Tuesday, October 26, 2021

Just Don't Include a Schedule B and Avoid the Willful FBAR Penalty - Come On Man?

A district court has held in U.S. v. Hughes, (DC CA 10/13/2021) 128 AFTR 2d ¶2021-5309, that a taxpayer's failure to file an FBAR was not willful when she failed to fill out Form 1040's Schedule B, Interest and Ordinary Dividends, which asks about foreign bank accounts. For another tax year, when she did fill out Schedule B, the court found that her failure to file an FBAR was willful.

The penalty for a failing to file an FBAR depending on whether the violation was willful or non-willful. The penalty for a non-willful violation cannot exceed $10,000. (31 USC 5321(a)(5)(B)(i)). The penalty for a "willful" violation cannot exceed the greater of $100,000 or half of the balance of the account at the time of the violation. (31 USC 5321(a)(5)(C)(i))

Ms. Hughes was a bookkeeper and prepared tax returns for herself and for some family members. It was undisputed that Ms. Hughes was required to file FBARs for tax years 2010-2013.

On her 2010 and 2011 tax return which she prepared herself, she failed to fill out Schedule B and she failed to report any of the interest income. Schedule B asks, effectively, if the taxpayer has a foreign bank account and whether the taxpayer needs to file an FBAR.

For 2012 and 2013, she did fill out Schedule B, and answered "yes" to those questions and Included the foreign bank income. But she did not file FBARsThe IRS sought penalties for willful violations for all four tax years.

The District Court Found That Her Failure To File FBARs
In 2012 And 2103 Was Willful.
But Her Failure In 2010 And 2011 Was Not.

The court's decision hinged on her completion, or lack thereof, of Schedule B. The court noted that taxpayer signs a return "declaring under penalty of perjury that [the taxpayer] had 'examined this return and accompanying schedules and statements.'"

The court wrote, "with respect to her 2012 and 2013 returns, there is no doubt that Hughes saw the questions about filing an FBAR, because she answered them... In 2010 and 2011, Hughes's returns did not include Schedule B, so the certification that she 'examined this return and accompanying schedules and statements' does not encompass that schedule and its admonitions about the FBAR. The IRS has identified nothing in Hughes's 2010 or 2011 returns as actually filed that, if 'examined' as she certified, would have put her on notice of the FBAR requirement. 

  • How about the fact that she intentionally excluded the income from her Form 1040 and she swore that the rest of the return was correct? 
  • How more intentional can you get than to have a tax return preparer, who knows that the schedule B is required based on the amount of dividend or interest income earned that year, who intentionally leaves out the schedule B?

The court continued, "The circumstances of Hughes's 2010 and 2011 tax returns differ from 2012 and 2013. 

Unlike those later years, there is no indication that Hughes reviewed Schedule B, with its instructions regarding the FBAR requirement, in preparing her 2010 and 2011 returns or any time before she did so. 

  • Very narrow reading of the facts, which completely ignores that she was the tax return preparer who knew a Schedule B, as well as FBAR was required to be filed.

In the absence of any evidence that Hughes was aware of the FBAR filing requirement when she completed her returns for those years, or that she was presented with any information that should have put her on notice of that requirement, the IRS has not met its burden to show that her failure to file FBARs in those years was anything more than negligent."  

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Monday, October 25, 2021

Subpart F Extension of Statute Applies To Entire Return

The extension of the statute of limitations for failure to report Subpart F income applies to a taxpayer's entire return, not just the Subpart F-related items, the IRS said in an Office of Chief Counsel memorandum released on October 22, 2021.

In memorandum 202142009, the Internal Revenue Service said that when the statute of limitations is extended to six years under Internal Revenue Code Section 6501(e)(1)(C) for failure to report Subpart F income, the extension applies to the entire return. 

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Cryptocurrency Is The IRS Criminal Investigation Unit's Primary Focus

According to Law360Cryptocurrency has become a primary focus for the Internal Revenue Service's Criminal Investigation division because the technology offers a convenient means to hide assets and income as well as facilitate other types of criminal activities, an agency official said.

The CI division is leading the way when it comes to tracing cryptocurrency and identifying criminal activity that's related to emerging cryptocurrency markets, said Ryan L. Korner, the special agent in charge of the CI division's Los Angeles field office. Korner spoke late Thursday during a virtual conference hosted by the University of California, Los Angeles Extension.

"It's One Of Our Top Priorities," He Said.
"We're Really Looking At Cryptocurrency From Several Different Perspectives, Obviously No. 1 Being Tax Crimes."

The IRS has been cracking down on cryptocurrency traders to increase tax compliance, as demonstrated in 2019 by the agency sending 10,000 letters warning cryptocurrency users to properly report and pay taxes on these transactions. A notice from 2014 requires cryptocurrency to be reported the same way as any other gain or loss on the sale or exchange of property, and additional guidance issued in 2019 did not change that position.

When examining cases involving virtual currency, Korner said the division is looking into a taxpayer's intent to hide assets or income using cryptocurrency or whether there is some sort of legitimate purpose for their cryptocurrency holdings, such as investment. 

The CI Division Is Skilled At Evaluating The Difference Between A Misunderstanding Of The Law And
A Willful Intent To
Evade Taxes, He Said.

"CI doesn't have the resources to waste in investigating innocent taxpayers," Korner said. "So we're doing a lot of work to make sure on the front end [that] when we initiate an investigation, we're looking at someone who actually has criminal culpability." Him him him him him
  • In fiscal year 2021 as of Aug. 31, CI had more than 150 "Cyber Cases" in inventory and about 90 of those were directly related to cryptocurrency, Korner said. 
  • Of the 230 cases in the pipeline in which prosecution recommendations have been made to the U.S. Department of Justice, approximately 80 cases were directly related to cryptocurrency, he said.
"We [also] had over $3.5 billion in seizures stemming from virtual currency investigations in FY 21, and that's about 90% of our total seizures for the year," he said. "So you can see we have got a lot of activity in this virtual currency space."

CI has become good at tracing cryptocurrency through its use of data analytics, which continues to be one of the primary weapons to combat tax fraud, Korner said.

The IRS has deployed a system by Palantir Technologies Inc. that enables personnel in every agency unit to cull vast quantities of data from both internal and external sources in a single, unified research platform. The agency announced a seven-year, $99 million deal with Palantir, which is based in Palo Alto, California, in September 2018.

Palantir continues to be the IRS' No. 1 choice in the field and the government continues to add new cryptocurrency-related data sets to the Palantir database, Korner said. In addition, the IRS is using information from cryptocurrency exchanges to gather that data through cyber crime units, he said.

One way data analytics is being used is to identify non-filers who have significant virtual currency activity by comparing received data with tax filings, Korner said. CI also identifies people who have purchased significant assets such as gold and real estate that are beyond their afforded means using cryptocurrency, he said.


But data analytics is not the only tool that's used and hasn't replaced boots-on-the-ground case development and investigative work, Korner said. CI continues to focus on developing informants in the virtual currency industry and continues to collaborate with federal, state and international law partners to identify other trends for tax noncompliance in the cryptocurrency space, he said.

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Thursday, October 21, 2021

LB&I Extends the Use of Virtual Taxpayer Meetings


According to Law360, the IRS' Large Business and International Division said that it will accept all requests to meet virtually with government employees, extending a practice established during the coronavirus pandemic to help offer an alternative to in-person meetings all around or telephone discussions.


The Internal Revenue Service Will Allow Large-Business Taxpayers To Meet Using Secure Videoconferencing Through Platforms Such As WebEx And ZoomGov,
The Government Said In A Memorandum To LB&I Employees.

"Since 2020, we advanced several measures to better interact virtually and digitally with large business taxpayers," LB&I Commissioner Nikole Flax, who was appointed to the position in April, said in a statement. "Our success in using these tools and the convenience and efficiency for taxpayers and their representatives convinced us that the way forward will continue to involve the use of video teleconferencing."

LB&I is the division within the IRS that is in charge of tax administration for domestic and foreign companies with assets over $10 million that must report federal taxes, global high-wealth individuals and international individual compliance programs.

Based on feedback the IRS received on its operations during the pandemic, the agency determined that telephone communications are not always productive or adequate, the IRS said. In response, if a taxpayer requests a video meeting on an approved platform, an IRS employee will grant that request, according to the LB&I memorandum.

LB&I's decision to accept all virtual meeting requests demonstrates how the agency has been working with taxpayers virtually, especially in conjunction with other programs such as expanding the use of secure email and creating a virtual reading room, the IRS said. These other programs allow parties to share certain privileged documents in a read-only capacity, the government said.

"These efforts are aimed at continuing to improve service to meet the needs of large business taxpayers and their representatives and are a part of the IRS' ongoing commitment to find more convenient and effective ways to interact with taxpayers and the community of tax professionals," the IRS said.

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Wednesday, October 20, 2021

Infrastructure Bill Flirting with IRS Bank Reporting Threshold of $10K and it's Effect on Bitcoin

According to Law360, the current Infrastructure Bill was modified by congressional Democrats to loosened their proposal to require banks to file annual tax information returns with customer account data, raising the reporting threshold from $600 to more than $10,000 and provide an exemption for wage earners and those whose income comes from federal programs such as Social Security.


"If You Don't Have $10,000 Above Your Paycheck,
Social Security Income Or The Like Coming In Or Going Out, There's No Additional Reporting," Wyden Said.

Banks would not be required to report specific transactions to the IRS, Wyden said, only those that result when taxpayers save for major purchases valued above $10,000. He said the IRS would receive only two specific pieces of information: the total amount going into and out of an account.

As originally proposed this year in the Treasury Green Book, the Internal Revenue Service information reporting proposal would require banks to file tax information returns on their customer accounts with data on gross inflows and outflows, cash and foreign transactions, and transfers among each customer's different accounts.

U.S. Treasury Secretary Janet Yellen released a statement Tuesday saying the IRS reporting proposal is needed to help the agency collect taxes from wealthy Americans with opaque sources of income that typically avoid the scrutiny that wage income undergoes.


"This Two-Tiered Tax System Is Unfair And Deprives The Country Of Resources To Fund Core Priorities," Said Yellen,


adding that the administration of President Joe Biden wants to focus on collecting unpaid taxes from Americans at the top of the income scale.

Citizens are worried the proposal will turn "bank presidents, community bankers, credit unions, lenders and tellers into spies for the IRS," he said.

Taxpayers reporting $0 to $100,000 in adjusted gross income on Schedule C were responsible for about 73% of unreported income while taxpayers earning $500,000 and over were responsible for about 4%, Barthold said. 

Republicans said this analysis shows the IRS reporting proposal would impact average Americans not just the uber-wealthy.

"The reality is wealthy people often earn their income through partnerships or other ways in which they can sell an asset for $2 million, put that $2 million in the bank account and tell the IRS that they only earned $200,000," he told lawmakers.

The IRS would be able to "spot when a wealthy tax cheat has millions of dollars flowing into an account, but isn't reporting that money on their tax return," she said. "Their wealthy clients are outright lying about this proposal, claiming that it would give the IRS information on individual transactions."

This mandate could reach anyone who accepts cryptocurrency for goods or services, leaving those who fail to properly complete their paperwork facing ruinous fines and even prison. Imposing it is unnecessary, ill-advised and possibly unconstitutional.

The ostensible purpose of this requirement is to enhance tax collection. 
Those who share detailed personal and financial information with their bank cannot complain, when the bank shares some of that information with the government.

Person-to-person crypto transactions are fundamentally different. They involve no third party. Recipients of cryptocurrency have no reason to gather the sender's personal information and senders have no reason to offer it.

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Tuesday, October 12, 2021

Senators Ask Yellen For Details On Global Tax Treaty Bypass?

According to Law360Top Senate Republicans on three committees want details on how President Joe Biden's administration could bypass the tax treaty process to reallocate U.S. taxing rights as part of a global minimum tax agreement, according to a letter dated October 8, 2021.

U.S. Treasury Secretary Janet Yellen should explain by Oct. 15 how the Biden administration proposes to enact the Organization for Economic Cooperation and Development's so-called Pillar One proposal without the tax treaty process, the senators wrote.

The letter was sent by Republican Sens. Pat Toomey of Pennsylvania and Mike Crapo and James Risch of Idaho. Toomey is the ranking member of the Senate Banking Committee, while Crapo serves as top Republican on the Finance Committee and Risch is the ranking member of the Senate Foreign Relations Committee.


Pillar One, which would reallocate taxing rights to countries where companies have customers but no physical presence, would require changes to U.S. tax law that must go through the Senate's tax treaty process, which requires a vote with two-thirds approval, the senators said. 


"We are especially concerned, given Treasury has failed to meaningfully consult our members on the potential treaty or legislative action that would be necessary to fully carry out the Pillar One agreement," the senators said.

They added that Republicans on the Foreign Relations Committee, which has jurisdiction over tax treaties, have received no correspondence from the Biden administration, according to the letter.

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136 Countries Agree To A Global 15% Minimum Tax Rate

According to Law360A comprehensive overhaul of the international corporate tax system was finalized on October 8, 2021 by 136 jurisdictions, including the United States, who agreed to a global 15% minimum tax rate and rules that would rewrite how the profits of large multinational businesses are allocated among jurisdictions.


The Landmark Deal Will Ensure That Multinational Corporations With Annual Revenue Above
€750 Million ($867 Million)
Will Be Subject To A
Minimum 15% Tax Rate
Starting In 2023.

The global pact will also reallocate earnings from about 100 of the world's largest and most profitable companies to countries worldwide, "ensuring that these firms pay a fair share of tax wherever they operate and generate profits," the OECD said.

U.S. Treasury Secretary Janet Yellen On Described The Agreement As "A Once-In-A-Generation Accomplishment" Where Virtually The Entire Global Economy Has Decided To End The Race To The Bottom To Lower Corporate Tax Rates.


Discussions appeared close to the finish line when Ireland, which had previously signaled commitment to its 12.5% rate, on October 7, 2021 agreed to the global pact after successfully lobbying for the term "at least" to be removed from the 15% minimum rate language. Two other holdout countries, Estonia and Hungary, also recently signed on to the agreement, including the minimum rate — a measure that will see countries collect around $150 billion in new revenues annually, according to the OECD.

Sri Lanka, Kenya, Pakistan and Nigeria have declined to endorse the deal, according to the OECD. (The next tax havens? -Not very safe.)

The Global Tax Pact Will Also Create New Taxing Rights Where A Portion Of Large Companies' Earnings Will Be Reallocated
To Market Jurisdictions Where Businesses Have Customers
But Not A Physical Presence.

Specifically, the rules will apply to multinational corporations with global sales above €20 billion and profitability above a 10% ma a baby with the rgin companies that "can be considered as the winners of globalization," according to the OECD.

For companies that fall within this scope, 25% of profit above the 10% threshold will be reallocated to market jurisdictions, according to the OECD, which said the new rules will reallocate more than $125 billion in total profits.

The OECD also outlined the implementation process for the profit allocation rules and global minimum tax, called Pillars One and Two of its overhaul, including a multilateral treaty that will be used to implement Pillar One's new taxing rights. Countries are aiming to have the treaty implemented in 2023, when domestic legislation for Pillar Two is also planned to be effective, according to the OECD.

The global agreement also entails "the standstill and removal" of digital services taxes, according to the OECD. Several countries had pursued unilateral measures in the absence of global rules, prompting trade tensions with the U.S. government, which argued the taxes unfairly targeted American tech companies.

The deal has drawn criticism from some advocacy groups, which have contended that neither the minimum rate nor the profit allocation rules go far enough. Oxfam's Tax Policy Lead Susana Ruiz said in a statement Friday said the 15% minimum rate has "practically no teeth" after the last-minute addition of a 10-year grace period for full implementation of the measure.

As for the profit allocation agreement, Alex Cobham, chief executive at the Tax Justice Network, said in a statement Friday that new rules are "a tokenistic measure" that affects "only a sliver of the profits of just 100 multinationals."

Negotiations began at the OECD four years ago to address concerns that large multinational corporations were shifting income from where it was generated to low-tax jurisdictions. The OECD also took on the task of retooling a century-old international tax system, which the organization said fails to fairly allocate taxing rights now that many companies can earn substantial profits in a country without needing a physical presence.

Ursula von der Leyen, president of the European Commission, said Friday that the agreement's details will be finalized later this month during the summit of the Group of 20 industrial and emerging-market nations.

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