Thursday, January 28, 2021

FinCEN Notice 2020-2: Proposed FBAR Filing Requirement for Virtual Currency!

The Financial Crimes Enforcement Network (FinCEN) has announced in FinCEN Notice 2020-2 that, currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. 

Generally, a U.S. person who has a financial interest in, or signature or other authority over, any foreign financial accounts, including bank, securities, or other types of financial .accounts (“reportable accounts”) in a foreign country, must file an FBAR with the FinCEN if the aggregate value of those foreign financial accounts exceeds $10,000 at any time during the calendar year. (31 CFR §1010.350(a)

Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. It can sometimes operate like “real” currency, i.e., the coin and paper money of the U.S. or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance. However, virtual currency doesn't have legal tender status in any jurisdiction. (Rev Rul 2019-24, 2019-44 IRB 1004)

According to FinCEN's Notice, the current FBAR regulations don't recognize a foreign account holding virtual currency as a type of reportable account. Since the FBAR regulations don't consider a foreign account holding virtual currency as a "reportable account," a taxpayer is not required to file an FBAR reporting that account (unless the account holds assets besides virtual currency).

However, Fincen announced that it intends to propose to amend the regulations implementing the bank secrecy act (bsa) regarding reports of foreign financial  accounts (FBAR) to include Virtual Currency as a type of reportable account under 31 CFR 1010.350.

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Tuesday, January 26, 2021

DC Say No Summary Judgment For IRS on Intent/Willful Blindness for Florida CPA's FBAR Assessment!

In US v. Isac SchwarzbaumUS District Court, Southern District Of FloridaCase No. 18-cv-81147, a Federal government allegations that a Florida accountant willfully failed to report four foreign bank accounts can't be resolved without a trial, a Florida district court ruled. 

On October 23, 2019, the Government initiated the instant action against Kronowitz seeking to collect outstanding civil penalties for his allegedly willful failure to report his financial interest in foreign bank accounts, as required by 31 U.S.C. § 3514 for the years 2005-2010.  

Specically, the Government alleges that Kronowitz failed to properly report his financial interest in the following accounts: 


Kenneth G. Kronowitz was born on March 21, 1937. He is married to Sybil Kronowitz and has three children. 

He graduated from the University of Miami with a degree in accounting in 1961. From 1961 to present, Kronowitz has been a licensed certified public accountant ("CPA").Since becoming an accountant in 1961, Kronowitz has always been a sole practitioner. Since 1962, Kronowitz has typically prepared approximately thirty (30) to forty (40) federal income tax returns annually for both individuals and businesses. In order to maintain his CPA license, Kronowitz was required to take at least forty (40) hours of Continuing Professional Education ("CPE") classes annually. However, Kronowitz does not recall the FBAR being mentioned in any of the CPE courses he has taken. He considers himself to be semi-retired, as he still prepares approximately ten or twelve returns per year for others for money. 

Kronowitz prepared his own tax returns for tax years 2005, 2006, 2007, 2008, 2009, and 2010. On the Schedule B forms filed with the 2007 and 2008 tax returns, in response to question 7a, Kronowitz marked "no." There were no Schedule B forms attached to the 2006, 2009, or 2010 individual tax returns. 

Question 7a on Schedule B states, "At any time during [applicable year], did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? See page B-2 for exceptions and filing requirements for Form TD F 90-22.1." Kronowitz also prepared the tax returns for the Trust for tax years 2008, 2009, and 2010. He marked "no" in response to question 3 under the "Other Information" section on Form 1041, which states, "[a]t any time during calendar year [ ], did the estate or trust have an interest in or a signature or other authority over a bank, securities, or other financial account in a foreign country?" 

Kronowitz insists that he did not look up Form TD F 90.22.1 (the FBAR) due to a mistaken lack of knowledge, not a "desire to cheat the government." 

Kronowitz was provided notice of the FBAR penalty assessments, which remain unpaid. In addition to the amount of the assessments, interest and failure to pay penalties have accrued; and as of August 12, 2020, the balance owed on the FBAR penalties, including accruals, is $791,742.63.

in the Motion for summary judgment, the Governmen's t argues the Kronowitz's FBAR violations were willful because he recklessly failed to report his interest in foreign accounts or was willfully blind to the FBAR requirement. In support of its argument, the Government contends that the facts establish that Kronowitz recklessly opened the Cayman Island accounts to hide assets, that he recklessly managed the UBS and BKB bank accounts in Switzerland, and that his repatriation of funds into the United States and reporting of gains on the Trust tax returns formed part of a scheme to protect his foreign investment gains, which required planning, direction, and knowledge of international taxes and management of wired funds across international borders. Thus, the Government argues, "[i]t is implausible that Kronowitz could have known how to operate this process . . . without ever seeing the FBAR requirement." 

Upon review, the Government's argument itself demonstrates why summary judgment is inappropriate in this case. First, contrary the Government's suggestion, upon summary judgment, the Court views the facts in the light most favorable to Kronowitz and draws inferences from those facts in favor of Kronowitz as the non-moving party. Crocker, 886 F.3d at 1134. 

Unsurprisingly, Kronowitz disputes that his actions comprised any scheme to "cheat the government," and insists that he was simply mistaken. Significantly, in order to make the determination, the Court would be required to weigh the evidence and consider Kronowitz's credibility, which it may not do at summary judgment. Strickland, 692 F.3d at 1154. 

In arguing that summary judgment is appropriate in this case, the Government relies primarily upon the Fourth Circuit's opinion in Horowitz, in which the court stated that "willfulness based on recklessness is established if the defendant '(1) clearly ought to have known that (2) there was a grave risk that an accurate FBAR was not being filed and if (3) he was in a position to find out for certain very easily.'" United States v. Horowitz, 978 F.3d 80, 89 (4th Cir. 2020) (quoting Bedrosian, 912 F.3d at 153). 

In Horowitz, the court determined that, despite their contentions regarding their subjective intent, the defendant taxpayers' failure to file FBARs was objectively reckless. 978 F.3d at 89. However, the Government's reliance is misplaced for the simple reason that the district court in Horowitz was considering cross motions for summary judgment.

Similarly, the other cases relied upon by the Government do not support the conclusion that it urges here—that the Court may determine the issue of willfulness as a matter of law upon summary judgment. See United States v. Williams, No. 1:09-cv-437, 2010 WL 3473311, at *1 (E.D. Va. Sept. 1, 2010) (finding no willfulness following bench trial), rev'd 489 F. App'x at 660; Bedrosian, 912 F.3d at 148 (same); Bohanec, 263 F. Supp. 3d at 888-89 (finding willfulness following bench trial). 

Moreover, whether Kronowitz was willfully blind based upon the facts in this case requires a determination of his subjective awareness and whether he purposely avoided learning the facts pointing to liability. Williams, 489 F. App'x at 658 (citation omitted). "As a general rule, a party's state of mind (such as knowledge or intent) is a question of fact for the factfinder, to be determined after trial." Chanel, Inc. v. Italian Activewear of Fla., Inc., 931 F.2d 1472, 1476 (11th Cir. 1991). 

Second, in this case, genuine issues of material fact bearing upon the issue of willfulness remain. In pertinent part, although it is undisputed that Kronowitz has been a licensed CPA for fifty-nine years, has prepared returns on behalf of both companies and individuals during the course of his career, and was required to attend CPE courses, Kronowitz testified that he did not deal with foreign tax issues for his clients, he did not remember any of the CPE courses mentioning the FBAR, and he was unaware of the FBAR until 2011. Accordingly, the Government's Motion for summary judgment was DENIED.

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New IRS ‘Submit Forms 2848 and 8821 Online’ Offers Contact-Free Signature Options For Tax Pros And Clients Sending Authorization Forms

The Internal Revenue Service on Jan. 25, 2021 rolled out a new online option that will help tax professionals remotely obtain signatures from individual and business clients and submit authorization forms electronically. 

Tax professionals can find the new “Submit Forms 2848 and 8821 Online” on the page. Tax professionals must have a Secure Access account, including a current username and password, or create an account in advance of submitting an online authorization form.


“This online tool will allow tax professionals to safely obtain signatures from individual and business clients and upload authorization forms,” said Chuck Rettig, IRS commissioner. “This is a first step in our ongoing efforts to expand digital options for tax professionals using electronic signatures and online uploads.”


The project is a result of the Taxpayer First Act that requires the IRS to expand use of taxpayers’ electronic signatures on authorization forms. 

This Online Option Also Will Help Protect Taxpayers And Tax Professionals By More Easily Allowing Remote Transactions.


Form 2848, Power of Attorney and Declaration of Representative, and Form 8821, Tax Information Authorization, are two forms that allow taxpayers to authorize the IRS to disclose their tax information to third parties, such as, tax professionals.


Form 2848 is a taxpayer’s written authorization appointing an eligible individual to represent the taxpayer before the IRS, including performing certain acts on the taxpayer’s behalf. It also authorizes the representative to receive related confidential tax information of the taxpayer from the IRS. Form 8821 is a taxpayer’s written authorization designating a third party to receive and view the taxpayer’s information.


The Taxpayer And The Tax Professional Must Sign Form 2848. If The Tax Professional Uses The New Online Option, The Signatures On The Forms Can Be Handwritten Or Electronic. 

Form 8821 Needs Only The Taxpayer’s Signature.
If Using The New Online Option, The Taxpayer’s
Signature Can Be Handwritten Or Electronic.


If the tax professional uses the electronic signature option for a new client, the tax professional must first authenticate the client’s identity. For details on this process, see the “Authentication” section in the online option’s Frequently Asked Questions.


Tax professionals may also use the “Submit Forms 2848 and 8821 Online” to withdraw previous authorizations. However, the new online option cannot be used to ask questions or address other issues.


The process to mail or fax authorization forms to the IRS is still available. Signatures on mailed or faxed forms must be handwritten. Electronic signatures are not allowed.


Most Forms 2848 and 8821 are recorded on the IRS’s Centralized Authorization File (CAF). Authorization forms uploaded through this tool will be worked on a first-in, first-out basis along with mailed or faxed forms. The new online option negates the need for specific equipment (e.g., fax machines, scanners), saves tax professionals’ time in obtaining signatures, reduces person-to-person contact, and allows complete flexibility in completing the form anywhere, anytime, for both the tax professional and client.


The “Submit Forms 2848 and 8821 Online” option is a step towards to a broader IRS effort to expand options for electronic signatures on authorization forms as required by TFA.


This summer, the IRS plans to launch the Tax Pro Account. Its initial functionality will allow tax professionals to initiate a third-party authorization on and send it to a client’s IRS online account. Individual clients will access their online account and digitally sign the authorization, sending it to be recorded on the CAF. The IRS expects this new method will dramatically speed processing and allow for almost immediate authorization. More information about the Tax Pro Account and the extent of its initial functionality will be announced in the future.


For additional information tax professionals may review the Uploading Forms 2848 and 8821 with Electronic Signatures webinar or Fact Sheet.

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Friday, January 22, 2021

So Trump Did Not Win the Election - Is It Time to Expatriate? - Part III

 As we previously discussed in So Trump Did Not Win the Election - Is It Time to Expatriate? - Part I Part II, whatever your motives, just because you leave the United States and renounce your citizenship, don't assume you can leave U.S. taxes (or U.S. tax forms and complexity) behind, particularly if you are financially well-off and there are 10 things you need to know about Expatriation:

  1. Uncle Sam taxes income worldwide.
  2. Expatriating means really leaving.
  3. The old 10-year window is closed.
  4. Big changes came in 1996.
  5. Tax avoidance is now irrelevant.
  6. There are special rules for long-term residents.
  7. There's an exit tax for expatriations on or after June 17, 2008.
 8. Some expatriates can escape the exit tax. 

In general the exit tax is unforgiving and has broad application. Yet if you have less than $600,000 of income from the deemed sale of your assets on expatriation, you pay no tax. This exemption amount is adjusted for inflation and is $627,000 for 2010. If your gain exceeds this amount, you must allocate the gain pro rata among all appreciated property. 

However, this exclusion amount must be allocated to each item of property with built-in gain on a proportional basis. This involves a complicated process of multiplying the exclusion amount by the ratio of the built-in gain for each gain asset over the total built-in gain of all gain assets. The exclusion amount allocated to each gain asset may not exceed the amount of that asset's built-in gain. Moreover, if the total allowable gain of all gain assets is less than the exclusion amount, the exclusion amount that can be allocated to the gain assets will be limited to that amount of gain. For example, in 2010, if the total allowable gain in an expatriate's assets was $500,000, then that $500,000 would be the limit instead of $627,000.

Fortunately not all expatriates face the exit tax; only "covered expatriates" do. Under prior law, you generally had to give notice you were expatriating to trigger the rules. Now if you relinquish your passport or green card, it's generally automatic. But some expatriates, even under the new law, can escape the exit tax. The financial thresholds (see point five above) can still exempt you. Some people born with dual citizenship who haven't had a substantial presence in the U.S. and certain minors who expatriated before the age of 18-and-a-half are also exempt. However, those people must still file an IRS Form 8854 Expatriation Information Statement. 

9. You can elect to defer the exit tax. 
If you do face the exit tax, you can make an irrevocable election (on a property-by-property basis) to defer it until you actually sell the property. This election allows people to leave the U.S. and expatriate without triggering immediate tax as long as the IRS is assured it will collect the tax in the future. To qualify, a covered expatriate must provide a bond or other adequate security for the tax liability. There are specific requirements for these security bonds. Plus, there is an updating and monitoring of the bond in case it becomes inadequate to cover the tax. The IRS scrutinizes these elections on a case-by-case basis, so hire an expert. There are detailed requirements for filing the deferral election, including documentation, and copies of various documents. 

One of these requirements is appointing a U.S. agent for the limited purpose of accepting communications with the IRS. Plus, the taxpayer must waive any tax treaty benefits that might otherwise impact the IRS getting its money. It doesn't appear that many of these deferral elections have been made so far. 

There's another reason, other than the bond, not to defer. When you do sell, you'll pay taxes at the rate then in effect, which will likely be higher. If the Obama Administration has its way, when the Bush tax cuts expire at the end of this year, the top rate on long-term capital gains will rise from 15% to 20%. Plus, the just-passed House reconciliation package to the Senate's health care bill (if also approved by the Senate) is supposed to impose an additional 3.8% tax on net investment income for taxpayers with threshold income amounts of $200,000 for individuals and $250,000 for joint filers. This could raise the top capital gains rate to 23.8% for those taxpayers.

10. You'll need professional help. 
As you might expect, there are forms to file and procedures to follow if you expatriate. In fact, if you are wavering, the paperwork alone may keep you stateside! You must file IRS Form 8854 (in some cases for 10 years). Additional special forms (Form W-8CE if you have any deferred compensation items, a specified tax deferred account, certain non-grantor trusts, etc.) are also required. A good source is IRS Notice 2009-85.

Still, get some professional help. As this mere scratching of the surface suggests, the tax rules regarding expatriation for citizens and long-term residents are complex, even dizzying. Gone are the days when one could renounce U.S. citizenship and stand a good chance of avoiding U.S. tax. If you're facing these issues, or even if you are a beneficiary of someone else who is facing them, get some professional help. Bon voyage!

"Should I Stay or Should I Go?"

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TC Holds That a U.K. Corp That Failed to File Return Is Not Entitled to Tax Deductions Nor Credits

A UK corporation was not entitled to deductions or credits against its U.S. income for 2009 and 2010 because it failed to submit returns for those years before the IRS prepared returns for it. The Tax Court also held that its interpretation of Code Sec. 882(c)(2) did not violate either the business profits article or the nondiscrimination article of the US-U.K. income tax treaty.

Adams Challenge (U.K.) Limited (“Adams”) was a U.K. corporation whose sole income-producing asset for 2009 and 2010 was a multipurpose support vessel. The vessel was chartered by a U.S. firm to assist in decommissioning oil and gas wells and removing debris on portions of the U.S. Outer Continental Shelf in the Gulf of Mexico.

During 2009 and 2010, Adams derived from the charter gross income of about $32 million, which the Tax Court determined was effectively connected with the conduct of a U.S. trade or business. The Court also found that the US-U.K. bilateral income tax treaty did not exempt that income from US taxation because the company had a permanent establishment in the US. However, Adams did not file Federal income tax returns for either 2009 or 2010. 

In April 2014, the IRS prepared substitute returns for 2009 and 2010 for Adams that included the charter income but did not include any deductions or credits to offset that income. The IRS then issued Adams a deficiency notice that determined that Adams was not entitled to deductions or credits for 2009 and 2010 because it failed to file returns for those years.

In 2015, Adams timely filed a petition for redetermination, and in 2017 filed with the IRS its own returns for 2009 and 2010.  

The Tax Court held that Adams was not entitled to deductions or credits to reduce its income tax for 2009 and 2010 because it didn’t submit returns as required under IRC Section 882(c)(2).

The Tax Court rejected Adams arguments that the IRS’s refusal to allow it to claim deductions and credits in these circumstances violated Articles 7(3) and Article 25 of the Treaty. 

The Court Found That a Foreign Corporation is Entitled to Article 7(3) Deductions Only if it:
(1) Files A Return; and
(2) Files That Return Before The IRS
Has Prepared a Return For it.

The Court also found that Adams failed to show that the requirement to file returns under Code Sec. 882(c)(2) imposed a heavier burden on it than the burden on domestic corporations. 

Although Adams argued that Code Sec. 882(c)(2) subjects it to more burdensome requirements because US companies do not forfeit all their deductions if they neglect to file returns by an “arbitrary deadline," the Court found that foreign corporations have more time to submit returns before the IRS disallows deductions and credits (e.g., foreign corporations have 23½ months after the close of their tax year to file returns before Code Sec. 882(c)(2) applies but domestic corporations must file their returns within 3½ month of the close of their tax year) and may preserve their rights to deductions and credits by filing protective returns reporting zero income and deductions. 

What a foreign taxpayer should do if they believe they are not engaged in a US trade or business, is to file a protective income tax return stating your beliefs as to why you're not engaging a US trade or business in this way where the IRS later disagrees you can file an amended return with all associated deductions and credits.

Remember that where Adams was claiming a tax treaty position for only no US tax, they would still need to file corporate income tax return with a Form 8833 - Treaty – Based Return Position Disclosure.

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Comm'r Rettig Says IRS No Longer Behind on Mail

On October 7, 2020 we posted IRS Has a Backlog of Unopened Mail and is Experiencing Processing Delays, where we discussed that the IRS was experiencing processing delays as it works through its unopened mail backlog and that at one point, due to the suspension of services, the IRS had a backlog of more than 11 million pieces of unopened mail

Now according to Commissioner Charles Rettig, who said on Thursday, that the mail backlog won’t be an issue going forward. 

“We Actually are Current, Believe It or Not,” 

Rettig said during a webcast hosted by the Urban-Brookings Tax Policy Center. “We’re not too far off of where we would be in the ordinary course.” 

The IRS had to sort through a massive backlog of paper-filed returns and other mail.

Have an IRS Tax Problem?

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Thursday, January 21, 2021

DC - Non-Willful FBAR Penalty Applies Per Form Not Per Account

A district court has found that the $10,000 non-willful FBAR penalty (for failure to file the FBAR) applies per FBAR form, not per the number of bank, etc. accounts required to be reported on the form. Two district courts have now come to this conclusion. One district court has found the opposite.

Under 31 USC § 5314(a), every U.S. person that has a financial interest in, or signature or other authority over, a financial account, or accounts, in a foreign country must report the account, or accounts, to IRS annually on a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (commonly referred to as an FBAR or FBAR form) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.

One FBAR is used to report multiple foreign financial accounts. (FBAR instructions)

The penalty for violating the FBAR requirement is set forth in 31 USC § 5321(a)(5). The amount of the penalty depends on whether the violation was non-willful or willful.

The Maximum Penalty Amount For A Non-Willful Violation Of The FBAR Requirements Is $10,000.

One district court has held that the penalty for a non-willful FBAR violation relates to each account required to be shown on the FBAR. Thus, IRS could impose the statutory maximum penalty of $10,000 for each of the taxpayer's thirteen accounts that should have been reported on one FBAR. (US v. Boyd(DC CA 2019) 123 AFTR 2d 2019-1651).

But another district court came to the opposite conclusion. It found that the $10,000 non-willful penalty applies only to the FBAR form itself, not the number of accounts required to be shown on the FBAR. (US v. Bittner  (DC TX 6/29/2020).

In 2010, Mr. Kaufman had 17 foreign accounts, the balance of which, in aggregate, exceeded $10,000. He was required to file an FBAR, but he did not do so.

A court found that his failure was non-willful, and the IRS imposed a penalty of $170,000, i.e., $10,000 for each account.

Mr. Kaufman argued that the penalty should be capped at $10,000, i.e., $10,000 for failure to file one FBAR.

The district court, finding the court's argument in Bittner persuasive, found the non-willful FBAR penalty applies per form, not per account. Thus, the penalty was capped at $10,000.

The district court found the arguments in Boyd unpersuasive. And the court noted that the Boyd decision was not binding on it. Him

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