Tuesday, March 30, 2021

Appeals Court Rules That Non-Willful FBAR Penalty Applies Per Form, Not Per Account

On June 19, 2019 we posted Negligent FBAR Penalty NOT Limited to $10K Per Year, where we discussed that the federal district court of California, upheld the IRS’ imposition of separate non-willful penalties against 13 foreign accounts disclosed on a single late FBAR return. In United States vs. Jane Boyd, the taxpayer had a financial interest in and/or otherwise controlled 14 financial accounts in the United Kingdom with balances collectively exceeding $10,000. The IRS assessed 13 separate FBAR penalties against Boyd, treating each reported account as a separate non-willful violation.  One account was not penalized based on IRS mitigation rules and the District Court agreed with the IRS assessment.

The Court of Appeals for the Ninth Circuit, reversed the district court decision and has held that the $10,000 non-willful FBAR penalty (for failure to file the FBAR) applies per FBAR form, not per the number of financial accounts (e.g., bank accounts) required to be reported on the form. This ruling aligns with all district court rulings concerning this issue.

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 (adjusted for inflation for violations after 2015). (31 USC § 5321(a)(5)(B)(i))

Since one FBAR can contain reports on multiple financial accounts, each containing more than $10,000, it is unclear if the $10,000 non-willful penalty under 31 USC § 5321(a)(5)(B)(i) applies per account or only per the one form that should have been filed.

The district court hearing the Boyd case had 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) 123 AFTR 2d 2019-1651)

But subsequent to the district court's decision in Boyd, three other district courts came to the opposite conclusion. They 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) 126 AFTR 2d ¶2020-5011, US v. Kaufman, (DC CT) 127 AFTR 2d ¶2021-342, and US v. Giraldi, (DC NJ) 127 AFTR 2d ¶2021-510)

Ms. Boyd had a financial interest in multiple financial accounts in the United Kingdom during 2010. She was required to report these accounts on a timely-filed FBAR, but she did not.

The IRS found that that she had committed 13 non-willful violations of the FBAR reporting requirements, i.e., one for each account she failed to report. And the IRS assessed a penalty totaling more than $10,000, for the 13 violations.

The Court of Appeals for the Ninth Circuit, in reasoning that was similar to the reasoning in BittnerKaufman, and Giraldi, reversed the district court and found that the FBAR non-willful penalty applies per form, not per account. Therefore "the maximum penalty for such a violation shall not exceed $10,000."

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Wednesday, March 24, 2021

Top 1% Fail To Report a Fifth of Their Income

According to Law360, the IRS underestimated the income that the top 1% of earners fail to report to the agency in its random audit program, finding they fail to report more than 20% of their income, according to a paper released on March 22,2021.

The paper was prepared by researchers at the National Bureau of Economic Research in conjunction with researchers at the Internal Revenue Service. They examined the agency's National Research Program, which conducts the random audits, between 2006 and 2013 and found that those examinations often don't uncover the full extent of wealthy individuals' tax avoidance.

The report estimated that about 21% of the top 1% of earners' income goes unreported in the program, almost a third of which can be attributed to "sophisticated evasion" that is undetected by the agency's random audits. The share of taxpayers' income that goes unreported is greater for upper-income earners, most likely due to a lack of IRS information on foreign bank accounts and resources at the agency to examine more complex tax planning, according to the report.

"Offshore tax evasion goes almost entirely undetected in random audits," according to the report.

The wealthiest Americans are able to evade paying their full share of taxes because the IRS' random audit process isn't equipped to examine more complicated pass-through entities, according to the report.

The IRS' Random Audit Program Wasn't Created With The Idea That It Would Be Used To Examine And Uncover Tax Avoidance By The Wealthiest Taxpayers, The Report Said.

The authors noted that the IRS might be limited in the resources needed to conduct audits of high-income earners who may have engaged in complex tax planning. They also said that conducting those kinds of examinations can be costly, whether they lead to litigation or a more strenuous audit process. Those factors "can pose practical limits on the extent to which the tax authority can pursue these types of tax evasion by high-income people," according to the report.

The IRS should invest in new audit tools that could help the agency uncover unreported income in the most complex scenarios involving wealthy taxpayers, as that may help the agency "generate substantial tax revenue," the report said.

The report detailed how wealthy taxpayers may be avoiding taxes through foreign bank accounts and pass-through entities. But there could be other ways that high-income earners evade taxes, such as the use of syndicated conservation easements or microcaptive insurance schemes, the report said.

"The potential existence of many more such schemes underscores the main point of our theoretical results, that we should expect sophisticated evasion to be concentrated at the top of the income and wealth distribution," the report said.

Another group published a report that found audits of high-income individuals and corporations by the IRS to be at an all-time low. The Transactional Records Access Clearinghouse, a research organization associated with Syracuse University, said less than two out of every 100 taxpayers reporting more than $1 million of income were audited last year. The group attributed the decline in audits to fewer revenue agents at the IRS.

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A Taxpayer Can Not Challenge An IRS Crypto Exchange Summons

According to Law360, a New Hampshire man cannot block the Internal Revenue Service from obtaining his records from cryptocurrency platforms because it would unlawfully impede the collection of tax, a federal judge said on  3/23/21 in dismissing his case challenging the agency's summons.

James Harper cannot force the IRS to expunge records it obtained on his accounts with Coinbase or block the agency from seeking information on his digital currency holdings from other platforms because it would prevent the U.S. from assessing or collecting federal taxes, which is prohibited by the Anti-Injunction Act, U.S. District Judge Joseph A. DiClerico Jr. said in an order.

"The effect of Harper's requested declaratory and injunctive relief would be to prevent the IRS from assessing Harper's or others' taxes using the information it has obtained through the John Doe third-party process," Judge DiClerico said.

In August 2019, Harper was one of more than 10,000 digital currency owners who received letters from the IRS outlining that the agency obtained information on their digital currency holdings without specifying any wrongdoing. The letters were received as the federal tax agency began examining potential reporting errors or omissions by digital currency owners on their tax returns.

Harper originally sued the IRS in July, claiming the agency violated his constitutional rights when it obtained personal financial information related to his digital currency accounts directly from third parties.

Over the course of a few years, Harper used the Coinbase, Abra and Uphold cryptocurrency exchanges to hold and liquidate his bitcoin holdings, according to court documents. The exchanges are not named defendants, but the complaint said they might have violated their terms of service by providing Harper's financial records to the IRS without a "valid subpoena, court order or judicial warrant based on probable cause."

Harper said in his initial complaint he disclosed all his trades and paid all relevant taxes on his digital currency holdings since he first invested in bitcoin in 2013. He argued the IRS obtained financial information from thousands of taxpayers holding digital currency without first obtaining a warrant or lawful subpoena.

Harper argued that the IRS violated his rights under the Fourth and Fifth Amendments of the U.S. Constitution by demanding his information from third parties without any specific suspicion of wrongdoing and doing so without notifying him or allowing him to challenge the seizure of such property, according to court documents.

Harper asked the court to order that the IRS expunge the information it received on his digital currency accounts from its summons, award him money damages and grant injunctive relief against the agency, according to the complaint.

In his Tuesday order, Judge DiClerico said Harper's claim that he paid all taxes related to his digital currency holdings was unfounded after he noted in his complaint the IRS might have obtained information in its summons that could lead to assessment of additional tax liabilities.

The summonses were also issued to determine whether taxpayers who may hold digital currency are complying with federal tax laws, which the court found to be a legitimate purpose.

The court also found Harper's arguments too broad to prove that any of the IRS officials named in his suit should be liable for money damages related to their involvement in issuing the summons. The judge dismissed those claims.

Have an IRS Tax Problem?

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Some Cryptocurrency Investors Are Receiving A New Round of Letters From The Internal Revenue Service

Some cryptocurrency investors are receiving a new round of letters from the Internal Revenue Service telling them that their federal tax returns don’t match the information received from virtual currency exchanges, a new front in the agency’s burgeoning scrutiny of the industry.
The letters acknowledge that trading exchanges, not the taxpayers, may have made the errors.
The letters are a fresh signal that the IRS is increasing its focus on cryptocurrency tax compliance, after first being slow to stay abreast of the growing industry.
The agency’s top criminal chief has described digital and virtual currencies as a “significant threat” to tax collection and said the agency will soon announce criminal tax evasion cases.
In 2017, the IRS won a landmark lawsuit that required digital currency exchange Coinbase to hand over data on customers who bought or sold at least $20,000 in cryptocurrency from 2013 to 2015.

The letters, which accountants say clients began receiving in recent weeks, are in addition to mailings the IRS began sending to more than 10,000 investors warning that they may owe taxes on cryptocurrency transactions.

Some letters told recipients that they may be unaware of their tax obligations and urged them to file amended or delinquent returns. A harsher version gave other recipients a deadline to respond in writing and disclose crypto dealings from 2013 through 2017.

Unlike its release of the three letter types, the IRS didn’t formally announce its mailing of the latest letters. Instead, a page about what the latest letters mean and require appeared on the agency’s website.

"We Received Information From A Third Party (Such As Employers Or Financial Institutions) That Doesn’t Match The Information You Reported On Your Tax Return,"
the website says.
It adds that “this discrepancy may cause an increase or decrease in your tax, or may not change it at all.”

The latest letters are “unusual, because they are targeting a class of investors. The first volume of letters were ‘warning’ letters. Now it’s the IRS saying, we’ve got the records and they do not match what you have reported on your tax returns.
A spokesman for the IRS, who requested anonymity because of agency rules, said that the latest letters will go out to a taxpayer any time the agency detects a mismatch between the trading profits or losses that taxpayers report on their returns and what third parties report to the IRS through forms known as 1099-B.
The person declined to say how many crypto taxpayers had received the latest letter, but added that they typically go out one or two years after a taxpayer has filed a return.
The IRS deemed crypto assets to be property rather than currency in 2014, the last time its only substantive guidance came out. That means the agency taxes crypto profits and losses like those for stocks, at capital gains rates.
Have an IRS Tax Problem?

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Tuesday, March 23, 2021

ITINs acceptable on Form 8879, IRS e-file Signature Authorization

The IRS has issued an update to the instructions for Form 8879, IRS e-file Signature Authorization.

The update provides that an Individual Taxpayer Identification Number (ITIN) can be used on Form 8879 in place of a Social Security Number (SSN) when the taxpayer doesn’t have, or isn’t eligible for, an SSN. 

Taxpayers use a Personal Identification Number (PIN) to sign an e-filed individual tax return that is transmitted by an electronic return originator (ERO). (Instructions to Form 8879)

Taxpayers use Form 8879 to authorize the electronic filing (e-filing) of their original or amended return by an ERO. 

Form 8879 must be completed when the Practitioner PIN method is used to sign the taxpayer's e-filed individual income tax return or when the taxpayer authorizes the ERO to enter or generate the taxpayer’s PIN on their e-filed individual income tax return. 

Now the IRS has updated the instructions to Form 8879 to include the following:

“If a taxpayer doesn't have and isn't eligible to get a Social Security number (SSN), enter the taxpayer's IRS Individual Taxpayer Identification Number (ITIN) wherever an SSN is requested on Form 8879.”

Before this update, the instructions to Form 8879 provided only that an ERO must “enter the name(s) and social security number(s) of the taxpayer(s) at the top of the form.” 

Have an IRS Tax Problem?

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DC Court Not Allow Challenge To Passport Denial Over Tax Debt

According to Law360, a D.C. federal court has dismissed the remaining claims in a man's suit challenging the federal government's denial of his passport application, finding that he failed to prove that the IRS improperly certified his tax debt as seriously delinquent.

The Internal Revenue Service correctly determined that Robert A. McNeil had seriously delinquent tax debts that caused the U.S. State Department to deny his passport application, and the agency wasn't required to notify McNeil before certifying his tax delinquency, according to the Thursday memorandum opinion.

"McNeil's argument concerning the notice requirement fails because even if notice was not effected here, it would not mean that the IRS' certification of his debt to the State Department was erroneous," the court said.

McNeil filed a public records request under the Freedom of Information Act  with the U.S. State Department in 2018 seeking records related to the government's rejection of his passport application based on the IRS' certification of his serious tax delinquency, according to court documents.

Following court proceedings that led to McNeil receiving a number of documents related to his FOIA request, McNeil amended his complaint against the State Department to include the IRS and add claims to his suit that the agency improperly determined and certified his tax debt.

The district court granted several motions for summary judgment in the government's favor that eliminated the FOIA claims made by McNeil, leaving the claims regarding the IRS' certification of his tax delinquency to be resolved, according to court documents.

McNeil argued that he was never made aware that the IRS had certified his tax debt and should have received notice from the agency, using two documents he received in his FOIA request as examples of records that could have provided that correspondence, according to court documents.

In its Thursday opinion, the court said that the IRS notice is only required under law to be sent contemporaneously, so it cannot be a prerequisite for the agency to certify a serious tax debt, the court said. And even if the notices were flawed, the law doesn't include a statute of limitations to challenge the certification of serious tax delinquency that would have prevented McNeil's suit, the opinion said.

McNeil also argued that the IRS assessed his tax debt unlawfully in his amended complaint, but that argument is impermissible under Internal Revenue Code Section 7345 , which only allows taxpayers to challenge the certification of serious tax delinquency, the court said in its opinion. Thus, McNeil failed to properly challenge aspects of the IRS' debt certification process, the court said.

"The court finds no support in § 7345 or anywhere else in the tax code for the notion that Congress wanted § 7345(e) to become a vehicle for challenging IRS procedures and tax assessments that cannot otherwise be challenged," the court said.

McNeil represented himself.

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TIGTA Reports That High-Income Taxpayers With Delinquent Taxes Could Be More Effectively Prioritized


Average AGI of Taxpayers in This Group

Balance Due

Actual Recovery Rate

Remaining Balance Due













The Treasury Inspector General for Tax Administration (TIGTA) today released the Audit Report High-Income Taxpayers Who Owe Delinquent Taxes Could Be More Effectively Prioritizedwhich discusses that it identified 685,555 taxpayers who had a balance due as of May 14, 2019.

These Taxpayers Reported Adjusted Gross Income (AGI) of $200,000 or More and Owed a Combined Total of $38.5 Billion.

Because the IRS prioritizes high balance due cases for collection, many of these high-income taxpayers would be included in high-priority work. However, balance dues are not prioritized by incomes earned and some improvements could be made to prioritize high-income taxpayers more effectively. 

When selecting cases to assign to a private collection agency, the IRS randomly selects cases that meet the Private Debt Collection criteria without regard to taxpayers’ ability to pay. TIGTA identified 3,185 high-income taxpayers whose accounts were not sent to a private collection agency at any point since the program started in Fiscal Year 2017 and who owed $110 million on modules that were shelved in an inactive inventory as of May 14, 2019. 

TIGTA also found that revenue officer staffing does not always align with locations where the greatest number of high-income cases are located. While TIGTA recognizes that resources are limited, hiring or reallocating resources to work high-income cases in these areas could lead to higher collection potential and increased revenue. 

TIGTA made seven recommendations to help the IRS improve the collection of taxpayer delinquent accounts of high-income taxpayers. IRS management agreed with two of the seven recommendations. The IRS plans to evaluate the recovery predictive models to consider additional income factors to improve the ability to predict recovery and plans to consider conducting ROCS that focus on high-income taxpayer TDA cases in locations where high-income taxpayer cases far outweigh the number of revenue officers assigned to those areas.

Have an IRS Tax Problem?

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Marini & Associates, P.A. 

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Toll Free at 888 8TAXAID (888-882-9243)