Wednesday, December 22, 2021

Malta Pension Plans - CAA Provide That Arrangements That Allow Noncash Contributions & Don't Limit Contributions To Funds From Employment Or Self-Employment Don't Qualify

The competent authorities of the United States and Malta signed a competent authority arrangement (CAA) confirming their understanding of the meaning of pension fund for purposes of the United States–Malta income tax treaty (Treaty). The competent authorities have entered into this agreement after becoming aware that U.S. taxpayers with no connection to Malta were misconstruing the pension provisions of the Treaty to avoid income tax on the earnings of, and distributions from, personal retirement schemes established in Malta.  

The CAA confirms the U.S. and Malta competent authorities’ understanding that (except in the case of a qualified rollover from a pension fund in the same country) a fund, scheme or arrangement is not operated principally to provide pension or retirement benefits if it allows participants to contribute property other than cash, or does not limit contributions by reference to income earned from employment and self-employment activities. 

Because Maltese Personal Retirement Schemes Contain These Features, They Are Not Properly Treated As A Pension Fund
For Treaty Purposes And Distributions From These Schemes
Are Not Pensions Or Other Similar Remuneration.


The IRS put taxpayers on notice earlier this year that it was reviewing the use of Maltese personal retirement schemes and that some U.S. citizens and residents are relying on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to take the position that they may contribute appreciated property tax free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Ordinarily gain would be recognized upon disposition of the plan's assets and distributions of the proceeds. 

The IRS is actively examining taxpayers who have set up these arrangements and recognizes that other taxpayers may have filed tax returns claiming Treaty benefits as a result of their participation in these arrangements. These taxpayers should consult an independent tax advisor prior to filing their 2021 tax returns and take appropriate corrective actions on prior filings.


The IRS also cautions taxpayers against entering into any substantially similar arrangements that would seek to misconstrue the provisions of a bilateral income tax treaty of the United States to avoid income tax. IRS enforcement, both the civil and criminal divisions, is committed to pursuing abuse and those who market and participate in abusive transactions. 


The CAA is available on and will be published in the Internal Revenue Bulletin. 

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Friday, December 17, 2021

FinCEN Issues Proposed Regs On Beneficial Ownership Reporting

The Financial Crimes Enforcement Network (FinCEN) has issued proposed regs implementing the beneficial ownership information reporting provisions of the Corporate Transparency Act. The proposed rules address, among other things, who must report beneficial ownership information (BOI), when BOI must be reported and what BOI must be reported.

These proposed regulations would implement the requirement in the CTA [1] that a reporting company submit to FinCEN a report containing beneficial owner and company applicant information (together, “beneficial ownership information” or BOI). This proposal fulfills the statutory direction to Treasury to promulgate regulations to implement the CTA and reflects FinCEN's careful consideration of public comments received in response to an advanced notice of proposed rulemaking (the “ANPRM”).[2] To the extent practicable, and as required by the CTA, the proposed regulations aim to minimize the burden on reporting companies and to ensure that the information collected is accurate, complete, and highly useful. More broadly, the proposed regulations are intended to protect U.S. national security, provide critical information to law enforcement, and promote financial transparency and compliance. The CTA and these proposed regulations represent the culmination of years of efforts by Congress, the Department of the Treasury (Treasury), other national security agencies, law enforcement, and other stakeholders to bolster the United States' corporate transparency framework and to address deficiencies in BOI reporting noted by the Financial Action Task Force (FATF), Congress, law enforcement, and others. The proposed regulations address: (1) Who must file; (2) when they must file; and (3) what information they must provide. Collecting this information and providing access to law enforcement, the intelligence community, and other key stakeholders will diminish the ability of malign actors to obfuscate their activities through the use of anonymous shell and front companies. The proposed regulations would also specify circumstances in which a person violates the reporting requirements.

The proposed regulations describe two distinct types of reporting companies that must file reports with FinCEN—domestic reporting companies and foreign reporting companies. Generally, under the proposed regulations, a domestic reporting company is any entity that is created by the filing of a document with a secretary of state or similar office of a jurisdiction within the United States. A foreign reporting company is any entity formed under the law of a foreign jurisdiction that is registered to do business within the United States.

The proposed regulations also describe the twenty-three specific exemptions from the definition of reporting company under the CTA. The CTA also includes an option for the Secretary of the Treasury (Secretary), with the written concurrence of the Attorney General and the Secretary of Homeland Security, to exclude by regulation additional types of entities. FinCEN does not currently propose to exempt additional types of entities beyond those specified by the CTA.

The proposed regulations describe who is a beneficial owner and who is a company applicant. A beneficial owner is any individual who meets at least one of two criteria: (1) Exercising substantial control over the reporting company; or (2) owning or controlling at least 25 percent of the ownership interest of the reporting company. The proposed regulations define the terms “substantial control” and “ownership interest” and describe rules for determining whether an individual owns or controls 25 percent of the ownership interests of a reporting company. The proposed regulations would also describe five types of individuals who the CTA exempts from the definition of beneficial owner.

The proposed regulations also describe who is a company applicant. In the case of a domestic reporting company, a company applicant is the individual who files the document that forms the entity. In the case of a foreign reporting company, a company applicant is the individual who files the document that first registers the entity to do business in the United States. The proposed regulations specify that a company applicant includes anyone who directs or controls the filing of the document by another.

Under the proposed regulations, the time at which a required report is due would depend on: (1) When the reporting company was created or registered; and (2) whether the report is an initial report, an updated report providing new information, or a report correcting erroneous information in a previous report. Domestic reporting companies created, or foreign reporting companies registered to do business in the United States, before the effective date of the final regulations would have one year from the effective date of the final regulations to file their initial Start Printed Page 69921 report with FinCEN. Domestic reporting companies created, or foreign reporting companies registered to do business in the U.S. for the first time, on or after the effective date of the final regulations would be required to file their initial report with FinCEN within 14 calendar days of the date on which they are created or registered, respectively. If there is a change in the information previously reported to FinCEN under these regulations, reporting companies would have 30 calendar days to file an updated report. Finally, if a reporting company filed information that was inaccurate at the time of filing, the reporting company would have to file a corrected report within 14 calendar days of the date it knew, or should have known, that the information was inaccurate.

The proposed regulations also describe the type of information that a reporting company is required to file. First, the reporting company would have to identify itself. The proposed regulations describe the information that a reporting company must submit to FinCEN about: (1) The reporting company, and (2) each beneficial owner and company applicant. This includes, for example, the name and address of each beneficial owner and company applicant, among other things. In lieu of providing specific information about an individual, the reporting company may provide a unique identifier issued by FinCEN called a FinCEN identifier. The proposed regulations describe how to obtain a FinCEN identifier and when it may be used. The proposed regulations also describe highly useful information that reporting companies are encouraged, but not required, to provide. This additional information would support efforts by government authorities and financial institutions to prevent money laundering, terrorist financing, and other illicit activities such as tax evasion.

The CTA provides that it is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent BOI to FinCEN, or to willfully fail to report complete or updated BOI to FinCEN. The proposed regulations describe persons that are subject to this provision and what acts (or failures to act) trigger a violation.

In addition to the proposed information reporting rules, FinCEN has issued another Advance Notice of Proposed Rulemaking soliciting public comment on a potential rule to address the vulnerability of the U.S. real estate market to money laundering and other illicit activity.

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1.  The CTA is Title LXIV of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Public Law 116-283 (January 1, 2021) (the “NDAA”). Division F of the NDAA is the Anti-Money Laundering Act of 2020, which includes the CTA. Section 6403 of the CTA, among other things, amends the Bank Secrecy Act (BSA) by adding a new Section 5336, Beneficial Ownership Information Reporting Requirements, to Subchapter II of Chapter 53 of Title 31, United States Code.

Back to Citation

2.  86 FR 17557 (Apr. 5, 2021).


Tuesday, December 14, 2021

Sixth Circuit Affirmed That Whirlpool Owes Tax On $45M Foreign Income

According to Law360, the Sixth Circuit affirmed in a split decision Monday that Whirlpool owes the Internal Revenue Service taxes on more than $45 million in income generated by a Luxembourg affiliate's sales to a Mexican subsidiary.

Income that a Whirlpool Corp. subsidiary in Luxembourg received from appliance sales to Whirlpool-US and Whirlpool Mexico in 2009 constituted foreign base company sales income under Internal Revenue Code Section 954(d)(2) and should have been included in Whirlpool's income for that year, the court majority said in the 2-1 decision.

The court majority said the income plainly met a two-part test laid out in the statute to be considered foreign base company sales income, or FBCSI. The first condition required Whirlpool's Luxembourg subsidiary conducting activities through a branch or similar establishment outside the company where it was incorporated. The second condition was that the purpose of the arrangement was to defer U.S. tax, the court said, upholding a decision by the U.S. Tax Court

"We therefore agree with the Tax Court that, under the text of the statute alone, '[Lux's] sales income is FBCSI that must be included in petitioners' income under subpart F,'" U.S. Circuit Judge Raymond Kethledge said in the majority opinion.

Whirlpool Corp. told Law360 in a statement that it follows all tax laws where it operates and pays its fair share of taxes.

"We are disappointed in the Sixth Circuit's decision, but we are reviewing the ruling in detail to determine our legal options going forward," the company said.

The decision affirmed a May 2020 ruling by U.S. Tax Court Judge Albert Lauber, who found that $45 million of profits connected to appliance manufacturing in Mexico fell under the Subpart F regime that immediately taxes some earnings from U.S. companies' foreign affiliates.

Whirlpool lawyers argued before the Sixth Circuit that the income in question came from a Mexican branch's manufacturing operations and isn't taxable as FBCSI, while the government argued that the company's Luxembourg affiliate effectively earned the income and it should be deemed FBCSI.

In a dissenting opinion, Circuit Judge John Nalbandian said the Tax Court incorrectly granted summary judgment to the IRS. The statute provides for an exception that wasn't adequately considered by the court majority, he said.

"In my view, Lux didn't generate taxable foreign base company sales income because it 'manufactured' the property it bought and sold," Judge Nalbandian said.

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US Treasury Proposes Rules To Reveal Owners of Shell Companies

According to Law360The U.S. Department of the Treasury's financial crimes unit rolled out a new rule proposal Tuesday that would establish a so-called beneficial ownership database to help prevent the illicit movement of funds through shell companies.

The rule would require that corporations, limited liability companies, and similar entities submit the full legal name, date of birth, current residential or business street address, and a unique identifying number from an acceptable identification document, such as a passport, for all beneficial owners, according to the proposal.

"The current lack of a centralized U.S. [beneficial ownership information] reporting requirement and database makes the United States a jurisdiction of choice to establish shell companies that hide the ultimate beneficiaries," the proposal says. "This makes it easier for bad actors to exploit these companies for the placement, laundering, and investment of the proceeds of crime."

"Collecting this information and providing access to law enforcement, the intelligence community, and other key stakeholders will diminish the ability of malign actors to obfuscate their activities through the use of anonymous shell and front companies," the 
Financial Crimes Enforcement Network (FinCEN) added.

A beneficial owner is defined in the rule as any individual who meets at least one of two criteria: exercising "substantial control" over the reporting company, or owning or controlling at least 25% of the ownership interest of the company. 

If the rule is finalized after a 60-day comment period, domestic reporting companies — or foreign reporting companies registered to do business in the U.S. for the first time — would be required to file their initial report with FinCEN within 14 calendar days of the date they are created or registered, respectively, according to the proposal. 

Reporting companies that were created or registered before the effective date of the final regulation would have a year to file their initial reports.

FinCEN was required under the Corporate Transparency Act — part of the Anti-Money Laundering Act within the National Defense Authorization Act for fiscal year 2021 — to create and hash out the rules governing the database.

FinCEN sought initial public input on the rulemaking in April, requesting extensive feedback at the time spanning 48 questions that included questions addressing potential cybersecurity and privacy concerns, compliance and cost burdens, and according to the proposal has taken those comments into "careful consideration."

The rule would aim to "minimize the burden" on reporting companies and to ensure that the information collected is "accurate, complete, and highly useful," FinCEN said, noting that the agency expects the "amount of additional time and effort required to comply with the proposed rule to be minimal" and that the secure nature of the database would prevent security issues.

"While FinCEN's approach could be viewed to raise concerns about the disclosure of personal information about a broader range of individuals, the privacy impact of reporting [beneficial ownership information] to FinCEN is relatively light, because, unlike beneficial ownership registries in many other countries, FinCEN's database will not be public and will be subject to stringent access protocols," according to the proposal.

FinCEN is tasked with additional rulemaking requirements under the NDAA and its sweeping new anti-money laundering legislation, including the crafting of regulations that would enforce a set of risk priorities the agency issued in June.

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Former Illinois Resident Settles $813K FBAR Penalty For Unreported Chinese Accounts

The U.S. has agreed to settle a dispute with a former Illinois resident who now lives in China over his alleged failure to report foreign bank accounts in Beijing and Hong Kong, the government told an Illinois federal court in U.S. v. Changlin Wu, case number 1:20-cv-04519, in the U.S. District Court for the Northern District of Illinois.

Changlin Wu has agreed to settle more than $813,000 in penalties, interest and fines for willful failure to file report of foreign bank and financial account forms for 2011 through 2013, according to the filing by the government. 

According to the government, Changlin Wu owes the penalties for failing to follow Report of Foreign Bank and Financial Account requirements for 2011 through 2013. Wu had interests in bank accounts in Beijing and Hong Kong that he failed to timely report.

Wu started a company called Longwoods Resources LLC, referred to as Longwoods US in the complaint, in 2007 and filed federal income tax returns for the three tax years in question. His self-prepared tax returns weren't timely filed, and he also didn't file a Schedule B, listing interest and ordinary dividends, with these tax returns even though he owned bank accounts that earned interest, the government said.

In October 2014, Wu told the Internal Revenue Service in an interview that he had one foreign bank account with the Bank of China in the name of a company called Longwoods Science & Technology Development Inc., referred to in the complaint as Longwoods China, with an account balance under $10,000. He later gave the IRS bank statements from that account showing a balance of approximately $48,000 in May 2012, the complaint said.

Wu gave conflicting statements about his ownership interests in Longwoods China, initially claiming he owned 19% but later stating he owned 100%, the government said. In addition, he informed the IRS in April 2015 that he held no personal bank accounts in China during 2011 through 2013, according to the complaint. 

The government said Wu had an interest in a foreign bank, securities or other financial account during each of the years at issue in which the aggregate balance, at some point during each year, exceeded $10,000. He failed to submit FBARs on time for the three years in question, and the FBARs he eventually submitted didn't disclose all the accounts in which he had an interest during those years or the correct highest balance amounts, the government said.

Wu's failure to submit the FBARs timely and accurately in each instance was willful, the U.S. government asserted.

If unspecified conditions aren't met by July 2, 2022, Wu agreed to file for a consent judgment, the government said, asking the court to hold the case until then.

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Monday, December 13, 2021

Deputy Commissioner for SBSE (Collection) Give Remarks at ABA Tax Conference

I attended the 35th Civil and Criminal Penalties Conference in Las Vegas last week where one of the panels gave the Deputy Commissioner for SBSE (Collection), Darren Guillot, the opportunity to discuss the things happening in Collection. I also had the opportunity to meet Keith Fogg, former professor at Villanova University School of Law, my alma mater, who recounts in Procedurally Taxing the following regarding Darren Guillo’s discussion: 

  • In 2019 there were approximately 9.5 million non-filers – meaning individuals who failed to file a federal income tax return despite having a filing obligation. While it is a little hard to be precise, the information available to the IRS for that year suggests this many individuals (I think Darren was only talking about individual non-filers at this point) had enough income to have a filing requirement. Certainly, a decent number of these non-filers probably are due a refund but it was assumed the majority would owe.
  • Collection is looking to Artificial Intelligence for help in responding to taxpayers. Starting in the summer of 2022 an authenticated voice bot will answer questions and let taxpayers set up an installment agreement. Going live now is a chat bot which will allow taxpayers to get answers and to make a one-time payment. Darren called this the unauthenticated version, but it can still be helpful. There will be essentially no wait time to talk to the chat bot. 
  • He is hopeful that the nearly 3 million people who qualify for a streamlined installment agreement each year will find this service helpful and that having people use it will take some of the pressure off of the Automated Call Sites (ACS).
  • He described something called the Case Creation Non-filer Identification Program which is a system for identifying non-filers and specifically high dollar non-filers. Individuals identified through this program will receive a CP 59 letter (CP stands for Computer Paragraph) alerting them of the need to file. Darren said that in the tests taxpayers have responded favorably to this letter.
  • He said that ACS is now working high dollar cases up to $1 million. Collection is identifying the types of cases where even though the amount of income earned by the individual is high, the likely collection action is the type that ACS supports. In the past the cut off for ACS handling a case was much lower but the cut off doesn’t reflect the type of collection action necessary to bring a taxpayer into compliance. Though he did not frame it in this manner, I expect that a high dollar delinquent account in which the taxpayer is a wage earner or someone who otherwise has assets that would be easy to levy will end up in this program.
  • In 2019, 843,000 of the 9.5 million non-filers were considered high income. For this purpose, the taxpayer was considered high dollar if more than $100,000 in income was reported to the IRS.
  • Revenue Officers (ROs) are the front-line collection employees in the field and generally maintain an inventory of about 50 to 70 cases. Now, there are less than 2,000 ROs working for the IRS. This is the lowest number of ROs since 1970. Darren said they had dwindled in size from about 4,000 in 2010. 
  • He said there is enough work for several thousand more ROs and collection representatives (the individuals who work in ACS.) The IRS is hiring now, and if legislation passes with funds for the IRS it will be hiring a large number of new ROs and collection representatives.
  • Finding new employees to hire is an issue. The IRS found high interest by well qualified individuals in collection representative positions in Puerto Rico. It has hired 400 people and is about to open its largest ACS site which will be located in Puerto Rico. It is in the process of hiring another 400 for a second site in Puerto Rico which will open by the end of the summer of 2022.
  • Darren said the IRS has gotten better at identifying individuals who owe money. In 2019 it was collecting about $430 per return. In 2021 it has collected an average of $686 per return. It has shifted ROs from working on delinquent returns to balance due returns.
  • Because the IRS has lost so many ROs its presence has diminished. Many smaller cities that previously had an RO presence no longer have one. To reach communities it might not otherwise easily reach given the current location of its staff, Collection is sending ROs out in “sweeps.” It will send 12-13 ROs into a community for a week to knock on doors and confront delinquent taxpayers who otherwise might not see an IRS field presence. The purpose is not to create criminal cases but to drive filing and payment. 
  • Collection did sweeps virtually during the pandemic. Darren said that these sweeps have been very effective, and he expects to continue them not only in the US but also overseas with an upcoming sweep in Australia. 
  • It is also going to conduct a sweep of high dollar return preparers who have not filed their own return. Collection’s name for the sweeps is Revenue Officer Collection Sweeps or ROCS.
  • Darren described another operation called Surround Sound run by the office of fraud enforcement seeking high dollar cases and the prospect of criminal referrals.
  • Related to this discussion, he said that the IRS is getting much better at finding taxpayers who own digital currency and pursuing those individuals who have not filed and paid.

Darren closed his remarks with a plea to practitioners to assist taxpayers in understanding the importance of timely filing even if they cannot pay at the time of filing, because the penalty for late filing is 5% per month which is much greater in comparison to the penalty for late payment which is 0.5% per month.

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Thursday, December 2, 2021

IRS Commissioner Hopes To Hire 25,000 IRS Workers In 18 Months

According to Law360, the 
Internal Revenue Service could add 25,000 positions in the next 18 months if Congress comes through with the money needed t
o expand the workforce, Commissioner Chuck Rettig said.

Increased funding would go toward Rettig's goal of filling positions in all parts of the IRS, he said during a University of Texas School of Law conference held in Austin, Texas.

"I Need That Funding,'' He Said. "I Need Lawyers, I Need People To Answer The Phone, I Need People To Open Envelopes.

"We need Congress to pass a budget that's respectful of the agency that interacts with more Americans than anyone else on the planet."

Rettig also reiterated plans for hiring in three groups: recent college and graduate school graduates and individuals with less than five years of experience; people age 35 to 45; and more experienced staff that would coach the other two groups, he said.

Rettig also said the agency is partnering with both a four-year university and a two-year school to create what he called "our own pipeline for job skills," without providing further details on the institutions.

"We're tired of competing with, you know, online retailers for the jobs we need," he said. Rettig has previously pressed for increased funding for the agency.

The federal government, however, is currently operating on stopgap funding legislation that runs through Friday. In July, the House approved a $13.6 billion IRS budget for fiscal year 2022.

Lawmakers are currently working on extending government funding. The Build Back Better Act, the budget reconciliation bill that would provide about $80 billion in funding for the agency, also is pending in the Senate following House approval in November. 

Rettig isn't alone among agency officials in touting significant hiring plans should the budget be increased. Sunita Lough, commissioner of the IRS' Tax-Exempt and Government Entities Division, said she plans significant hiring in the event of a budget boost. Andy Keyso, chief of the IRS Independent Office of Appeals, has also said he would continue a hiring push should increased funding come through.

In addition to mentioning hiring plans and the need for increased funding, Rettig said Wednesday that the agency has gone from having more than 16.4 million unprocessed returns in July to 6.8 million as of Nov. 12 and will be "at normal inventory" by the end of 2021.

"We need funding," he said. "People in this country don't deserve to have a large inventory of unprocessed returns."

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