Treasury Issues Foreign Trust Reporting Rules

According to Law360, The U.S. Treasury Department proposed regulations on May 8, 2024 that provide guidance on the requirements for individuals to report their transactions with foreign trusts to the Internal Revenue Service, including the receipt of large gifts.

The proposed rules cover several disclosure provisions regarding interactions with foreign trusts, including reporting obligations under Internal Revenue Code Section 6048 and penalties under IRC Section 6677 for the failure to comply with those requirements. In addition, the guidance addresses IRC Section 6039F, which requires individuals to report the receipt of large foreign gifts, in part by proposing an anti-avoidance rule.

In general, the proposed regulations for Section 6039F incorporate guidance that Treasury provided in a 1997 notice. The rules also provide new guidance to address subsequent statutory developments and to target certain abuses the IRS has flagged, according to the preamble.

This additional guidance includes an anti-avoidance rule that allows the IRS to recharacterize purported loans and other transfers from foreign trusts as gifts if the agency determines the transfer "is in substance" a gift, Treasury said in the preamble. The department noted the IRS has become aware of U.S. individuals who are seeking to circumvent Section 6039F by claiming that the amounts they receive from overseas aren't gifts but that the transfers are otherwise not taxable, Treasury said.

"These amounts, however, objectively have all the indicia of being a gift," Treasury said. "Under the existing principles of federal tax law, the IRS therefore will recharacterize these amounts as foreign gifts that should have been reported under Section 6039F."

According to the preamble, Congress enacted many of the reporting requirements in response to abusive tax schemes involving foreign trusts that reemerged in the mid-to-late-1990s after previously peaking in the 1980s. These schemes generally involved U.S. individuals using foreign trusts to transfer large amounts of assets offshore, where it was difficult for the IRS to identify ownership and related tax payments on the income from such trusts, Treasury said.

The proposed guidance generally implements rules that were first outlined in a notice and revenue procedures for Section 6048, which provides reporting rules regarding a U.S. person's interactions with a foreign trust, including creating and owning the trust, along with transferring and receiving assets.

Under Section 6677, failures to comply with the reporting requirements under Section 6048 can amount to a civil penalty equal to 35% of the trust's gross reportable amount. The statute also allows the IRS to impose an additional penalty of $10,000 every 30 days that somebody fails to comply with reporting obligations within 90 days of notification from the agency.

The proposed guidance includes three separate civil penalties under Section 6677 that correspond to each reporting requirement that Treasury proposed under Section 6048. Failure to comply with one proposed Section 6048 rule, which involves requirements for reporting information about U.S. owners of foreign trusts, initially imposes a penalty amounting to the greater of $10,000 or 5%, rather than 35%, according to Treasury.

The proposed rules also cover IRC Section 643(i), which includes reporting rules for U.S. individuals that receive loans from foreign trusts and use foreign trust property.

The Section 643(i) guidance generally incorporates a previous notice, with certain modifications to provide procedural rules, such as how to determine a loan's yield to maturity, according to Treasury. In addition, the guidance includes anti-abuse rules, such as requiring payments and information to be timely reported, Treasury said.

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IRS Independent Office of Appeals forms Alternative Dispute Resolution Program Management Office

In IR-2024-119 dated April 24, 2024, the Internal Revenue Service Independent Office of Appeals today announced the formation of a new Alternative Dispute Resolution Program Management Office. This office will collaborate with the IRS Business Operating Divisions to help taxpayers resolve tax disputes earlier and more efficiently.

“This new office will revitalize existing programs and pilot new initiatives as part of IRS transformation efforts in alignment with the IRS Strategic Operating Plan,” said IRS Commissioner Daniel Werfel. “We’re committed to providing taxpayers who wish to resolve their issues without litigation a choice of early resolution options, and the Alternative Dispute Resolution Program Management Office will ensure taxpayers are aware of those options.”

For years, the IRS has offered ADR at various stages of the tax administrative process. While ADR can be a quicker, more collaborative and cost-effective approach to case resolution, use of the programs has declined in recent years.

By increasing awareness, changing and revitalizing existing programs and piloting new approaches, the IRS hopes to make its ADR programs, such as Fast Track Settlement, Fast Track Mediation, Rapid Appeals Process and Post-Appeals Mediation more attractive and accessible for all eligible parties.

“We’re excited to give our programs the focus they merit,” said Acting Chief of Appeals, Elizabeth Askey. “Michael Baillif, who recently joined Appeals as a senior advisor, will serve as the director of the new office; he has extensive dispute resolution experience in both the private sector and the IRS, and I know he’ll be excellent in this role.”

Among other things, the ADR PMO will pilot changes to Fast Track Settlement—a program that allows Appeals to mediate disputes between a taxpayer and the IRS while the case is still in Exam’s jurisdiction.

More specifically, the new office will also remove barriers to participating in Post-Appeals Mediation—a program that introduces a new mediator if the parties are unable to reach agreement during traditional Appeals settlement negotiations. More specifically, the ADR PMO plans to:

• Test ADR programs that allow Appeals to help resolve or mediate disputes earlier in the examination process;
• Streamline and clarify existing guidance; and
• Remove barriers to enable easier use of and access to ADR.

The ADR PMO, in collaboration with the IRS Business Operating Divisions, will also perform outreach and education, coordinate the training and support of mediators, collect data and monitor the effectiveness of ADR offerings.

The traditional appeal process will remain available for taxpayers who choose it. 

These proposed ADR enhancements reflect input from both internal and external stakeholders who submitted comments in response to the IRS's July 27, 2023 request. The office is still developing the proposed pilots and changes to existing programs and will communicate changes as they become available.

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IRS To Increase Audit Rates By 50% On Wealthy & Large Corporations

IRS Commissioner Danny Werfel offered some specifics about the agency's plans for audits of wealthy individuals and corporations at a press conference last week, Dow Jones Marketwatch reported. These figures can be found in the IRS's recently published strategic operating plan update and update supplement.

By The Time Taxpayers File Their 2026 Taxes, The IRS
Plans To Implement A 50 Percent Increase In The Audit
Rate For Households With Incomes Of $10 Million
And Up, Compared To 2019, As Well As A Near
Tripling Of The Rate Of Corporate Audits.

That means that it plans to audit 16.5 percent of the 2026 returns for households with total positive income of at least $10 million, up from 11 percent in 2019. The agency plans to audit 22 percent of returns from corporations with at least $250 million in assets, up from 9 percent in 2019.

Werfel also spoke about the agency's hiring plans through the end of the decade, MarketWatch reported. The IRS now has approximately 90,000 full-time employees, up from around 79,000 employees in fiscal year 2022, he noted. Werfel is seeking a headcount of around 102,500 at the end of this decade, he said. "We believe that figure represents a right-sized IRS," he said. 

At the same time, the agency will not increase audit rates for individuals and small businesses making under $400,000, Werfel said, adding that audit rates for those taxpayers remain at historically low levels. 

The IRS also plans to expand enforcement efforts by increasing its total trained staff, identify and implement strategic options to rapidly increase enforcement activities, including nonaudit activities, and expand efforts involving digital assets, including releasing proposed regulations on broker reporting, according to the update supplement.

The agency's recent enforcement efforts set an important tone for large and complex filers and provide incentives for organizations to be diligent in ensuring that they're meeting their tax responsibilities, Werfel said.

The IRS is also planning to deploy two pilot models this year intended to improve audit outcomes and reduce racial disparities, according to the update. The agency is committed to ensuring that it is covering a variety of areas of equity in tax administration, Werfel said.

Last year, the IRS started auditing 76 of the largest partnerships in the U.S., including hedge funds, publicly traded partnerships and large law firms and those audits are ongoing this year, according to the annual update. 

The agency has made an incredible amount of progress since receiving the Inflation Reduction Act's nearly $80 billion funding boost in 2022, Werfel said, even with President Joe Biden and former House Speaker Kevin McCarthy, R-Calif., agreeing to claw back $21.4 billion between 2023 and 2025.

"These efforts will continue to accelerate as we get deeper into the strategic operating plan and as we continue the work made possible by Inflation Reduction Act funding," Werfel told reporters.

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Appeals Court Overturns Farhy & Finds IRS Does Have the Power to Assess Information Return Penalties!!!

According the Law360, the D.C. Circuit on May 3, 2024 overturned Farhy v. Commissioner, 160 T.C. No. 6 (2023), which held that the IRS was without the authority to assess the Form 5471 imposed by Internal Revenue Code Section 6038(b). 

Now a three-judge appellate panel found that the Tax Court had wrongly stripped the agency of its power to automatically assess $500,000 in penalties against businessman Alon Farhy, who for eight years failed to report his ownership of Belizean corporations as required by Internal Revenue Code Section 6038(a).

The Tax Court held that the IRS could only collect these penalties through a civil suit filed by the U.S. Department of Justice, not through administrative collection methods. However, the United States Court of Appeals for the District of Columbia Circuit disagreed with the Tax Court’s interpretation. 

The Appellate Court Held That The Text, Structure,
And Function Of Section 6038 Demonstrate That
Congress Authorized The Assessment Of Penalties
Imposed Under Subsection (B).

Congress clearly meant for the reporting violation penalties to be assessable through the IRS' administrative process when lawmakers created them in 1982 under IRC Section 6038(b), the panel said in an opinion authored by Circuit Judge Cornelia T.L. Pillard. 

The court then turned to the long established Reenactment Doctrine and went on to say “It is well established that when Congress revisits a statute giving rise to a longstanding administrative interpretation without pertinent change, the ‘congressional failure to revise or repeal the agency’s interpretation is persuasive evidence that the interpretation is the one intended by Congress.’” ... Since adding subsection (b) in 1982, Congress has amended section 6038 seven times; each time, it has left undisturbed the IRS’s practice of assessing and administratively collecting penalties imposed under section 6038(b). 

The ruling overturned an the April 2023 decision by Tax Court Senior Judge L. Paige Marvel, who found the law didn't explicitly give the agency the collection power. 

"If subsection (b) penalties are that hard to recover, they may not be worth the candle," Judge Pillard said in the opinion. "It would be 'highly anomalous' for Congress to have responded to the identified problem of the underuse of subsection (c) penalties by promulgating a penalty that, while simpler to calculate, is much harder to enforce."

What's more, the panel said, is that Congress spelled out that the new subsection (b) penalty was meant to coordinate with the existing process for enforcement using tax credits in subsection (c), which everyone, including Farhy, agrees are assessable by the IRS administrative process. Splitting the review of penalties springing from the same violation would have "anomalous implications," Judge Pillard said in the opinion.

"Farhy's reading would create parallel and substantively overlapping judicial tracks for determination of twinned penalties for the same noncompliance: federal district court for the subsection (b) penalties, and Tax Court for the subsection (c) penalties," Judge Pillard said.

"We Decline To Adopt A Reading Of Section 6038(B) That Attributes To Congress The Intent To Respond To The 

Problem It Identifies In A Manner That Is Not Only 

Ineffective, But Counterproductive," Judge Pillard Said.

Farhy interpreted the law to mean that a penalty must be explicitly characterized as a tax or designated as assessable through IRS administrative processes elsewhere in the tax code for the government to assess it under IRC Section 6201(a).

The government said the law "covered the waterfront" and a narrower interpretation would result in "absurdities," according to the appellate opinion.

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“Bitcoin Jesus” Charged with Tax Fraud

According to DoJ, an indictment was unsealed on April 30, 2024 charging Roger Ver, an early investor in bitcoins, with mail fraud, tax evasion and filing false tax returns. Ver was arrested this weekend in Spain based on the U.S. criminal charges. The United States will seek Ver’s extradition to stand trial in the United States.

According to the indictment, Ver formerly of Santa Clara, California, owned MemoryDealers.com Inc. and Agilestar.com Inc., two companies that sold computer and networking equipment. Starting in 2011, Ver allegedly began acquiring bitcoins for himself and his companies. He also allegedly avidly promoted bitcoins, even obtaining the moniker “Bitcoin Jesus.”

On Feb. 4, 2014, Ver allegedly obtained citizenship in St. Kitts and Nevis and shortly thereafter renounced his U.S. citizenship in a process known as expatriation. As a result of his expatriation, Ver allegedly was required under U.S. law to file tax returns that reported capital gains from the constructive sale of his world-wide assets, including the bitcoins, and to report the fair market value of his assets. 

He was also allegedly required to pay a tax, referred to as an “exit tax,” on those capital gains. By Feb. 4, 2014, Ver and his companies allegedly owned approximately 131,000 bitcoins that traded on several large exchanges for around $871 each. MemoryDealers and Agilestar allegedly held approximately 73,000 of those bitcoins.

Ver allegedly hired a law firm to assist him with his expatriation and to prepare his expatriation-related tax returns. Ver also allegedly hired an appraiser to value his two companies. 

Ver Allegedly Provided Or Caused To Be Provided False
Or Misleading Information To The Law Firm And
Appraiser That Concealed The True Number Of
Bitcoins He And His Companies Owned.

(Lying to Your Lawyer is a Waste of Your Money
and a Waste of His or Her Time!!!)

As a result, the law firm allegedly prepared and filed false tax returns that substantially undervalued the two companies and their 73,000 bitcoins and did not report that Ver owned any bitcoins personally.

The indictment further alleges that by June 2017, Ver’s two companies continued to own approximately 70,000 bitcoins. Around that time, Ver allegedly took possession of those bitcoins and in November 2017 sold tens of thousands of them on cryptocurrency exchanges for approximately $240 million in cash. 

Even though Ver was not then a U.S. citizen, he was still legally required to report to the IRS and pay tax on certain distributions such as dividends from MemoryDealers and Agilestar, which were U.S. corporations. Ver allegedly concealed from his accountant that he had received and sold MemoryDealers’ and Agilestar’s bitcoins that year. 

As a result, Ver’s 2017 individual income tax return did not report any gain or pay any tax related to the distribution of MemoryDealers’ and Agilestar’s bitcoins to him.

In total, Ver is alleged to have caused a loss to the IRS of at least $48 million.

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Crypto Mixer Executives Arrested For Allegedly Participating In $2B of Illicit Transactions

According to Law360, New York federal prosecutors announced that they have arrested the co-founders of crypto mixing service Samourai Wallet over their operation of a crypto service that authorities say executed over $2 billion in unlawful transactions.

The unsealed indictment charges Samourai CEO Keone Rodriguez and Chief Technology Officer William Lonergan Hill with one count of conspiracy to commit money laundering and one count of conspiracy to operate an unlicensed money transmitting business related to their roles in a business prosecutors say executed more than $100 million in money laundering transactions from dark web markets such as Silk Road and Hydra.

"While offering Samourai as a 'privacy' service, the defendants knew that it was a haven for criminals to engage in large-scale money laundering and sanctions evasion," the indictment said. "Indeed, as the defendants intended and well knew, a substantial portion of the funds that Samourai processed were criminal proceeds passed through Samourai for purposes of concealment."

While crypto mixers are privacy tools that can be used for lawful purposes, they are also favored by illicit actors because of their ability to obscure the path of funds. The services break down and batch crypto transactions to make the trail of transactions on the blockchain harder to follow.

According to federal prosecutors, Rodriguez and Hill developed, marketed and operated the Samourai mixing service as an unlicensed money transmitting business, earning millions of dollars in fees despite knowing criminals used the service for money laundering and sanctions evasion since its founding in 2015.

Authorities Highlighted Posts And Messages Allegedly From The Co-Founders Discussing
The Platform's Use By Russian Oligarchs And
Criminals Utilizing Online Black Markets, As
Well As Marketing Materials That Promoted
Its Services For "Illicit Activity."

Authorities arrested Rodriguez on Wednesday with plans for him to see a judge in the Western District of Pennsylvania on Thursday, the U.S. Department of Justice said in its announcement. 

Hill was arrested in Portugal on Wednesday, and prosecutors will seek his extradition to face criminal charges in New York alongside Rodriguez. 

Together, the Charges Carry a Maximum Sentence of 25 Years!

Law enforcement also coordinated with Icelandic authorities to seize Samourai's web servers and domain, and served a seizure warrant on the Google Play Store to remove the mobile application for U.S. users.

Authorities have ramped up their scrutiny of crypto mixers in recent months, sanctioning multiple services, winning a conviction against the operator of the Bitcoin Fog mixer and pursuing a criminal case against the founder of Tornado Cash.

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