time has progressed since the passage of the check the box rules, the IRS has created more and more exceptions to the disregarded treatment. The following is a summary of the principal exceptions, but is not intended to be exhaustive. If any readers think we have missed anything major, please feel free to comment to this posting.
  1. Status is modified if the single owner of the entity is a bank. Treas. Regs. Section 301.7701-2(c)(2) (iii). 
  2. Status is modified for certain tax liabilities. Treas. Regs. Section 301.7701-2(c)(2)(iii). These include: (1) federal tax liabilities of the entity with respect to any taxable period for which the entity was not disregarded; (2) federal tax liabilities of any other entity for which the entity is liable; and (3) refunds or credits of federal tax. 
  3. Disregarded status ignored or modified for taxes imposed under Subtitle - Employment Taxes and Collection of Income Tax (Chapters 21, 22, 23, 23A 24, and 25 of the Code) and taxes imposed under Subtitle A including Chapter 2 - Tax on SelffEmployment Income. Treas. Regs. Section 301.7701-2(c) (2) (iv) (A). 
  4. Status is modified for certain excise taxes, as described in Treas.Regs. Section 301.7701-2(c)(2J(v). Although liability for excise taxes isn't dependent on an entity's classification, an entity's classification is relevant for certain tax administration purposes, such as determining the proper location for filing a notice of federal tax lien and the place for hand-carrying a return under Code Section 6091
  5. Conduit financing proposed regulations will treat a disregarded entity as separate from its single member. Code Section 7701 (I).
  6. Special rules will apply in hybrid situations. Hybrid situations are circumstances where an entity is not disregarded in one jurisdiction but is disregarded in another.
  7. Final regulations (TD 9796) that treat domestic disregarded entities wholly owned, directly or indirectly, by foreign persons  as domestic corporations solely for purposes of making them subject to the reporting requirements under Internal Revenue Code, Section 6038A that apply to 25% foreign-owned domestic corporations.
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IRS Update Makes Voluntary Disclosures For ALL Domestic & Foreign Disclosures More Expensive

The cost of ALL Voluntary Disclosures of previously unreported income or offshore assets to the IRS avoid criminal prosecution, just got more expenses under an updated procedures the revenue agency released on November 29, 2018.
IRS deputy commissioner for services and enforcement Kirsten Wielobob issued a memorandum on November 20, 2018 that the IRS posted publicly Thursday, November 28, 2018, which outlines the process for all voluntary disclosures following the closing of the IRS’s Offshore Voluntary Disclosure Program on Sept. 28, 2018. She noted in the memo that the 2014 OVDP began as a modified version of the OVDP that launched in 2012 after earlier programs in 2009 and 2011.

Voluntary disclosure is a long-standing practice of the IRS to provide taxpayers with criminal exposure a means to come into compliance with the law and potentially avoid criminal prosecution. See I.R.M. This memorandum updates that voluntary disclosure practice. Taxpayers who did not commit any tax or tax related crimes and do not need the voluntary disclosure practice to seek protection from potential criminal prosecution can continue to correct past mistakes using the procedures the updated Voluntary Disclosure Program or by filing an amended or past due tax return. When these returns are examined, examiners will follow existing law and guidance governing audits of the issues.
“These programs were designed for taxpayers with exposure to potential criminal liability or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets,” Kirsten Wielobob wrote.

 “They Provided Taxpayers With Such Exposure Potential Protection from Criminal Liability and Terms for Resolving their Civil Tax and Penalty Obligations.”
The New Procedures Are Effective for ALL
Disclosures After Sept. 28, 2018.

The penalties have continue to increase, since the original OVDI program began in 2009.
The process begins with taxpayers requesting “pre-clearance” for participation from the agency’s Criminal Investigation Division, after which civil examiners determine tax liabilities and penalties. The civil penalties, which may be assessed for fraud or the fraudulent failure to file income tax returns, could be higher than what would have been assessed under the old Offshore Voluntary Disclosure Program that the IRS ended Sept. 28.
For all cases where CI grants preclearance, taxpayers must then promptly submit to CI all required voluntary disclosure documents using a forthcoming revision of Form 14457. This form will require information related to taxpayer noncompliance, including a narrative providing the facts and circumstances, assets, entities, related parties and any professional advisors involved in the noncompliance.

Once CI has received and preliminarily accepted the taxpayer’s voluntary disclosure, CI will notify the taxpayer of preliminary acceptance by letter and simultaneously forward the voluntary disclosure letter and attachments to the LB&I Austin unit for case preparation before examination. CI will not process tax returns or payments.
The updated Voluntary Disclosure Procedures also provide for various outcomes depending upon the extent of taxpayers’ cooperation with the IRS.
Civil Penalties For Fraud (IRC 6663) Are To Be Applied To The Tax Year With The Highest Tax Liability, But In The Absence Of An Agreement, They Could Be Applied To A Greater Number Of Years Within The Six-Year Scope.
If the parties are unable to reach an agreement, IRS examiners have the discretion to increase the disclosure period to the full duration of noncompliance and assert maximum penalties with the approval of management.

Do You Have Undeclared Income From
Domestic or Foreign Sources?
Want to Know Which Remaining IRS Disclosure Program is Right for You? 
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IRS Issues Additional New Tax Transcript Procedures

On August 23, 2018 we posted IRS to Introduce New Tax Transcript as of 9/23/18! where we discussed that the IRS announced in IR-2018-171 that it is moving to better protect taxpayer data, in a new format for individual tax transcripts that will redact personally identifiable information from the Form 1040 series.
Now, in a Fact Sheet and accompanying Information Release IR-2018-256, IRS has announced it will be making changes to tax transcript procedures. Among the changes are: a) beginning on Jan. 7, 2019, IRS will honor requests to have taxpayer tax transcripts sent to practitioners' secure mailboxes; and b) IRS will stop its tax transcript faxing service as of Feb. 4, 2019.
In IR-2018-256,  the IRS announced that after working with the tax preparation community, the Internal Revenue Service would stop its tax transcript faxing service as of Feb. 4, 2019, and offer a more secure alternative to taxpayers and tax professionals.
The IRS worked with the tax preparation community to reach agreement on an alternative that will meet tax practitioners’ needs in e-filing individual tax returns while also enhancing safeguards for taxpayer data.
The IRS continues to look for ways to better protect taxpayer information and tax transcripts, which are summaries of individuals’ tax returns. Cybercriminals who obtain tax transcripts use them to file fraudulent returns that are difficult to detect because they closely mirror a legitimate tax return.
The halt to faxing transcripts is another step taken by the IRS to protect taxpayer data. In September 2018, the IRS began to mask personally identifiable information for every individual and entity listed on the transcript. See New Tax Transcript and Customer File Number.
All financial entries on the transcript remain visible. However, tax practitioners who work to bring taxpayers into compliance by filing prior-year tax returns may need access to employer information that taxpayers no longer have. In those cases, tax practitioners may request an unmasked Wage and Income Transcript. The Wage and Income Transcript can be used for current year tax preparation but it generally is not available until mid-year. 

Alternatives for taxpayers for return preparation

The IRS has multiple ways taxpayers can obtain a copy of their tax transcript other than faxing. Individuals may still call the IRS to obtain a masked tax account transcript and one will be mailed to the last address of record.
For faster service, taxpayers may go to for Get Transcript Online, verify their identities and create an account. They can then view or download a copy of their tax transcript immediately. Or they can go to for Get Transcript by Mail and request a transcript be mailed to their last address of record. Taxpayers also may call 800-908-9946 for automated service to order a transcript by mail.

Alternatives for tax professionals for return preparation

Starting Jan. 7, 2019, tax professionals who contact the Practitioner Priority Service number may, with proper authorization, have an unmasked Wage and Income Transcript deposited in their e-Services secure mailbox.
Tax practitioners must meet certain requirements in order to use the secure mailbox option. Those requirements are outlined in Fact Sheet 2018-20, Steps for Tax Professionals to Obtain Wage and Income Transcripts Needed for Tax Preparation. Practitioners also should review Fact Sheet 2018-21, IRS Offers Tips to Tax Professionals to Reduce CAF Number Errors, Better Protect Data from Cyberthieves.
The Wage and Income Transcript provides information limited to the Forms W-2, 1099 and other income documents sent to the IRS. It does not include general tax transcript information. The Wage and Income Transcript will give tax practitioners the employer information needed to file tax returns electronically.
Tax professionals also may request that an unmasked Wage and Income Transcript be sent to the client’s address of record. Alternatively, taxpayers may request an unmasked transcript for tax preparation, and it will be mailed to their address of record.

Faxing and business tax transcripts

The Feb. 4, 2019, discontinuation of the faxing service also applies to business tax transcripts as well as individual tax transcripts. However, business tax transcripts are not masked. At the request of business taxpayers, the transcript will be mailed to the address of record. Tax professionals may obtain a business tax transcript through the e-Service Transcript Delivery System.                                                                                                                                 
Practitioners who want to access both the SOR and TDS must create an e-Services account and submit an e-File application, if one is not on file. Unenrolled practitioners also must e-file five or more returns annually to access TDS. An e-File application requires a background check and may take up to 45 days to complete so plan accordingly.
Have a Tax Problem?

Contact the Tax Lawyers at
Marini & Associates, P.A. 
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Thursday, December 20, 2018

IRS Issues Rules On Share Sales By Foreign Partners

According to Law360, the U.S. Department of Treasury on December 20, 2018 proposed rules to treat income from the sale of a foreigner's interest in a U.S. partnership as taxable U.S.-sourced income, overturning a U.S. Tax Court decision that mandated the opposite result.

Section 864(c)(8) of the Tax Cuts and Jobs Act effectively re-establishes that the sale of a foreigner’s interest in a partnership owning U.S. trade or business assets is effectively connected income, a portion of which is taxable by U.S. authorities. That result was consistent with the Internal Revenue Service's position in a 1991 revenue ruling and contradicted the result in the 2017 Tax Court case Grecian Magnesite v. Commissioner of Internal Revenue.

The Tax Court had found the Greek mining firm was not liable for tax on $4 million of interest in a Pennsylvania magnesite company because the business was conducted through its foreign offices and thus was foreign-sourced.

The TCJA explicitly defined such income as U.S.-sourced, so long as the partner would have received a share of the gain had the overall partnership been sold.

The regulations specified the rule would only apply to partnership gain otherwise recognized in the code, although the law allows Treasury to go further. The tax code normally does not recognize gain or loss in a partnership from the contribution of property in exchange for interest.

Treasury solicited comments from stakeholders about whether to broaden the rules.

"The Treasury Department and the IRS recognize, however, that certain nonrecognition transactions may have the effect of reducing gain or loss that would be taken into account for U.S. federal income tax purposes," the department said in the regulations' preamble.

The proposed regulations also conform to double taxation treaties that might also cover partnerships held by a foreign entity, specifying that permanent-establishment clauses would not prevent the application of the section. But the regulations also stated assets exempted from taxation by tax treaties as a permanent establishment, such as ships or aircraft, would also not be taken into account for the determination of a partnership gain or loss.

Have an IRS Tax Problem? 
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Wednesday, December 12, 2018

Doctor Prescribes Fake Documents & Now Pleads Guilty To Obstructing The IRS - Really?

According to DoJ. a medical doctor pleaded guilty to corruptly obstructing the due administration of the internal revenue laws on December 11, 2018.

According to court documents, Dr. Joseph Jacob Hummel purchased the home of an acquaintance, only to be repaid for the purchase a short time later. 

When Special Agents with Internal Revenue Service-Criminal Investigation (IRS) interviewed Dr. Hummel about this real estate transaction, he falsely stated that he rented the property to the original owner and then sent the agents a sham lease, supporting this statement.

Hummel faces a maximum sentence of three years in prison.  He also faces a period of supervised release and monetary penalties. Sentencing is scheduled for March 26, 2019.

Have a Criminal Tax Problem?
Contact the Tax Lawyers at 
Marini & Associates, P.A.
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DC Hold That Limit on FBAR Penalty is an Annual Limit

A district court has held that the monetary limit on the penalty for willfully failing to file a Report of Foreign Bank and Foreign Accounts (FBAR) is an annual one. The court found that, in reaching this conclusion, it was not required to consider the ongoing split of court opinions in previous cases about whether the limit on the penalty is defined by statute or reg.

 There is now disagreement amongst district courts as to whether the 2004 statutory amendment invalidated the $100,000 cap established by
31 C.F.R 1010.820. Among the courts that have held that the statutory amendment merely increased the maximum but did not require IRS to in any case impose the maximum, and thus held that the limit contained in the reg. was the maximum penalty that IRS could impose, were Colliot(DC TX 2018) 121 AFTR 2d 2018-1834, and Wadhan, (DC CO 2018) 122 AFTR 2d 2018-5208. However, there is also Norman, Ct. Fed. Cl. Dkt 15-872, where the Court held that the taxpayer Norman was liable for the FBAR willful penalty and this Court rejected the Colliot holding that the FBAR willful penalty was limited to a maximum of $100,000, because the regulations had not been changed to reflect the statutory amendment increasing the maximum FBAR willful penalty. 

The taxpayer, Mr. Shinday had foreign bank accounts for which he was required to file an FBAR, and for which he didn't file an FBAR, for 2005 through 2011. The balances in those accounts, for 2005 through 2011, varied from approximately $380,000 to $1,031,548.

IRS assessed willful FBAR penalties against Shinday for the tax years 2007 to 2011. The aggregate amount of these penalties was $257,888, which represented 25% of the combined 2006 year-end balance of Shinday's foreign bank accounts, which equaled $1,031,548.  This total was then divided equally, in order to apply penalties equally for each year starting in 2007 and ending in 2011.

Shinday argued that IRS's claim to reduce Shinday's penalty assessments to judgment must be dismissed because IRS assessed penalties which exceeded the $100,000 penalty cap established by 
31 C.F.R. 1010.820.  Relying on Colliot and Wahdan, Shinday contended that 31 C.F.R. 1010.820's cap controls because it is consistent with 31 U.S.C. 5321, the statute under which it was issued.
Court OKs IRS calculation. The court approved IRS's calculation.

The court said that neither of the cases cited by Shinday supported his position. In Colliot, the court found that IRS could not assess FBAR penalties exceeding the $100,000 cap promulgated under
31 C.F.R. 1010.820, but that court only considered FBAR penalties that exceeded $100,000 in a given year. Similarly, the court in Wahdan concluded that IRS "is not empowered to impose yearly penalties in excess of $100,000 per account."

The court here said that the facts of Colliot and Wahdan were thus inapposite to this case because the five penalties assessed against Shinday were individually all less than $100,000. Although in the aggregate the penalties against Shinday totaled $257,888, the yearly, individual penalties were each approximately $51,578. Each time Shinday willfully failed to timely file an FBAR, IRS assessed a penalty. The penalties were imposed for separate, if successive, alleged FBAR violations resulting from Shinday' failure to file FBAR reports in 2007, 2008, 2009, 2010, and 2011.

Finally, the court noted that, in arriving at its decision, it did not need to reach the issue of whether
31 USC 5321 invalidates the Department of Treasury's implementing regs., because there was no year in which Shinday was penalized more than $100,000. (Shinday DC CA 12/4/2018 122 AFTR 2d ¶ 2018-5483).

Have Undeclared Income from an Offshore Account?
Want to Know Make Sure You Are Not Over Penalized?
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