US Treasury Proposes Rules To Reveal Owners of Shell Companies

According to Law360, The 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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Sources

Law360

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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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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Ex-Chiropractor Can't Adjust His Prison Term In FBAR Case

According to Law360, a former chiropractor failed to shave 374 days from his five-year sentence for evading taxes over $500,000 and failing to report over $1.5 million in foreign accounts when a federal court refused to credit his time served on other charges.

Carlo Amato Understood That His Plea Deal Barred Sentence Reductions When He Entered Into It The Court Said.

His court documents made clear multiple times that he should not expect an opportunity to shorten his five-year term, according to the court.

The court sentenced Amato in 2019 following his guilty plea to one count of tax evasion and one count of failing to file a Foreign Bank and Financial Accounts report, according to court documents.

Amato, who operated a chiropractic office through two entities, failed to report income earned from one of the office's bank accounts, listing his income in 2014 as zero despite having earned more than $550,000 that year, court documents said. He admitted failing to report $1.5 million stowed in Russian accounts even though he knew he was required to do so, the U.S. Department of Justice said.

Amato also admitted to evading more than $300,000 in taxes for 2012, 2013 and 2015 and overbilling at least six insurance companies by more than $1 million for services that were never performed, the DOJ said.

The government agreed that it would not pursue further charges. As part of the deal, Amato agreed he would not try to adjust his sentencing guidelines of five to 10 years. He also would waive his right to appeal if sentenced within the guidelines.

Before sentencing, Amato's counsel filed a motion to reduce his sentence by the 374 days he served in pretrial detention for two state law charges, one of which was related to his federal charges. The U.S. government objected, arguing the motion sought a reduction in his sentence, and Amato's counsel withdrew it. The court subsequently sentenced Amato to five years in jail.

Amato filed a motion to vacate his sentence. He argued his counsel had been ineffective by advising that the sentence could be reduced. Amato told the court he never would have entered a guilty plea if he knew a reduction was impossible. The attorney also should have secured a better plea bargain agreement, one that did not prohibit reductions in sentencing and should not have withdrawn the motion, he said.

The court disagreed, saying Amato had been fully informed of the plea agreement before entering it. He was aware of the maximum penalties he could face and the court's discretion in sentencing, and aware that he could not rely on any predictions or promises made by counsel outside the proposed agreement, according to the court. The agreement also plainly stated that Amato could not reduce his sentence once he agreed to the deal, the court said.

Amato also mistakenly believed his attorney could secure a better deal, the court said, but failed to show that the government would have accepted one. He had no right to a more favorable sentence, the court added. Withdrawing the motion was not evidence of poor legal service, the court said; rather, it was meritless from the start.

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Max FBAR Penalty Applies To Each Account Not To Each Form

On March 30, 2021 we posted Appeals Court Rules That Non-Willful FBAR Penalty Applies Per Form, Not Per Account, where we discuss that the Court of Appeals for the Ninth Circuit, reversed the district court decision and has held that the $10,000 non-willful FBAR penalty (for failure to file the FBAR) applies per FBAR form, not per the number of financial accounts (e.g., bank accounts) required to be reported on the form in 

Now according to Law360, in U.S. v. Alexandru Bittner, ,case number 20-40597, in the U.S. Court of Appeals for the Fifth Circuit, the court ruled on that the $10,000 maximum penalty for a nonwillful failure to file a foreign bank account report applies to each account, not each year, reversing a lower court's decision and diverging from the Ninth Circuit.

The lower court's decision that the penalty applied for each failure to file an annual FBAR was inconsistent with the Bank Secrecy Act and corresponding regulations, the three-judge panel said.

"It Is Not Absurd — It Is Instead Quite Reasonable — 

To Suppose That Congress Would Penalize Each Failure
To Report Each Foreign Account,"
U.S. Circuit Judge Stuart Kyle Duncan Said In The Court's Unanimous Opinion.

The opinion noted the panel's disagreement with a Ninth Circuit decision in March that found a California woman was liable for only one Internal Revenue Service-assessed penalty for each annual, nonwillful failure to file an FBAR. Earlier in November, the federal government accepted her undisclosed settlement offer. 

In The Fifth Circuit Case, The Panel Sided With The IRS' Imposition Of $10,000 Penalties Totaling More Than $2.7 Million on Alexandru Bittner, A Dual U.S. And Romanian National.

The IRS Had Levied The Penalties For Each Of Bittner's Unreported Accounts Every Year From 2007 To 2011.

The IRS assessed the penalties in 2017 and sued him in 2019 over the late forms, according to court documents. A Texas federal judge in June 2020 lowered the assessed penalties to $50,000, saying the $10,000 cap on penalties applied to each year.

The Fifth Circuit, however, disagreed with the district court's view that a violation of Section 5314 of Title 31 is directly tied to the obligation the statute imposes, which is the filing of a single report per year. Further, the lower court's view would lead to a result unattached from the statute, the appeals court said.

Bittner was born in Romania, immigrated to the U.S. and became a naturalized citizen, and then returned to Romania, where he became a successful businessperson and investor, according to the Fifth Circuit opinion. While there, he earned millions of dollars and bought interests in companies, including in real estate, construction and manufacturing, the opinion said.

Bittner's business abilities were a factor in the Fifth Circuit's rejection of his claim that the lower court was wrong to deny his defense that he had reasonable cause for failing to report his foreign accounts.

"Bittner's business savvy makes his failure to inquire about his reporting obligations even more unreasonable," Judge Duncan said.

Judge Duncan also said Bittner failed to demonstrate he had exercised ordinary business care and prudence regarding reporting requirements, noting he admitted to doing nothing to comply with them.

The Fifth Circuit affirmed the lower court's decision that Bittner was liable for failing to report accounts, and its rejection of his reasonable cause defense. The panel vacated and remanded the case for further proceedings.

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IRS Seized $3.5B In Crypto In Fiscal 2021 and May Seize Billions More In 2022

 According to Law360, The Internal Revenue Service's Criminal Investigation division identified nearly $10.3 billion in financial wrongdoing in the agency's 2021 fiscal year and seized around $3.5 billion in cryptocurrency connected to crime, according to a report released on November 18, 2021.

The Internal Revenue Service's Criminal Investigation division seized around $3.5 billion in cryptocurrency connected to crime for fiscal year 2021. (iStock)

The agency's criminal investigators identified nearly $2.2 billion in tax fraud and almost $8.2 billion in other financial crimes for the 2021 fiscal year, according to the annual report from the IRS Criminal Investigation division. Around 93% of CI's seizures in the fiscal year were cryptocurrency, which some agency officials have said facilitates asset and income concealment, according to the report. 

CI agents "are the only federal law enforcement officers with the authority to investigate criminal violations of the U.S. tax code," IRS Commissioner Chuck Rettig said in prepared remarks. "Their work reinforces the backbone of our voluntary compliance tax system — a system that funds services and benefits for our nation, including defense, infrastructure and education."

The report covered October 2020 through September 2021, during which time the division also continued working cases connected with abuse of various coronavirus relief provisions, such as the Paycheck Protection Program, according to the report. These cases involved a Florida man's admission that he secured around $4 million of those funds — authorized by the Coronavirus Aid, Relief and Economic Security Act  and used some of the cash to purchase a Lamborghini.

Other investigations conducted by CI included tax cases involving public corruption, cyber crimes and corporate fraud, as well as nontax cases involving money laundering, according to the report. It highlighted $1 billion in bitcoin seized that had been stolen from the now-defunct online drug bazaar Silk Road. Its creator, Ross Ulbricht, is serving a life sentence in prison for money laundering, according to the report.

CI has seen a slight uptick in its number of special agents, with 2,046 working in the division in the 2021 fiscal year compared with 2,030 in 2020, according to the report. More funding for the IRS could be on the horizon as legislators continue weighing the reconciliation bill, which has included a proposal for about $80 billion in funding for the agency.

In a conference call Thursday, CI chief Jim Lee said potential reconciliation money would be used to boost those staffing figures, which he called his "No. 1 priority" as the agency loses around 150 agents per year amid a general attrition issue. 

"It would help CI tremendously," Lee said. The funds also would let the IRS continue its focus on cyber, data analytics and technology, he added.

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