Tuesday, August 29, 2023

Holocaust Survivor Not Exempt From $6M FBAR Penalty

According to Law360, a Holocaust survivor who refused to pay $8.8 million in tax penalties for failing to disclose two Swiss bank accounts has agreed to pay $6 million following settlement delays, ending the government's lawsuit against him, according to a New York federal court in U.S. v. Walter Schik, case number 1:20-cv-02211, in the U.S. District Court for the Southern District of New York.

Walter Schik, a retired tie salesman and business owner, agreed to the settlement almost a year after the government announced a deal, according to an order filed on August 23, 2023. The government sued Schik in 2020 for failing to pay $8.8 million in FBAR penalties for 2007. The $16 million in his unreported Swiss accounts, from which he made no withdrawals, had been inherited from relatives killed in Nazi Germany's concentration camps, Schik said.

Schik, who became a U.S. citizen in 1957 after escaping to New York City as a teenager, had argued that he shouldn't have to pay the penalties. He had little formal education, he said in filings, and his accountant never told him about the legal requirement to file a Report of Foreign Bank and Financial Accounts, or FBAR, with the Internal Revenue Service. 

When He Learned Of The Error, He Made Amended Filings, Applied To The IRS' Offshore Voluntary Disclosure Program, And Paid Back Tax And Interest On The Foreign Income
In His Accounts, He Said.

The government announced that it had reached a settlement with him in August 2022. But when negotiations dragged on, U.S. District Judge Mary Kay Vyskocil threatened to dismiss the suit for failure to prosecute, calling the government's failure to finalize the deal "unacceptable" in a July order threatening sanctions.

Judge Vyskocil had rejected the government's request to reduce the case to judgment, saying in March 2022 that it was for a jury to decide whether Schik "was willful rather than merely negligent," therefore triggering the steep penalties, when he didn't file the FBAR.

Schik opened one bank account in Switzerland in the 1960s to deposit money recovered from relatives who had died in the concentration camps, according to filings. His Swiss money manager continued to open and close accounts on his behalf, the filings said, with Schik only signing his name to forms he never himself filled out.

The manager's opening and closing of accounts resulted in the two bank accounts that were ultimately targeted by the IRS.

The Swiss money manager was indicted in 2010 on charges of conspiring with U.S. taxpayers and foreign financial institutions to enable his clients to hide Swiss bank accounts from the IRS. After finding out about the indictment, Schik filed a voluntary disclosure to the IRS, according to filings.

After The Agency Rejected The Disclosure, Schik Filed An
FBAR For 2007, Reporting The Holdings In The Account.
But The IRS Rejected That Form As Well, The Suit Said.

Schik told the court that his opening of the Swiss accounts, and even his initial hiding of their contents,  was understandable and traceable to his suffering from a "Holocaust mentality," according to a September 2021 filing. 

Schik believed he needed secret funds in case he ever needed to flee persecution again, they said.

Born in Austria, Schik was 13 when his family was sent to concentration camps, he told the court. He was sent to a camp near Budapest, Hungary, where he was released with the sons of a wealthy Jewish business owner who had made a deal with the Nazis, while Schik's parents and siblings died at Auschwitz, he said. He escaped the Nazis a second time, tearing the Star of David from his jacket to hide after being captured, and later immigrated to the U.S. at age 16 under the identity of another child, he said.

"This deeply traumatic experience has affected Mr. Schik's entire life and, as relevant in this case, he justifiably believed that it was important to always maintain some funds in Switzerland, a neutral country during World War II," he said in a 2021 memorandum seeking to block the government's motion to reduce the penalties to judgment.

"This is a far cry from the typical offshore banking case, where secret accounts are used to skim cash profits and avoid tax," the memo said.

Have Undeclared Income from an Offshore Bank Account?
Been Assessed a 50% Willful FBAR Penalty?
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Monday, August 28, 2023

IRS Issues First-Ever Broker Rules For Digital Asset Sales


According to Law360, b
rokers of digital assets would face tax reporting requirements similar to those for brokers of securities and other financial instruments under the first-ever proposed rules governing assets such as cryptocurrency and nonfungible tokens, released Friday by the Internal Revenue Service.

Digital asset brokers would need to file information returns and payee statements on the sale of the assets for customers in certain transactions under Internal Revenue Code Section 6045, according to the proposed rules. These brokers include trading platforms, payment processors, wallet providers and individuals who offer to redeem assets that were created or issued by that individual. 

The Rules Would Begin Applying In 2026
For Transactions From The Previous Year.

By completing a new form called Form 1099-DA, brokers can assist taxpayers in assessing their tax obligations and avoiding complicated calculations or pay digital asset tax preparation services to file tax returns, according to the IRS. The 282-page proposal also recommended that brokers in certain circumstances include gain or loss and basis information for sales that take place on or after Jan. 1, 2026, so that customers have the information they need to prepare their tax returns.

The proposed rules are in line with tax reporting regulations on other types of assets to avoid preferential treatment, and they are part of broader enforcement on wealthy taxpayers seeking to circumvent tax rules and payments, Internal Revenue Commissioner Daniel Werfel said in a statement.

"We Need To Make Sure Digital Assets Are Not Used To Hide Taxable Income, And The Proposed Regulations Are Designed
To Provide A Clearer Line Of Sight Into Activities By High-Income People As Well As Others Using Them," Werfel Said.

The rules implement a provision of the Infrastructure Investment and Jobs Act, enacted in 2021, that called for increased reporting on digital asset brokers. In a July revenue ruling, the IRS clarified that a cryptocurrency holder who earned additional tokens or coins from validating transactions in a blockchain or crypto exchange, a process called staking, should report the value of those rewards as part of gross income. The guidance speaks to a pending lawsuit in the Sixth Circuit against the agency's treatment of a couple's income earned from staking activities.

Much of the digital asset reporting provision in the 2021 law is drawn from the Organization for Economic Cooperation and Development's crypto-asset reporting framework that members approved in 2022 to address the rapid adoption of such assets that can be transferred and held without banks and other traditional financial intermediaries.

Real estate brokers, mortgage lenders, title companies and closing attorneys would also need to disclose in their tax returns transactions that use digital assets to purchase real estate, as well as supply payee statements on the assets' fair market value from the sellers, according to the proposal.

Who Needs to Submit Form 1099-DA?

Anyone who is considered a digital asset broker will need to submit Form 1099-DA to both customers and the IRS.

The IRS’s proposed regulations go into extensive detail about who should be considered a broker. They emphasize entities that are “in a position to know” the identities of the parties involved in digital asset transactions. Their proposal would categorize all of the following as brokers:

  • Centralized exchanges (such as Coinbase)
  • Decentralized exchanges (such as Uniswap)
  • Wallets that allow users to buy, sell, and trade digital assets (such as Metamask)
  • Bitcoin ATMs and other physical kiosks

Although the crypto community is likely to push back against decentralized exchanges (DEXes) having to report to the IRS, we anticipate that the IRS will not be flexible on this requirement. DEXes do not currently collect tax information about their customers, but the IRS is likely to argue that they are, in fact, “in a position to know” users’ identities and will enforce Know Your Customer (KYC) requirements.

Notably, the IRS’s proposed regulations do not consider any of the following to be brokers:

  • Miners, node operators, or others who are simply maintaining the blockchain
  • Hardware wallets that do not directly allow users to buy, sell, and trade digital assets (for example, a wallet that must be connected to an exchange in order to complete any of these transactions)
  • Software developers who indirectly facilitate digital asset transactions (for example, by developing code for a company like Coinbase)
  • Smart contract developers who receive income from a smart contract they created, but do nothing to maintain or update it

Previously, due to the broad language of the Infrastructure Act, there was a great deal of concern that these parties would be considered brokers and would face reporting requirements that they couldn’t possibly fulfill.

What Will Be Reported on Form 1099-DA?

Form 1099-DA will report information about the sale or disposition of digital assets. The IRS specifies that this includes cryptocurrencies, NFTs, and stablecoins.

Form 1099-DA will report the same information that’s currently reported on Form 1099-B for stocks:

  • When you got the digital asset (Acquisition date)
  • How much you paid for it (Cost basis)
  • When you sold or swapped it (Sale or disposition date)
  • How much money you got from selling or swapping it (Sales proceeds)
  • Gross proceeds (Total proceeds from that exchange or broker, not taking cost basis into account)

This will apply to sales made after January 1, 2025, so you can expect your first 1099-DA form in January of 2026.

Although the U.S. Department of the Treasury acknowledged that nonfungible tokens are different from other digital assets such as cryptocuWill wrap this thing up and saidrrencies, the proposal ultimately deemed that transactions that use NFTs are subject to the additional reporting requirements. Back in March, the IRS announced that it plans to float guidance treating NFTs as collectibles under IRC Section 408(m).

NFTs, which may represent artwork, antiques, music, films, fashion design and other entertainment memorabilia, are bought, sold and traded on digital asset trading platforms similar to other digital assets, and such transactions will trigger a gain or loss, the proposal said.

"The Reporting Of Gross Proceeds And Basis Information
 Is Equally Useful To Taxpayers And The IRS As
Reporting On Other Digital Assets," The Proposal Said.

The inclusion of NFTs in the proposed rules may be concerning for stakeholders because there has not been a lot of IRS guidance on the matter, according to Joshua Smeltzer, partner at Gray Reed.

Have An IRS Tax Problem?

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

for a FREE Tax HELP Contact us at:
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Toll Free at 888 8TAXAID (888-882-9243)


Monday, August 21, 2023

IRS Memo Concludes That Certain Promoters Are Misrepresenting Trust Income Tax Rules

According to the IRS, attorneys, accountants and others are mistakenly claiming that a certain type of trust structure will not get hit with a tax on any earned income, including capital gains, and are misinterpreting regulations governing the income earned by trusts, the IRS said in said in AM 2023-006 released on August 18, 2023.

The marketed trust structure involves a third-party settlor, acting on behalf of Taxpayer, creates and nominally funds a trust with legal documents that are provided by the promoter. Taxpayer is appointed the “Compliance Overseer” with power to add and remove trustees and change beneficiaries of the trust. The promotional materials are inconsistent as to whether Taxpayer, a third-party, or both serve as trustee. In the case of a third-party serving as trustee, it is unclear whether the third-party would be an independent trustee. 

Taxpayer is not a named beneficiary of the trust. In some variations, Taxpayer’s spouse and/or children are specifically named as beneficiaries but are subject to change by the Taxpayer. The trust instrument gives the trustee sole discretion to make distributions of income or principal to beneficiaries (“discretionary distributions”). It is unclear whether the Taxpayer, serving in the role of Compliance Overseer, is given a power to direct the trustee to make or withhold discretionary distributions to beneficiaries. The trust is a self-styled “spendthrift” trust or “spendthrift trust organization.” There are no provisions that allow any party to revoke the trust by distributing trust assets back to the donor in termination of the trust. 

An accompanying letter described as a legal opinion (“legal opinion letter”) states that the trust is in “in compliance with the IRC” and thereby must obtain an Employer Identification Number (EIN) and file Form 1041, “U.S. Income Tax Return for Estates and Trusts” (in addition to any other filing requirements) annually as a complex trust. A subsequently dated legal opinion letter from the same source notes that the trust is “not subject to turn over orders by any court. This limits the liability of Beneficiaries and Trustees of the Trust. It also makes the corpus of the Trust unreachable by creditors.” 

The marketing materials for these trust structures,
which typically promote them with terms such as
"non-grantor," "irrevocable," "discretionary" and
"complex," misinterpret the beginning of
Internal Revenue Code 
Section 641,
which provides the basic rule that
the trust's taxable income is computed
as it is for individuals, with certain modifications,
Internal Revenue Service said in AM 2023-006

"Contrary to the claims of the promotors, the trust will recognize income on its capital gains and dividends, except to the extent those amounts are distributed or deemed to be distributed to its beneficiaries," the IRS said.

Have An IRS Tax Problem?

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TIGTA Report Indicates IRS Violated Restrictions On Directly Contacting Taxpayers

TIGTA initiated an audit of the IRS because TIGTA is required to annually report on the IRS’s compliance with provisions of the law that restricts the IRS from directly contacting taxpayers who are represented.

What TIGTA Found 

The IRS has policies and procedures to help ensure that taxpayers are afforded the right to designate an authorized representative to act on their behalf in a variety of tax matters. In addition, the IRS has a process to handle the review and disposition of taxpayer allegations of direct contact violations. However, the IRS has not developed a system to identify IRS employee violations of the direct contact provisions. 

TIGTA found that revenue officers potentially violated taxpayers’ rights concerning directly contacting taxpayers who are represented before the IRS. TIGTA reviewed a stratified statistically valid sample of 132 taxpayers from a population of 1,613 taxpayers who had collection actions documented in case history narratives by revenue officers between October 1, 2021, and June 30, 2022. 

TIGTA Found Eight Taxpayers (8) (6%) For Whom
Revenue Officers Did Not Comply With The I.R.C. Sections Pertaining To Direct Contact Provisions And
The Right To Fair Collection Practices.

TIGTA also reviewed Fiscal Year 2022 Embedded Quality Review System (EQRS) data pertaining to Field Collection. There were 129 cases in which the quality element ‘right to representation not observed,’ was reported as a potential exception and the reviewer included a narrative explaining the specific nature of the violation. 

TIGTA found that for the 129 potential violations, there were 48 taxpayers for whom the IRS did not comply with the law regarding the right to representation. While IRS procedures require the reporting of potential Fair Tax Collection Practices violations to a Labor Relations Specialist for investigation, the 48 potential violations TIGTA identified were not reported. TIGTA concluded that the IRS has significant gaps in both its reporting of potential employee misconduct and in disciplining employees for potential taxpayer violations. TIGTA also determined that training for new revenue officers does not have case scenarios to show the variety of ways taxpayers may ask to consult with a representative. 

What TIGTA Recommended 

TIGTA recommended that the IRS: 

  1. Ensure that group managers discuss the potential violations identified during the review of Integrated Collection System case narratives with responsible employees and report potential violations to Labor Relations; 
  2. Report the potential Fair Tax Collection Practices violations identified in EQRS reviews to Labor Relations for investigation; 
  3. Establish controls to ensure that all potential violations of Fair Tax Collection Practices identified in case reviews are reported for investigation; 
  4. Establish procedures that require EQRS reviewers to include a narrative detailing a potential violation relating to the ‘right to representation not observed’ quality element; and 
  5. Improve new revenue officer training by adding direct contact scenarios pertaining to taxpayers’ statements concerning their right to representation. 
The IRS agreed with all five recommendations.

Have An IRS Tax Problem?

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Wednesday, August 16, 2023

IRS Releases Inflation Reduction Act 1-year report card Including Efforts To Pursues High-Income Individuals Tax Evaders

The IRS released its report on efforts it's made, pursuant to its increased funding provided a year ago in the inflation reduction act.

Included in this report was an account of their successes in ensuring high-income taxpayers pay taxes owed.

The IRS is working to ensure high-income filers pay the taxes they owe. Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to hide their income and evade paying their share. The IRS is now taking swift and aggressive action to close this gap.

  • Pursuing tax-evading millionaires. In recent months, IRS Criminal Investigation has closed a lengthy list of cases in which wealthy taxpayers have been sentenced for tax evasion, money laundering and filing false tax returns. Instead of paying taxes owed, these evaders spent money owed to the government on gambling, vacations and luxury goods.
  • Making delinquent millionaires pay up. In recent months, IRS closed about 175 delinquent tax cases for millionaires, generating $38 million in recoveries. IRS will continue to pursue millionaires who do not pay their taxes as the agency ramps up enforcement capabilities through the Inflation Reduction Act. Examples of schemes IRS is now pursuing include:

    • High-dollar scheme exploiting Puerto Rico. IRS recently identified about 100 high-income individuals claiming benefits in Puerto Rico without meeting the residence and source rules involving U.S. possessions. These wealthy individuals are attempting to avoid U.S. taxation on U.S. source income, and IRS expects many of these cases to proceed to criminal investigation.
    • Pension arrangements in Malta. As part of IRS' effort to pursue unlawful offshore tactics, the Department of Treasury and IRS in June issued proposed rules that define Maltese personal retirement schemes used to avoid U.S. taxes as listed transactions. IRS is working to identify taxpayers who are improperly using Malta-U.S. Treaty rules to improperly claim exemptions. Inflation Reduction Act resources will enable IRS to detect those who leverage these offshore schemes.
    • Cracking down on millionaire non-filers. The IRS continues to intensify work around wealthy individuals who do not file tax returns. These are particularly egregious cases where instead of filing their taxes and paying taxes owed, these individuals used the money to make lavish purchases. In one recently closed case, an individual used funds owed to the government to purchase a Maserati and Bentley. IRS is continuing to work with law enforcement partners to hold these individuals accountable.

Have Unreported Income?

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Yes Yet Another FBAR Penalty Being Dropped Based Upon Bittner

According to Law360, a New York federal judge approved an $80,000 settlement in a $330,000 dispute between a woman and the federal government over improperly reported overseas accounts. The case is U.S. v. Bouskila, case number 2:21-cv-04243, in the U.S. District Court for the Eastern District of New York.

Cecile Bouskila will pay the $80,000 settlement as well as 1% annually accruing interest from the date of the amount-due notice, a 6% annually accruing late-payment penalty from 90 days after that notice and other post-judgment interest, according to the order

The Internal Revenue Service Had Previously Assessed
$330,000 In Penalties For Bouskila's Failure To Timely
File Reports Of Foreign Bank And Financial Accounts,
Or FBARs, From 2004 Through 2011.

In March, the U.S. Supreme Court ruled in a separate case that the $10,000 maximum penalty dictated by the Bank Secrecy Act is applicable per annual form, rather than per account. Bouskila had previously argued that sentiment, claiming that she was liable for a maximum penalty of $80,000.

Have an FBAR Penalty Problem?  
Never Stop Arguing
Legal Basis for Abatement!

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