Friday, April 30, 2021

Draft Schedules K-2 And K-3 Released To Enhance Reporting Of International Tax Matters By Pass-Through Entities

The Treasury and the IRS released on April 30, 2021 updated early drafts of new Schedules K-2 and K-3 for Forms 1065, 1120-S, and 8865 for tax year 2021 (filing season 2022). The schedules are designed to provide greater clarity for partners and shareholders on how to compute their U.S. income tax liability with respect to items of international tax relevance, including claiming deductions and credits.

The early release drafts of the schedules are intended to give a preview of the changes before final versions are released.  The release of an early draft of the instructions for the schedules is planned for this summer.

The redesigned forms and instructions will also give useful guidance to partnerships, S corporations and U.S persons who are required to file Form 8865 with respect to controlled foreign partnerships on how to provide international tax information.  The updated forms will apply to any persons required to file Form 1065, 1120-S or 8865, but only if the entity for which the form is being filed has items of international tax relevance (generally foreign activities or foreign partners).

The Changes Do Not Affect Partnerships And S Corporations With No Items Of International Tax Relevance.

The Treasury Department and the IRS released prior drafts of Schedules K-2 and K-3 for the Form 1065 in July 2020 and engaged with stakeholders to solicit input on the changes.  Helpful comments were received, and changes have been made to the schedules and instructions as appropriate.

To promote compliance with adoption of Schedules K-2 and K-3 by affected pass-through entities and their partners and shareholders, the Treasury Department and the IRS intend to provide certain penalty relief for the 2021 tax year in future guidance. 

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LB&I Releases Practice Unit: Reasonable Cause and Good Faith


The IRS has updated its Practice Unit on the reasonable cause defense to certain penalties. This Practice Unit provides auditors with information on how to determine whether a taxpayer has a reasonable cause defense to a proposed penalty. 

Certain penalties are not imposed if the taxpayer can prove “reasonable cause” for the return position giving rise to the penalty (“reasonable cause defense”). Penalties that have a reasonable cause defense include:

  • Most accuracy related penalties under Code Sec. 6662, and the civil fraud penalty under Code Sec. 6663. (Code Sec. 6664(c))

  • The Code Sec. 6662A reportable transaction understatement penalty (when the transaction is adequately disclosed). (Code Sec. 6664(d))

  • The penalty for erroneous claims for refund or credit. (Code Sec. 6676(a))

  • Failure to file and/or failure to pay under Code Sec. 6651. (Code Sec. 6651(a)(1))

  • Understatement of taxpayer's liability by return preparer under Code Sec. 6694. (Code Sec. 6694(a)(3))

In some cases, to take advantage of the reasonable cause defense, the taxpayer must also show that they acted in good faith or that their failure to comply was not due to willful neglect. 

Whether the taxpayer has a reasonable cause defense to a penalty depends on which penalty the IRS seeks to impose. However, in general, reasonable cause depends on all the facts and circumstances. 

According to the Practice Unit, an auditor should determine whether the taxpayer acted with reasonable cause on a case-by-case basis. The most significant of the facts and circumstances the auditor must consider is the taxpayer’s effort to report their proper tax liability.

  • Example 1. On their return, a taxpayer reports amounts from an erroneous information return but does not know the amounts are incorrect. This type of error may indicate that the taxpayer has reasonable cause for reporting the incorrect amounts on their return. However, there must be additional facts suggesting the taxpayer made a reasonable effort to ascertain the correct amounts. 
  • Example 2. On their return, the taxpayer makes an isolated computation or transposition error. This type of error may indicate the taxpayer’s good faith effort to report their proper tax liability. 

Other factors for an auditor to consider are the taxpayer’s experience, knowledge, education, and whether the taxpayer relied on the advice of a tax advisor.

When the auditor considers a taxpayer’s reliance on the advice of a tax advisor, the auditor should consider whether:

  1. The taxpayer's reliance on the advice of a tax advisor was objectively reasonable.
  2. The taxpayer provided their tax advisor with all the necessary information to evaluate the tax matter.
  3. The tax advisor had enough knowledge and expertise related to the tax matter to provide advice.
  4. The taxpayer "actually relied" on their tax advisor's advice.
  5. The taxpayer exercised the care that a reasonably prudent person would have used under the circumstances when relying on the tax advisor's advice.

Generally, A Taxpayer Does Not Have Reasonable Cause
If The Penalty Relates To The Late Filing Of A Tax Return
Or Payment Of A Tax Obligation.

The taxpayer is responsible for timely filing and payment, and this responsibility cannot be delegated. However, an auditor should consider factors that might excuse late filing or late payment such as whether the taxpayer's records were unavailable (for example, due to disaster or casualty) or whether there was a law change of which the taxpayer could not reasonably have been expected to be aware.

In addition, a taxpayer's forgetfulness is not generally a basis for reasonable cause; however, it could be if there is a medical reason for such forgetfulness (e.g., the taxpayer has dementia).

Have as IRS Tax Problem?


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Thursday, April 29, 2021

We Can Help You Eliminate Your $25,000 Late Form 5472 Penalties for $5,000 Per Penalty!

On June 21, 2016 we posted  US Taxpayers Are Receiving Automated $10,000 Penalty Assessments For Late Filed Form 5471's & 5472's - We Can Help! where we discussed that we have been receiving a lot of calls from businesses who have recently received penalty notices regarding late filed or non-filed Form 5471 & 5472's. 

On November 3, 2020 we posted, New $25,000 Penalty for Not Reporting SMLLC with Foreign Owner Now Being Assessed by the IRS, we where we discussed that the IRS has now issued final regulations and they treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation separate from its owner, but only for the reporting, record maintenance and associated compliance requirements that apply to 25% foreign-owned domestic corporations under Code Sec. 6038A. and that for Tax Years beginning after December 31, 2017, the TCJA Act increased the late filed Form 5472 penalty to $25,000 From $10,000 for Each Return that must be filed.

There are ways to defend against these automatic assessments and request penalty abatement. The defenses that you should consider when assess the penalty for filing an international information return after the due date.

  1. Follow the Delinquent Information Return Procedure – No longer available after November 9, 2020 - see Reasonable Cause Defense below.

Taxpayers who have identified the need to file delinquent international information returns who are not under a civil examination or a criminal investigation by the IRS and have not already been contacted by the IRS about the delinquent information returns should file the delinquent information returns through normal filing procedures. Taxpayers may attach a reasonable cause statement to each delinquent information return filed for which reasonable cause is being asserted. During processing of the delinquent information return, penalties may be assessed without considering the attached reasonable cause statement. It may be necessary for taxpayers to respond to specific correspondence and submit or resubmit reasonable cause information.

  1. Ask for a First-Time Offender Abatement (FTA) - Generally, an FTA can provide penalty relief if the taxpayer has not previously been required to file a return or has no prior penalties (except the estimated tax penalty) for the preceding three years with respect to the same IRS  File (IRM §20.1.1.3.6.1). With respect to a Form 5472 late-filing penalty, the IRM provides for an FTA if an FTA was applied to the taxpayer's related Form 1120 late-filing penalty or no penalty was assessed on the related Form 1120 (IRM §21.8.2.20.2).
  2. Reasonable Cause Defense - Under Section 6038 of the tax code, which lays out the information reporting requirements for individuals and businesses with an interest in foreign corporations and the penalties for delinquent filing, penalties may be abated if a reasonable cause exists for the failure to file. However, neither the statute nor the applicable regulations define a reasonable cause standard for the abatement. Treasury Regulations Section 301.6651-1(c) provide a definition of what constitutes reasonable cause for failure to file corporate income tax returns and says that "if the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to reasonable cause." And

Though a $25,000 penalty may discourage some from filing in international information return after the deadline, there is a greater exposure to not late filing and information return and that is that the statute of limitations for tax returns which is generally three years does not apply for returns that are missing the information reports and the statute remains open indefinitely. Under the indefinite statute of limitations, not only can the IRS make adjustments to items related to the international information returns, but they also can examine any other area on the tax return.  

Has Your Company Been Assessed an
Automatic $25,000 Penalty for a Late Form 5472?

 

 
Contact the Tax Lawyers at
Marini & Associates, P.A. 
 
 for a FREE Tax Consultation Contact US at
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or Toll Free at 888-8TaxAid (888 882-9243)



Bitcoin Fog Operator Accused By Feds of Money Laundering

According to Law360, the purported operator of cryptocurrency mixing service Bitcoin Fog was arrested in Los Angeles on April 27, 2021and accused of laundering hundreds of millions of dollars worth of bitcoin.

Roman Sterlingov, a citizen of Russia and Sweden, is facing money laundering and unlicensed money transmission charges in Washington, D.C., federal court for running what the FBI and IRS say is an "illicit bitcoin money transmitting and money laundering service."

According to the government, Bitcoin Fog operates as a "tumbler" or "mixer" service, which allows customers to send bitcoin to recipients in a way that conceals the source of the cryptocurrency. The process disassociates incoming bitcoin from certain bitcoin addresses or transactions and then commingles that bitcoin with other incoming bitcoin prior to conducting further transactions.


This Procedure Allows Criminals To Launder Their Funds
By Concealing The Source And Location
Of Their "Dirty" Bitcoin, Authorities Say.



Bitcoin Fog, one of the original bitcoin tumbler services operating on the darknet, has been for around a decade and has processed total transactions valued at roughly $336 million, according to a statement of facts filed by an IRS special agent. The darknet is a hidden network of websites that are not accessible through normal means, but rather through browsing tools such as Tor.

The largest senders of bitcoin through Bitcoin Fog have been illicit darknet markets, the government says, such as Silk Road, Agora, Evolution and AlphaBay, which trafficked in drugs and other illegal goods.

"Investigators obtained records of Sterlingov's true-name accounts at several cryptocurrency exchanges," the statement of facts says. "Sterlingov's accounts revealed the vast majority of cryptocurrency deposited into his accounts was originally sourced and traced back to Bitcoin Fog clusters."

Neither Sterlingov nor Bitcoin Fog have registered with the Treasury Department as a money services business despite conducting transactions with U.S. customers, as required under federal law, the government says.

Sterlingov made his initial appearance in L.A. federal court on April 27, 2021, according to the U.S. Attorney's Office for the Central District of California, and his detention hearing has been continued to May 4. He remains in federal custody.

According To The Statement Of Facts, Bitcoin Fog Charged A Variable Fee Of 2% To 2.5% On Each Deposit, But The Amount Of Money Sterlingov Made From Bitcoin Fog Is Unclear.

Investigators say based on the bitcoin tumbler's transaction activity over time, Sterlingov would have made about $8 million in commissions if he cashed out the administrative fees around the time of the transactions.

However, given that the value of bitcoin has skyrocketed since Bitcoin Fog launched in the fall of 2011, going from $2 per bitcoin to a current value of $50,000, Sterlingov's profits that were kept in bitcoin would have appreciated significantly, according to the government. The current value of the Bitcoin Fog "cluster," including customer funds under Sterlingov's control as well as his own money, is almost $70 million, investigators say.

The case is U.S. v. Sterlingov, case number 1:21-mj-00400, in the U.S. District Court for the District of Columbia.

 Have a Virtual Currency Tax Problem?




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Tuesday, April 27, 2021

On Dec. 31 IRS Closing Some Payment PO Boxes and Says Don't Mail to Them Now


In an e-News for Tax Professionals, the IRS has announced that on December 31, 2021, it is closing several individual payment P.O. boxes in San Francisco, CA and Hartford, CT and has noted that mailing to those addresses now could result in delays.

Effective January 1, 2022, the following San Francisco and Hartford P.O. Boxes will be permanently closed: 

Form 1040 --------------------------- P.O. Box 7704, San Francisco, CA 94120-7704.

Form 1040ES ------------------------ P.O. Box 510000, San Francisco, CA 94151-5100.

Form 4868 --------------------------- P.O. Box 7122, San Francisco, CA 94120-7122.

Installment Agreements ------------ P.O. Box 7125, San Francisco, CA 94120-7125.

Form 1040 --------------------------- P.O. Box 37008, Hartford, CT 06176-7008.

Form 1040 --------------------------- P.O. Box 37910, Hartford, CT 06176-7910.

Form 1040ES ------------------------ P.O. Box 37007, Hartford, CT 06176-7007.

Form 4868 --------------------------- P.O. Box 37009, Hartford, CT 06176-7009.

Form 4868 --------------------------- P.O. Box 37911, Hartford, CT 06176-7911.

Installment Agreements ------------ P.O. Box 37004, Hartford, CT 06176-7004.

To ensure the IRS's timely receipt of any payments, the IRS encourages taxpayers and tax professionals to avoid mailing payments to these closing addresses.  

To help ensure timely receipt, IRS encourages you to avoid mailing to these closing addresses as there could be mail delays. Please check Where to File on irs.gov for active addresses, before mailing your payments. However, payments mailed to these closed payment locations after Jan. 1, 2022, will be returned to sender. If you receive an IRS payment letter, send your payment to the address located in the letter.

IRS encourages taxpayers to use IRS Direct Pay. It's fast, secure and easy to pay a tax bill or estimated tax payment directly from a checking or savings account. Users receive instant confirmation that their payment has been made. See Publication 3891, Lockbox Addresses for 2021, for more information.

Have as IRS Tax Problem?


 Contact the Tax Lawyers at
Marini & Associates, P.A. 

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



Nearly 170,000 Taxpayers Possibly Didn't Report Up To $29 Billion Paid Through Venmo, PayPal and SquareUp

According to Law360, nearly 170,000 taxpayers possibly didn't report up to $29 billion of peer-to-peer payments that they received despite getting information returns for the transactions, according to a watchdog report released Monday. 

The taxpayers received Forms 1099-K for the payments, according to data from three peer-to-peer payment applications, but they never filed a tax return and therefore the payments were never reported to the government, according to the report from the Treasury Inspector General for Tax Administration.

Limited reporting requirements pose problems for the agency in identifying unreported business income facilitated by peer-to-peer payment applications, but the agency didn't always take action against nonfilers and underreporters even when information was available, according to the report.

Peer-to-peer payment applications such as Venmo, PayPal and SquareUp allow users to send money from a mobile device through a linked bank account or card, the watchdog's report said. The applications are growing, and present tax compliance challenges for the Internal Revenue Service, according to TIGTA.

"If The IRS Is Unable To Effectively Identify Noncompliance, Taxpayers May Begin Using Peer-To-Peer Payment Applications
 To Conduct Business, Skirt Third-Party Reporting And Avoid Paying Taxes On Income," The Watchdog Report Said.

Internal Revenue Code Section 6050W  requires entities designated as third-party settlement organizations, or central organizations obligated to make payments to payees of third-party network transactions, to file Form 1099-K information returns when total transactions with a payee exceed 200 and gross payments exceed $20,000, according to the report.

However, it is unclear if many peer-to-peer applications meet the definition of third-party settlement organizations and are therefore required to file the information reports, the report said. Nevertheless, many of the applications file the Forms 1099-K when the criteria are met anyway, TIGTA said.

TIGTA made three recommendations to the IRS in the report. The agency agreed with two, including one that it should work with the U.S. Department of the Treasury's Office of Tax Policy to consider pursuing a regulatory change clarifying the third-party settlement organization designation.

However, the IRS pushed back on a TIGTA recommendation that it launch a compliance initiative project that includes Form 1099-K payments associated with peer-to-peer payment applications.

De Lon Harris, Small Business/Self-Employed Commissioner, Examination, one of the division's co-commissioners, wrote in the agency's response in the report that the IRS has necessary systems in place to find noncompliance.

"Given Our Existing Resource Constraints 

And The Opportunity Costs Inherent In Prioritizing
This 1099-K Issue Over Higher Priority Work
That Is Likely To Yield Greater Tax Assessments

the IRS does not believe there is a demonstrated compliance problem that would warrant further examination resources," he wrote. "We are concerned TIGTA has not considered the results of the compliance efforts taken by the IRS, particularly in the underreporter programs."

The American Rescue Plan Act  significantly lowered the information reporting threshold under Section 6050W to $600 regardless of the number of transactions starting in 2022.

TIGTA has raised concern about the agency's Form 1099-K compliance work before. The watchdog in a December report identified 314,586 business taxpayers with $335.5 billion in Form 1099-K income that appeared to have a filing obligation but weren't identified as nonfilers by the IRS. 

The report also found 62,087 individual nonfilers with $575 million in Form 1099-K income who the IRS hadn't identified as nonfilers and nonfiler cases weren't created. TIGTA estimated that if the agency identified, created and worked just the nonfiler and underreporter cases with Form 1099-K income of $1 million or more for businesses and $100,000 for individuals it could have assessed more than $5.7 billion in taxes.

Eric Hylton, then the commissioner of SB/SE, in the management response in that report, wrote that both underreporting programs were functioning as intended.

Have a IRS Tax Problem?


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Corporations & The Top 1% Should Heed Warnings of Impending IRS Tax Audits

On March 24, 2021 we posted Top 1% Fail To Report a Fifth of Their Income, where we discussed that 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.

And on April 14, 2021 we posted that The Tax Gap Could Exceed $1 Trillion - IRS Enforcement is The Answer, where we discussed that IRS the Commissioner Chuck Rettig told the Senate Finance Committee that 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. Rettig said the agency has lost about 17,000 employees in the enforcement area over the last decade.

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

Included in the Biden Administration’s proposed budget for fiscal 2022 is an additional $1.2 billion in funding to help the IRS ramp up its tax enforcement efforts after more than a decade of spending and staffing cuts. 

What this means for taxpayers is a likely increase in IRS audits and heightened scrutiny of tax compliance, especially for corporations and high-net-worth individuals. Whether taxpayers can survive unscathed largely depends on their record-keeping practices and their ability to substantiate their tax positions and claims of income, deductions, and credits.

It is no secret that the U.S. tax code is complex and rife with grey areas that taxpayers may use to their advantage to legally reduce their taxable income and/or tax liabilities. However, it is critical that taxpayers at all income levels ensure the methods they use for purposes of tax efficiency do not cross the line into tax evasion, which is the intentional concealment of income and/or information from the IRS or other taxing authorities. Whereas a simple mistake on your tax return can result in penalties and interest on unpaid amounts, willful tax evasion can lead to substantial fines, penalties, interest and even jail time for taxpayers and their accomplices, which many include employees and/or a spouse.

Generally, the IRS can conduct an audit during the three years subsequent to a taxpayer’s return filing date. If it detects a substantial error, the agency may be able to extend the audit period to six years. 

Once selected for an audit, taxpayers’ bear the responsibility to prove the accuracy of their previously filed tax returns, including demonstrated proof of all items of income, deductions and credits. Such support may include bills, dated receipts and cancelled checks or other proof of payments; legal documents, including divorce papers, loan agreements and property settlements; records of employment; documentation of damages from theft or loss, including property appraisals; and Schedule K-1s reporting shareholders’ shares of income, losses, deductions and credits. If taxpayers lack this documentation, the government may use its own methods to reconstruct the taxpayers’ income and expenses.

Furthermore, high net worth individuals should also prepare for the Proposed Estate Tax Increases & Do Their Planning Now.

To prepare for the prospect of a better funded, more aggressive IRS, businesses and taxpayers at the upper income levels should take the time now to meet with experienced independent Tax Attorneys to review their current tax positions to ensure tax compliance, identify tax risks and even uncover potential opportunities to maximize their taxes.


Are You Ready For Tax Increases?


 Contact the Tax Lawyers at
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or 
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Monday, April 26, 2021

Proposed Estate Tax Increases - Do Your Planning Now

According to Shearman & Sterling LLP  on March 25, 2021, Senators Bernie Sanders (VT) and Sheldon Whitehouse (RI) introduced the For the 99.5% Act (the “Act”), which proposes major changes to the U.S. transfer tax regime by increasing estate, gift and generation-skipping transfer (GST) taxes and vitiating the effectiveness of certain wealth transfer planning techniques.

The chart below highlights the proposed substantial reductions in estate, gift and GST exemption amounts and increases in transfer tax rates for gifts made, and estates of decedents dying, after December 31, 2021:

 

Annual Exclusion Gifts: Annual exclusion gifts would no longer be unlimited. A donor could not give more than twice the annual exclusion amount (currently $15,000) if the gift is of an asset that cannot be immediately liquidated by the recipient, such as gifts in trust or gifts of entity interests. Withdrawal or put rights would be disregarded for this purpose. Other proposed changes would affect transfers made, and trusts created, after the enactment date of the Act. These changes include:

  • Grantor Trusts: Assets that are transferred by a decedent to a grantor trust after the enactment date would generally no longer avoid estate tax, and distributions made from a grantor trust would be subject to gift tax. A grantor trust created and funded prior to the enactment date would generally be exempt from these provisions to the extent no additional contributions were made after the enactment date.
  • GRATs: Grantor-Retained Annuity Trusts (GRATs) would be less effective in transferring wealth as they would be required to have: (i) a minimum term of 10 years, (ii) a maximum term of the grantor’s life expectancy plus 10 years and (iii) a remainder interest of not less than the greater of 25 percent of the fair market value of trust assets and $500,000.
  • GST Exempt Trusts: For a trust distribution to qualify for GST exemption, the trust could no longer have a term of more than 50 years. Existing GST exempt trusts lasting more than 50 years would lose their GST exempt status 50 years after enactment.
  • Valuations: The availability of marketability and minority discounts for appraisals of interests held in entities would be severely limited.
  • Basis Step-Up: The Act would confirm that a step-up in basis is not available to assets held in a grantor trust unless those assets are includable in the grantor’s estate, which is something most practitioners have already accepted. A separate bill, known as the Sensible Taxation and Equity Promotion (STEP) Act, was also recently introduced with the purpose of effectively eliminating any step-up in basis at death.


It is unclear which, if any, of these provisions will be enacted into law and—other than the proposed reductions in exemption amounts and increases in tax rates which become effective on January 1, 2022—what the effective date would be.

What is clear, is that the Act is intended to substantially increase the transfer tax burden on high-net-worth families. 

By Engaging In Proactive Planning Now, However, You Can Still Take Advantage Of The Current Law,
Which Is Considerably More Favorable.

Due to the introduction of the Act, we encourage you to revisit your estate plan to ensure that it continues to reflect your wishes and that you consider if you should take advantage of certain effective wealth transfer planning techniques while they are still available.

Want To Cut Your Estate Tax?


Contact the Tax Lawyers at
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 for a FREE Tax Consultation Contact us at
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or Toll Free at 888-8TaxAid (888 882-9243).