DC Court Finds The Taxpayer Was Reckless & Willfully Blind for FBAR Penalty but Not Fraudulently Fail to File Associated Tax Returns.

A New Hampshire woman owes the federal government around $824,000 in penalties for failing to report her foreign bank accounts but doesn't owe $885,608 of fraud penalties, plus interest because the U.S. didn't show she intended to evade taxes, a federal court ruled.

An Ocean Boulevard woman is alleged to have failed to report interest from $3 million worth of bank accounts she held in Switzerland, then the Czech Republic, for which the Internal Revenue Service now claims she owes $885,608 in penalties.

By not seeking professional tax advice on foreign accounts she knew were earning income, Annette DeMauro was willful in failing to file her foreign bank account reports for 2007 through 2009, the U.S. federal court for the District of New Hampshire ruled.

But while DeMauro took steps to conceal her foreign accounts and money transfers, she did so in an attempt to hide assets from her abusive ex-husband, said the ruling by Judge Joseph Laplante. 

The U.S. Therefore Failed To Meet Its Burden For Assessing Enhanced Late-Filing Penalties, He Said.

In a complaint filed with the U.S. District Court of New Hampshire, Demauro is accused by the federal secretary of the Treasury of failing to file Report of Foreign Bank and Financial Report (FBAR) forms for 2007, 2008 and 2009. The federal government alleges her failure to file the forms was “willful” and she now owes FBAR penalties of $274,695 for each of those three years.

In the court complaint, the government also seeks interest and late-payment penalties, bringing the total Demauro allegedly owes to $885,608, “plus interest or other statutory additions accruing after March 2, 2017.”

Demauro's attorney summarizes Demauro’s defense as claiming the government has not demonstrated she willfully failed to file the reports, that she is not liable for the penalties and she’s owed at least $51,675 in taxes “wrongfully collected” from her.

In her counterclaim, Demauro is described as 80 years old and “not sophisticated in tax and financial matters.” Her suit says she never filed a tax return until after her second divorce in 2001 and first opened the Swiss bank account, on the advice of her divorce lawyer, to protect money from theft by a former husband.

“Ms. Demauro did not even know what an FBAR was until after she was contacted by the IRS and notified of the audit,” her counterclaim states.

In The District Court District Of New Hampshire Decision On 08/28/2020 The Court Finds In Favor of The United States
On Its Willful FBAR-Penalty Claim, See 31 U.S.C. §§ 5314, 5321, But Against The United States on the Counterclaims Challenging The IRS's Fraudulent-Failure-To-File Penalties,
See 26 U.S.C. § 6651.

With respect to FBAR, the United States showed by a preponderance of the evidence that DeMauro acted recklessly, and thus “willfully,” by failing to seek professional tax advice on foreign accounts she knew were earning income, even though she had consistently relied on professionals in the past and also had paid taxes on real property gained through her divorce. Even if DeMauro did not consciously avoid learning about the FBAR reporting requirement, she at the very least should have surmised that there was a grave risk she was not meeting her tax-filing obligations. Her conduct therefore constitutes a willful civil violation.

For DeMauro's Counterclaims, However, The United States Did Not Meet Its Burden of Showing By Clear And Convincing Evidence That DeMauro Failed To Timely File Returns 

With The Specific, Fraudulent Intent To Evade Taxes.

While the United States correctly notes that DeMauro took steps to conceal her foreign bank accounts and money transfers, she credibly testified that she did so in an attempt to hide assets from her abusive ex-husband—an explanation that even the IRS investigating agent believed and found compelling—and because she trusted the many professionals around her to handle the finer details of her finances. Given these mitigating explanations, the counterclaims pose a closer question than the affirmative FBAR claim. 

On this record, the court finds that the United States did not meet its burden for assessing enhanced late-filing penalties by clear and convincing evidence, and thus orders the return of penalties already exacted. A separate entry of judgment shall follow this order.

The case is U.S. v. Annette B. DeMauro, case number 1:17-cv-00640, in the U.S. District Court for the District of New Hampshire.

Have You Been Assessed an FBAR Penalty 
or a Fraudulent-Failure-To-File Penalty?

Contact the Tax Lawyers at 

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at www.TaxAid.us or www.TaxLaw.ms

or Toll Free at 888-8TaxAid (888 882-9243)

 

Sources

Law360

Court Upholds IRS Summons For State Information on Marijuana (Pot) Companies

According to Law360, The Internal Revenue Service can request information from state governments in its investigations of federal tax crimes, the Tenth Circuit said Tuesday, affirming a Colorado federal court's decision to toss a suit from pot businesses challenging the agency's summonses.

The three-judge panel concluded that a lower court correctly upheld the IRS' summonses for information on Green Solution LLC and other companies owned by Eric Speidell and on Medicinal Wellness Center LLC and other businesses owned by Judy Aragon and Steven Hickox.

The appeals court applied a precedent it set earlier this year establishing that the federal government has the ability to request state-based information in investigations of federal tax crimes and it rejected the companies' arguments that the IRS acted outside its authority.

"Over The Last Several Years, Multiple Colorado Marijuana Dispensaries Have Challenged The IRS' Ability To Investigate And Impose Tax Consequences Upon Them,
" U.S. Circuit Judge Mary Beck Briscoe Said In The Opinion. "The Dispensaries Have Lost Every Time."

The cannabis companies had argued the IRS lacks the authority to issue the summonses, and told the Tenth Circuit in August that the court's ruling in Standing Akimbo v. U.S. should not apply in their cases.

James D. Thorburn, an attorney for the cannabis companies, told the circuit panel during oral arguments last month that the burden is on the government to make an affirmative case that the documents sought are existent, described with particularity and relevant. The IRS urged the circuit panel to follow precedent the court set in Standing Akimbo and toss the companies' appeals.

In the earlier case, the Tenth Circuit found in April that the IRS satisfied proper requirements when it requested business information from the Colorado Department of Revenue in its audit of dispensary Standing Akimbo.

The government had argued that the factors that led to the Tenth Circuit's decision in Standing Akimbo, such as the submission of affidavits by IRS revenue agents explaining the need for the records requested, are similar to the proceedings in Speidell's series of appeals. The parallels in proceedings should make clear that the summonses should be enforceable, the government said.

The appeals court opinion "quoted liberally" from its ruling in Standing Akimbo in its decision and concluded that the IRS' investigation in the case also met a four-part test established in U.S. v. Powell , a 1964 U.S. Supreme Court decision. The judgment in Powell stipulated an agency must state a legitimate purpose for seeking information outside its possession that is relevant to an investigation and proper administrative procedures must be followed.

In the Green Solution and Medicinal Wellness case, the companies failed to prove that the IRS investigation was "quasi-criminal," as they alleged, and provided no evidence to support that argument, such as a referral by the agency to the U.S. Department of Justice to prosecute the marijuana businesses, the opinion said.

Speidell and several Green Solution entities he owned were issued summonses by the IRS in 2016 seeking information from state agencies about the businesses' 2013 and 2014 tax returns to determine whether the companies improperly claimed federal business expense deductions, according to court documents. 

Those Deductions Are Disallowed For State-Regulated Marijuana Businesses Under IRC Section 280E .

A Colorado federal court denied Speidell's attempts to quash the summonses in the series of cases during 2018 and 2019, according to court documents. Medicinal Wellness Center LLC and its related entities, which joined Speidell in urging the reversal of the lower court's order on appeal, were also required to hand over documents under the ruling, according to court documents., Tax Division.

The consolidated cases are Eric D. Speidell et al. v. U.S., case numbers 19-1214, 19-1215, 19-1216, 19-1217 and 19-1218, in the U.S. Court of Appeals for the Tenth Circuit.

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It May Be Time For You To Retitle Your Hong Kong Registered Vessel

The IRS has announced in Ann. 2020-40, 2020-45 IRB the effective date of the termination of the U.S.-Hong Kong agreement to exempt from income tax, on a reciprocal basis, income from the international operation of ships. 

The Shipping Agreement is Terminated Effective for Tax Years Beginning on or after January 1, 2021.

In August 1989, the U.S. and Hong Kong concluded an agreement to exempt from income tax, on a reciprocal basis, income from the international operation of ships (the “shipping agreement”). The shipping agreement was effective for tax years beginning on or after January 1, 1987. (Notice 97-40, 1997-2 CB 287)

On July 14, 2020, the President issued an Executive Order (EO) on Hong Kong Normalization, which, among other things, directed the Commerce Department to give Hong Kong notice of intent to terminate the shipping agreement. (E.O. 13936)

IRS has announced that he termination of the shipping agreement is effective for tax years beginning on or after January 1, 2021. 

Need International Tax & Shipping Advice?

The Tax Lawyers at

Marini & Associates, P.A. 

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or Toll Free at 888 8TAXAID (888-882-9243) 

TIGTA Lists 10 Most Serious Challenges for IRS for FY 2021 - INCREASING INTERNATIONAL TAX COMPLIANCE

On October 19, 2020 we posted TIGTA Lists 10 Most Serious Challenges for IRS for FY 2021, where we discussed that TIGTA, in an Oct. 14 memorandum to Treasury Secretary addressed the 10 most serious management and performance challenges confronting IRS in fiscal year 2021. TIGTA has a statutory requirement to submit an annual report on the subject. Herein we would like to discuss problem #9 INCREASING INTERNATIONAL TAX COMPLIANCE

Complexity and change in the international tax environment require that the IRS collaborate with tax administrations of foreign countries to enforce compliance. The IRS must continue to focus significant efforts on global tax cooperation and tax administration practices that can prevent and resolve disputes among countries to increase certainty for taxpayers. 

In most cases, foreign persons are subject to U.S. tax of 30 percent (or lower treaty rate) on their U.S. source income. A foreign individual is any person that is not a U.S. person, including a nonresident alien, a foreign corporation, a foreign partnership, a foreign trust, or a foreign estate. The U.S. tax owed is generally withheld from payments made to foreign persons by a withholding agent. A withholding agent is any U.S. or foreign entity (individual, corporation, partnership, etc.) that takes receipt of, has control or custody of, or disposes of or makes a payment of any income to a foreign individual that is subject to withholding. Withholding agents are required to file Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, to report on an individual taxpayer basis the income and withholding for each foreign person. For Tax Year 2017, the IRS received 6.3 million Forms 1042-S from 49,618 withholding agents. These agents reported U.S. tax withholdings totaling more than $528 billion.

In response to our prior recommendations, the IRS has implemented processes to improve its identification of reporting discrepancies for Federal tax withheld on U.S. source income paid to foreign individuals. However, these processes did not identify some withholding tax discrepancies. TIGTA reported that IRS processes did not identify 1,919 withholding agents with reporting discrepancies totaling more than $182.7 million. 

Our Review Also Identified 366 Withholding Agents That Claimed $506 Million More In Credits For Tax Withheld Than Was Reported On The Forms 1042-S.

In addition, partnerships conducting business in the United States are required to withhold taxes on certain income paid to foreign partners. A foreign partner can be a foreign corporation, foreign partnership, and any other person who is not a U.S. citizen. The withholding serves as an incentive for foreign partners to file the appropriate U.S. tax return. However, TIGTA reported that the IRS’s compliance efforts in this area can be improved. TIGTA identified significant errors in the database that the IRS uses to track withholding reported by partnerships, which limits the IRS’s ability to verify withholding credits and accurately identify potential nonfilers.

Foreign individuals are also required to pay tax related to the sale of U.S. real estate. Specifically, the Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 imposes an income tax on foreign persons selling U.S. real property interests. Buyers are required to withhold a percentage of the anticipated taxes due on the amount realized from the sale. A foreign seller of U.S. property can claim a credit for the tax withheld by the buyer. If the seller’s tax liability is less than the amount of tax withheld, the seller gets a refund of the difference. TIGTA reported that the IRS’s reconciliation processes do not effectively identify and address FIRPTA reporting and payment noncompliance.(TIGTA, Ref. No. 2020-40-014, Millions of Dollars in Discrepancies in Tax Withholding Required by the Foreign Investment in Real Property Tax Act Are Not Being Identified or Addressed (Mar. 2020))

TIGTA Identified 2,988 Buyers With Discrepancies of More
Than $688 Million Between The Withholding Reported
on Forms 8288-A, Statement Of Withholding On Dispositions
By Foreign Persons Of U.S. Real Property Interests,
Filed During Processing Year 2017 And The Withholding Assessed To The Buyer’s Tax Account.

Extensive data inaccuracies in the FIRPTA database, incorrect and unclear guidelines, and employee errors contributed to these discrepancies.

The IRS also has not established processes to use Form 1099-S, Proceeds from Real Estate Transactions, to identify buyers that do not report and pay FIRPTA withholdings. 

TIGTA’s Analysis Of Forms 1099-S For Tax Year 2017 Identified Approximately $22 Million In FIRPTA Withholding That Was Not Reported And Paid To The IRS.

Finally, employee errors resulted in 1,835 foreign individuals potentially receiving more than $60 million in FIRPTA withholding credits than they were entitled.

Have an International IRS Tax Problem?

                                                                Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

TIGTA Lists 10 Most Serious Challenges for IRS for FY 2021 - IMPROVING TAX REPORTING AND PAYMENT COMPLIANCE

On October 19, 2020 we posted TIGTA Lists 10 Most Serious Challenges for IRS for FY 2021, where we discussed that TIGTA, in an Oct. 14 memorandum to Treasury Secretary addressed the 10 most serious management and performance challenges confronting IRS in fiscal year 2021. TIGTA has a statutory requirement to submit an annual report on the subject. Herein would like to discuss problem #7 IMPROVING TAX REPORTING AND PAYMENT COMPLIANCE:

One of the IRS’s key responsibilities is to ensure that taxpayers comply with the tax law. The gross Tax Gap is the estimated difference between the amount of tax that taxpayers should pay and the amount paid voluntarily and on time. 

The Average Annual Gross Tax Gap Is Estimated To Be
$441 BILLION For Tax Years 2011 Through 2013, And Approximately $39 BILLION (9 Percent) Is Due To Nonfilers.

Nonfilers are taxpayers who do not timely file a required tax return and timely pay the tax due for such delinquent returns. According to the IRS,high-income nonfilers, although fewer in number, contribute to the majority of the nonfiler Tax Gap.

In May 2020, TIGTA reported that the IRS was not working high-income nonfiler cases owing billions of dollars. TIGTA’s analysis of Tax Years 2014 through 2016 data identified 879,415 high-income nonfilers who did not have a satisfied filing requirement with an estimated tax due of $45.7 billion. The top 100 high-income nonfilers for Tax Years 2014 through 2016 have estimated tax due of approximately $9.9 billion, making up 22 percent of the $45.7 billion associated with the 879,415 high-income nonfilers.

TIGTA also reported that the IRS could better use Currency Transaction Reports (CTR) to improve its compliance activities. Federal law requires financial institutions to report currency (cash or coin) transactions of more than $10,000 conducted by, or on behalf of, one person, as well as multiple currency transactions that aggregate to more than $10,000 in a single day. The Financial Crimes Enforcement Network Form 112, Currency Transaction Report, is used to report these transactions. The IRS considers CTR information useful to identify cash activity that may not be reported accurately on the income tax return. It may lead the examiner to discover sources of unreported income. However, some subjects of the CTRs with significant dollar amounts of cash transactions may not be filing income tax returns. 

TIGTA Found That 5,266 Subjects of The CTRs Totaling
More Than $1.9 Billion Did Not File Income Tax Returns
For Tax Year 2017; However, The IRS Is Not Using
The Data To Identify These Nonfilers.

Large corporation (those with assets of $10 million or more) tax noncompliance contributes an estimated $26 billion to the average annual underreporting Tax Gap. The IRS uses a computer model, the Discriminant Analysis System (DAS), to systemically score the examination potential for Form 1120, U.S. Corporation Income Tax Return, tax returns with total assets of $10 million or more. Generally, the higher the score, the greater the audit potential. However, TIGTA reported that the IRS could improve the DAS model to better identify returns with a higher likelihood of potential tax adjustment. We analyzed 10,755 returns closed in the DAS workstream during FYs 2015 through 2018 and found that 47 percent were closed with no change to the tax return. Although the IRS is updating the DAS model to improve the no-change rates, TIGTA found that it is not leveraging all available examination information, such as the examination scope and knowledge on productive issues, when developing new formulas, and it plans to test new formulas only on returns that are nearly a decade old.

“Although no longer listed, achieving operational efficiencies should remain an area of continued focus for the IRS,” George added.

The agency is facing “significant” resource challenges, he said, citing IRS’s budget reduction in real terms over the past decade and the loss of some 29,000 full-time positions, including more than 14,600 key enforcement personnel. 

Have an IRS Tax Problem?

                                                                Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

TIGTA Lists 10 Most Serious Challenges for IRS for FY 2021

J. Russell George, the Treasury inspector general for tax administration (TIGTA), in an Oct. 14 memorandum to Treasury Secretary Steven Mnuchin, offered his perspective on the 10 most serious management and performance challenges confronting IRS in fiscal year 2021. TIGTA has a statutory requirement to submit an annual report on the subject.

Each year, TIGTA evaluates IRS programs, operations, and management functions to identify the most vulnerable areas in the Nation’s tax system. For Fiscal Year (FY) 2021, the IRS’s top management and performance challenges, in order of priority, are:

1. Responding to the COVID-19 Pandemic;
2. Enhancing Security of Taxpayer Data and Protection of IRS Resources;
3. Implementing Tax Law Changes;
4. Addressing Emerging Threats to Tax Administration;
5. Supporting an Enhanced Taxpayer Experience;
6. Modernizing IRS Operations;
7. Improving Tax Reporting and Payment Compliance;
8. Reducing Fraudulent Claims and Improper Payments;
9. Increasing International Tax Compliance; and
10. Protecting Taxpayer Rights

The memorandum described the onset of the COVID-19 pandemic as “the most significant change” to the list since last year, noting that it “has dramatically impacted” IRS and the taxpayers it serves. 

“Although no longer listed, achieving operational efficiencies should remain an area of continued focus for the IRS,” George added.

The agency is facing “significant” resource challenges, he said, citing IRS’s budget reduction in real terms over the past decade and the loss of some 29,000 full-time positions, including more than 14,600 key enforcement personnel. 

Have an IRS Tax Problem?

                                                                Contact the Tax Lawyers at

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or Toll Free at 888 8TAXAID (888-882-9243) 

Private Equity CEO Enters into Non-prosecution Agreement on Offshore Tax Fraud Scheme & Agrees to Pay $139 Million

According to the DoJ, Robert F. Smith, the Chairman and Chief Executive Officer of a San Francisco based private equity company, Vista Equity Partners, entered into a Non-Prosecution Agreement (the agreement) with the Department of Justice, for his involvement from 2000 through 2015 in an illegal scheme to conceal income and evade millions in taxes by using an offshore trust structure and offshore bank accounts. In that agreement, Smith admits his involvement in the illegal scheme and agrees to cooperate with ongoing investigations and to pay back taxes and penalties and full.

This may be a part of a Voluntary Disclosure, which should prevent him from being federally prosecuted and from jail time?

“It is never too late to do the right thing,” said U.S. Attorney Anderson. “It is never too late to tell the truth. Smith committed serious crimes, but he also agreed to cooperate. Smith’s agreement to cooperate has put him on a path away from indictment.” Could this have been part of a Voluntary Disclosure, which would prevent him from being federally prosecuted and from jail time?

According to the agreement, 

• Smith, a resident of Austin, Texas, formed the Excelsior Trust in Belize, and a shell company, Flash Holdings, in Nevis in 2000. 
• Smith used third-parties to conceal his beneficial ownership and control of the Excelsior Trust and Flash Holdings. 
• In reality, Smith controlled both offshore structures and made all substantive decisions regarding Flash Holdings’ operations, transactions, income, investments and assets. 
• Smith used the Excelsior Trust to conceal his ultimate ownership and control over Flash Holdings. 
• He further used Flash Holdings to hide his interest in private equity investments. 

Smith admits that he formed these foreign entities in order to use them to avoid the payment of U.S. taxes. Furthermore, Smith admits that he knowingly and intentionally used the Excelsior Trust and Flash Holdings and their associated foreign bank accounts in the British Virgin Islands and Switzerland to conceal from the IRS, and the U.S. Treasury Department, income earned and distributed to Flash Holdings from private equity funds. 

As a result of the overall scheme, 

• Smith willfully did not report to the IRS over $200 million of partnership income. 
• Smith also failed to report his ownership of his foreign bank accounts in BVI and Switzerland as required by law. 

Over the years, Smith used millions of this unreported income to acquire and make improvements to real estate used for his personal benefit. 

• Smith admits that, in 2005, he used approximately $2.5 million in untaxed funds to purchase and renovate a vacation home in Sonoma, California. 
• In 2010, Smith again used untaxed funds to purchase two ski properties and a piece of commercial property in France. 
• In 2011 and 2012, Smith used approximately $13 million of untaxed funds to build and make improvement to a residence in Colorado and to fund charitable activities at the property. 

Under the terms of the agreement, Smith has agreed to continue cooperating with the Department of Justice in other related investigations. Further, Smith has agreed to pay approximately $56 million in taxes and penalties stemming from the unreported income and another $82 million in penalties stemming from his concealment of his offshore bank accounts. 

Taken altogether, Smith will pay more than $139 million in taxes and penalties. Additionally, Smith agrees to abandon his protective claims for a refund totaling approximately $182 million that were filed with the IRS. The protective refund claims consisted, in part, of claims filed with the IRS for charitable contribution deductions on Sept. 21, 2018, and Oct. 11, 2019. As a result of the agreement, Smith shall take no further direct or indirect tax benefit from such claims.

Do You Have Undeclared (Offshore) Income ?

 

Want to Know if which Voluntary Disclosure
Program is Right for You? 

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