SCOTUS Ruled That Non-willful Failure To File A FBAR Report Warrants a $10,000 Penalty Per Form Not Per Account!

The U.S. Supreme Court ruled on February 28, 2023, in Alexandru Bittner v. U.S., case number 21-1195, that the Bank Secrecy Act's $10,000 maximum penalty for the nonwillful failure to report foreign bank accounts applies on a per-form basis and not per account. 

The justices ruled 5-4 in determining the nonwillful failure to file a report of foreign bank and financial accounts, or FBAR, warrants a penalty of $10,000 per form rather than $10,000 for each account undisclosed. In the case, Alexandru Bittner, a naturalized U.S. citizen from Romania, filed federal tax returns but not the FBAR for several years. The IRS then imposed a total penalty of $2.72 million on 272 accounts for 2007 through 2011.

"Best Read, The BSA Treats The Failure To File A
Legally Compliant Report As One Violation
Carrying A Maximum Penalty Of $10,000,

not a cascade of such penalties calculated on a per-account basis," Justice Neil Gorsuch said in the majority opinion.

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IRS Extends Certain Lookback Periods For COVID & Hurricane Extended Returns

According to Law360, the IRS said it will disregard a period in 2020 and another in 2021 between April 15 of each year and the date of postponed tax filing deadlines for determining the start of lookback periods for some tax refund or credit determinations.

The Internal Revenue Service said in Notice 2023-21 that while Notices 2020-23 and 2021-21 postponed certain filing due dates, postponements and extensions aren't the same thing. The postponements didn't lengthen the lookback periods under Internal Revenue Code Section 6511(b)(2)(A ), the IRS said.

According to the agency's notice, under Section 6511(a) , taxpayers must file refund or credit claims within three years of filing returns or two years after paying the tax, whichever comes later. Section 6511(b)(2) limits credit or refund amounts to amounts of tax paid within a specific period immediately before the filing of refund or credit claims, the lookback period, according to the notice. For taxpayers filing claims within three years of filing returns, lookback periods are three years plus the periods of filing extensions, and otherwise they're two years, the IRS said.

The notice allows taxpayers who had return filing due dates postponed by Notices 2020-23 and 2021-21 but didn't get extensions and who timely file credit or refund claims to be credited or refunded amounts paid on April 15 of each year, according to Notice 2023-21.

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Tax Court Says Failure to File Form 3520 Keeps Statute Open For Individual’s Form 1040

According to Law360, in the case of Leigh C. and Barbara J. Fairbank, docket number 13400-18, in the U.S. Tax Court, the Internal Revenue Service sent a notice laying out tax deficiencies owed by a now-divorced couple on time, the U.S. Tax Court said on Thursday, February 23, 2023, finding the deadline for issuing such a notice was extended due to their failure to disclose foreign transactions.

Missing foreign filings may subject to entire tax return to extend statue of limitations. These exceptions essentially give the IRS the ability to audit a tax return outside of the normal statute of limitations if the return is missing any of the specified foreign reporting forms.

Taxes are generally required to be assessed by the IRS within three years after a taxpayer’s return is filed, Code §6501(a). In the case of a false or fraudulent return filed with the intent to evade tax, or if the taxpayer fails to file a required return, the tax may be assessed at any time, Code §6501(c)(1), (2), and (3).

Code §6501(C)(8) Provides An Exception To The Three-Year Period Of Limitations Due To Failures To Provide Information About Cross-Border Transactions Or Foreign Assets.

Under this exception, the statute of limitations period for possible assessment of additional taxes and penalties related to the taxpayer’s income taxes remains open indefinitely and it is applicable to the entire income tax return, not just the tax consequences related to the information required under the relevant foreign information reporting provision. If the failure to file the information return is due to reasonable cause, the extended limitations period applies only to items on or items related to the late filed information return.

The disclosure forms relevant to Code §6501(c)(8) include:

• Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
• Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations
• Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships
• Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities
• Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

• Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation

• Form 8938, Statement of Foreign Financial Assets
• Form 3520, Annual Return To Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner

The Tax Court held that the IRS timely sent the notice of deficiency detailing the roughly $109,000 in taxes and nearly $22,000 in penalties owed by Leigh C. and Barbara J. Fairbank, the Tax Court said in a memorandum opinion. 

The Typical Three-Year Statute Of Limitations Under Internal Revenue Code Section 6501(A) Hadn't Run Out Because The Couple Failed To Disclose Foreign Transactions Involving
UBS And An Entity Founded In Liechtenstein,
According To The Opinion.

The agency's tax adjustments largely stemmed from undisclosed income in a UBS account, according to the opinion. 

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According to the 5th Circ., the IRS Can Revoke a Man's Passport for Unpaid Taxes

According to Law360,  the Fifth Circuit on September 15, 2022 upheld a ruling revoking a man's passport because of his $400,000 tax debt, saying U.S. Supreme Court guidance shows that the freedom to travel internationally isn't a fundamental right protected by the U.S. Constitution.

The three-judge panel unanimously agreed that a 2015 law allowing the government to revoke James Franklin's passport because he owed more than $50,000 in tax penalties was a useful tool for recovering billions in delinquent taxes owed to the Internal Revenue Service.

"Congress was within its rights to provide the IRS another arrow in its quiver to support its efforts to recoup seriously delinquent tax debts," Judge Carolyn Dineen King wrote in the panel's opinion. "And, importantly, what Congress provided was an arrow, not a bazooka."

The Court Cited Cases And Guidance From The
Supreme Court After 1965 Making It Clear That
International Travel Should Not Be Considered The Same
As Constitutionally Protected Travel Between States.

The Supreme Court has made clear that international travel is only one aspect of liberty protected by the due process clause of the Constitution, the court said.

The judges praised the law's effectiveness as limited in scope to incentivize only deeply delinquent taxpayers while also preventing those taxpayers from leaving the country to hide money offshore.

"The government is not authorized to seize the passport of any person who owes any taxes," the court said. "Instead, the scheme is focused on those with serious tax debts and provides several procedural safeguards through both the tax process and, ultimately, through a cause of action should the certification itself be erroneous."

Franklin sued the IRS in 2020 after it certified $400,000 in penalties against him for tax years going back to 1998 and accused him of not reporting a foreign trust and of failing to file accurate returns. The certification of the penalty triggered the secretary of state to revoke his passport. He sued, saying the law that allowed his passport to be revoked was a violation of his Fifth Amendment right to due process.

If You Have Serious Delinquent IRS Debt, You Should Consult with Experienced Tax Attorneys, As There Are Several Ways Taxpayers Can Avoid Having the IRS Request That the State Department Revoke Your Passport. 

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By 2026 The EU Intends To Have A Registry of Crypto Assets

According to Law360, The European Commission plans to establish a central register of crypto assets held in European Union member countries by 2026, according to the draft of a new law designed to curb tax evasion from use of the technology, seen by Law360 on Wednesday December 1, 2022.

The eighth amendment to the Directive on Administrative Cooperation in Tax Matters, known as DAC8, is set to be published Dec. 7 and would require tax authorities across Europe to share information with each other about citizens' crypto assets. The commission, the EU's executive branch, would also have to establish a central register for information to be recorded and shared, to be made available to the competent authorities of all member countries.

The law would require crypto exchanges and digital wallet providers to give tax authorities information on their customers' holdings. This would be carried out by extending the scope of the automatic exchange of information requirements to crypto-asset service providers, according to the draft.

An explanatory memorandum attached to the legislation said tax authorities currently don't have enough information to monitor crypto assets and the money generated from them.

"There Is a Lack of Information Available to Tax Administrations regarding Crypto Assets, While the Crypto Assets Market Has Gained in Importance over the Last Few Years," the draft law said.

"There Is a Lack of Information Available to Tax Administrations regarding Crypto Assets, While
the Crypto Assets Market Has Gained in Importance
Over the Last Few Years," the draft law said.

DAC8 is intended to formalize the taxation of crypto assets and electronic currency across the EU and to ensure consistency with the bloc's anti-money-laundering law.

The commission said it aims to ensure adequate taxation of revenue stemming from investments in, or payments with, crypto assets and so-called e-money.

Under a draft of a separate law recently obtained by Law360, financial institutions would also be banned from keeping anonymity-enhancing, as well as anonymized, crypto coins.

The addition of anonymity-enhancing crypto assets, which would bring in privacy coins such as Monero and Dash, is in line with the logic of the original text, according to notes in that draft.

The Organization for Economic Cooperation and Development said the reporting framework for cryptocurrency would provide for transparency in crypto transactions through the annual automatic exchange of information with the residence jurisdictions of taxpayers.

This would be done in a standardized way similar to the common reporting standard, the OECD said.

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Tax Practitioners Must Review Their Communications Containing Both Legal And Nonlegal Advice

According to Law360, Tax practitioners must tread carefully regarding communications that contain both legal and nonlegal advice following the U.S. Supreme Court's sudden dismissal of a case that asked the justices to decide whether such dual-purpose communications are privileged.

The high court unexpectedly dismissed the dispute, known as In Re Grand Jury, by issuing a rare one-sentence decision last month just two weeks after the justices heard oral arguments, saying the petition in the case was improvidently granted.

The High Court's Dismissal Means There Is Still A
Split In The Circuit Courts Over How To Determine
Whether Dual-Purpose Communications Are Privileged.

Practitioners should adhere to a strict interpretation of privilege set by the Ninth Circuit in In Re Grand Jury that said in an amended opinion last year that dual-purpose communications that contained tax preparation advice were not privileged because the primary purpose of the discussions was not legal advice.

Though the Ninth Circuit's "primary purpose" standard is binding only in the states under its jurisdiction, attorneys said they would recommend taking additional measures to ensure certain communications remain confidential even outside those states.

The In re Grand Jury case involved an unnamed law firm's bid to shield certain international tax communications with a client from disclosure to a grand jury. After the Ninth Circuit ordered the firm to turn over those documents two years ago, the firm petitioned the Supreme Court to review its challenge. The justices agreed to review it in October.

At oral arguments on January 9, 2023, the justices strained to understand if there was even a difference between the primary purpose and significant purpose standards based on the firm's and government's positions. 

In The Wake Of The In Re Grand Jury Case,
The First Step Is, If Possible,
Is To Avoid Mixing
The Reasons For Legal And Nonlegal Communications 

in an email, text message, memo or other documents when an attorney is advising a client on a U.S. Department of Treasury Regulation.

Susan Combs, tax controversy and litigation partner at Holland & Hart LLP, suggested using labels and stating the intended purpose of the document if an attorney has concerns about the potential lack of clarity on the purpose of the communication. 

If a challenge is brought as to whether a communication is privileged or not, she said it likely won't come for months or years, when documents are sought in litigation or by a subpoena. If that happens, such indicia can be very helpful to a judge who must decide whether a communication's primary purpose was to provide legal advice, she said.

Many practitioners have struggled for years on how to identify what is legal advice and tax preparation assistance in dual-purpose communications due to the uneven treatment in the federal courts on what is considered privileged tax information. 

Some have held that attorney-client privilege does not apply to communications that deal with a client's tax return preparation, while it does for tax controversy and tax planning issues.

"For Lawyers Who Prepare Tax Returns And Advise
On The Legal Aspects Of Those Same Returns,
There Is A Greater Risk And There Has Always
Been A Greater Risk Of Privilege Waiver,"
said Lawrence Hill, a partner at Steptoe & Johnson LLP .

In particularly sensitive cases, such as criminal cases like In Re Grand Jury, Hill said, "it would be prudent to consider not having the same lawyer advise on the soft spots of the return and prepare the return."

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