IRS Reminds Taxpayers That GoFundMe May Be Income

The IRS announced on March 21, 2022, that Money received through ‘crowdfunding’ may be taxable. 

Crowdfunding is a method of raising money through websites by soliciting contributions from a large number of people. The contributions may be solicited to fund businesses, for charitable donations, or for gifts. In some cases, the money raised through crowdfunding is solicited by crowdfunding organizers on behalf of other people or businesses. In other cases, people establish crowdfunding campaigns to raise money for themselves or their businesses.

he crowdfunding website or its payment processor may be required to report distributions of money raised if the amount distributed meets certain reporting thresholds by filing Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS. If Form 1099-K is required to be filed with the IRS, the crowdfunding website or its payment processor must also furnish a copy of that form to the person to whom the distributions are made. The American Rescue Plan Act clarifies that the crowdfunding website or its payment processor is not required to file Form 1099-K with the IRS or furnish it to the person to whom the distributions are made if the contributors to the crowdfunding campaign do not receive goods or services for their contributions.

Prior to 2022, the threshold for a crowdfunding website or payment processor to file and furnish a Form 1099-K was met if, during a calendar year, the total of all payments distributed to a person exceeded $20,000 in gross payments resulting from more than 200 transactions or donations.

For Calendar Years Beginning After December 31, 2021,
The Threshold Is Lowered And Is Met If, During A
Calendar Year, The Total Of All Payments Distributed
To A Person Exceeds $600 In Gross Payments,
Regardless Of The Number Of Transactions Or Donations.

Accordingly, if a crowdfunding website or its payment processor makes distributions of money raised that meet the reporting threshold, and the contributors to the crowdfunding campaign received goods or services for their contributions, then a Form 1099-K is required to be filed with the IRS. Additionally, if the distributions of the money raised are made to the crowdfunding organizer, a copy of the Form 1099-K must be furnished to the organizer; alternatively, if the distributions of the money raised are made directly to individuals or businesses for whom the organizer solicited funds, the Form 1099-K must be furnished to those individuals or businesses that receive amounts that meet the reporting threshold.

A person receiving a Form 1099-K for distributions of money raised through crowdfunding may not recognize the filer's name on the form. Sometimes the payment processor used by the crowdfunding website, rather than the crowdfunding website itself, will issue the Form 1099-K and be included as the filer on the form. If the recipient of a Form 1099-K does not recognize the filer's name or the amounts included on the Form 1099-K, the recipient can use the filer's telephone number listed on the form to contact a person knowledgeable about the payments reported.

Box 1 on the Form 1099-K will show the gross amount of the distributions made to a person during the calendar year, but issuance of a Form 1099-K doesn't automatically mean the amount reported on the form is taxable to the person receiving the form. As discussed below, the income tax consequences depend on all the facts and circumstances. If the distributions reported on a Form 1099-K are not reported on the tax return of the recipient of the form, the IRS may contact the recipient for more information. The recipient will have the opportunity to explain why the crowdfunding distributions were not reported on the recipient's tax return.

See FS-2022-20 four more information regarding "Crowdfunding."

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IRS Getting Back on Track

According to Law360, the Internal Revenue Service is in a position to resolve its backlog of unprocessed tax returns, which number in the tens of millions, by the end of this year, IRS Commissioner Chuck

Rettig told House lawmakers on March 17, 2022.

Barring any unanticipated developments, such as those related to the pandemic, the IRS should be able to enter the next calendar year having resolved its backlog, Rettig said during a hearing before the Ways and Means oversight subcommittee.

"If The World Stays As It Is Today, We Will Be What We Call 'Healthy' By The End Of Calendar Year [2022] And Enter The [2023] Filing Season With Normal Inventories," Rettig Said.

In testimony provided to the Senate Finance Committee last month, National Taxpayer Advocate Erin Collins said that as of early February, the IRS had approximately 23.5 million returns, correspondence and account management cases in its inventory that needed to be processed manually. The IRS announced in January that it would be deploying so-called surge teams that would help return the agency's processing and correspondence inventories to a "healthy level."

As part of the surge teams, the IRS has brought 800 experienced employees onto its account management team and, as of Thursday, has added 700 workers to its submissions processing operations, Rettig said during the hearing.

The IRS was also granted direct-hire authority from the Office of Personnel Management to fill some 10,000 entry-level positions in submission processing and account management, Tony Reardon, head of the National Treasury Employees Union, previously told Law360. That authority went into effect only two days ago, Rettig said.

Employees can be on-boarded within 30 to 45 days under the direct-hire authority, Rettig said, compared with the normal six- to eight-month process.

The Agency Also Received Substantial Interest From Job Applicants In Response To Its January Announcement That The Office Of The Chief Counsel Was Looking To Hire As Many
As 200 More Attorneys To Take On Abusive Tax Schemes,
Rettig Said.

"I'm pleased to say that we put out that announcement and we received multiples of that from folks who are coming on board," he said.

Still, the IRS is consistently "out-gunned" when it comes to complex matters involving partnerships, despite having 6,500 experienced field agents active, Rettig said.

"We do not have the resources to go after the 'bigs' or the 'super bigs' as we refer to them," he said.

Rettig has previously told lawmakers that the agency is outmanned on those types of issues.

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Staffing at IRS Criminal Division's Down 25% Since 2010

According to Law360, the Internal Revenue Service's Criminal Investigation division lost about a quarter of its workforce since 2010.

The IRS Said In a Fact Sheet That The Division's Staff Had Dropped About 25%, to Below 3,000 Employees, From 4,017 in 2010.

Nonetheless, the agency said, the division managed last year to identify $10.4 billion in tax fraud and financial crime and likely deterred at least an equivalent amount of criminal behavior, using a budget of $600 million.

The IRS also released an item highlighting broad categories of cases the CI division tackles, including tax, narcotics and cryptocurrency investigations, with specific case examples under each umbrella.

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Taxpayer is Not Complying with IRS Summons in $120M FBAR Case

According to Law360, a California woman the government is suing in federal court for nearly $120 million in penalties over alleged violations of foreign bank account reporting rules is not complying with IRS summonses, the U.S. said on March 16, 2022.Barry without The case is U.S. v. Francis Burga et al., case number 5:18-cv-01633, in the U.S. District Court for the Northern District of California, San Jose Division.

Francis Burga has produced documents sought by the Internal Revenue Service, according to a status report filed by the U.S., but hasn't indicated when additional documents she requested from another individual will arrive. The government has said that it can't determine whether she has complied with the summonses, which are being enforced by a court order, until it can review all the material they are expected to yield.

Efforts to enforce the summonses are unfolding parallel to a separate case centered on claims that Burga and her late husband willfully failed to file reports on their foreign bank accounts. She and Margelus Burga, founder of the data storage design and manufacturing company Glide/Write USA, had hundreds of bank accounts between 2004 and 2009 in several countries for which they failed to file the reports, the government said.

According To The U.S., The Burgas Were Also Involved In
a False Invoicing Scheme At Glide/Write That Relied in Part
on A Liechtenstein Trust Their Financial Adviser, Peter Meier, Helped To Manage.

Meier is the other individual from whom Francis Burga has requested documents in the summons enforcement proceedings, according to Wednesday's status report.

She Claims To Have No Control Over Meier's Production
of The Documents, According To The Report,
But Has Said She Will Produce Any That He Provides.

Separately, Burga is challenging IRS deficiency notices issued to her as an individual and as administrator of her husband's estate in the U.S. Tax Court, according to the status report, maintaining that the notices moot the summons proceedings.

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IRS Spotlights Criminal Investigation & Law Enforcement

In FS-2022-18 the IRS spotlights IRS Criminal Investigation (CI) serves the American public by investigating potential criminal violations of the Internal Revenue Code and related financial crimes in a manner that fosters confidence in the tax system and compliance with the law. 

It is the only federal law enforcement agency authorized to investigate federal criminal tax violations and pursues related financial crimes, such as money laundering, currency violations, and terrorist financing. 

General Tax Fraud Investigations Are at The Core of CI’s
Law Enforcement Efforts, for Example, Agents Expend Substantial Energy Unpacking Domestic and Offshore
Tax Avoidance Strategies That are Facilitated Through
Trust and Partnership Arrangements.

In recent years, CI has significantly expanded its presence in areas of emerging importance. Since 2015, it has built up a world-class cybercrimes program to address the exponential growth of cybercrimes impacting the tax, financial, and economic systems of the U.S. This group successfully seized more than $3.5 billion of illicit cryptocurrency in fiscal year 2021, and they have already seized more than this amount in fiscal year 2022.

 

Last Year, IRS-CI Identified $10.4 Billion From Tax Fraud and Financial Crimes and Likely Deterred at Least an Equivalent

Amount of Such Behavior, With a Budget of Just Over $600M.

That is a Direct Return of More Than 16:1.

A snapshot of recent IRS CI work 

1. Russian Bank Founder Sentenced For Evading Taxes
 

In 2013, when the value of Oleg Tinkov’s investment in his Russian bank’s stock rose to over $1 billion, he quickly renounced his U.S. citizenship and substantially understated his wealth on tax filings with the IRS to avoid exit taxes. Expatriation law requires that those with a net worth of more than $2 million pay taxes on their assets as if they were sold on the day before expatriation, but despite the value of his post-Initial Public Offering assets rising to above $1.1 billion, Tinkov claimed he did not have assets above $2 million. In addition, he did not report any gain from the constructive sale of his property worth more than $1.1 billion, causing a tax loss of nearly $250 million. A year after his expatriation, Tinkov was the 15th richest oligarch in Russia, with an estimated net worth of over $8 billion.

 

Tinkov was indicted in September of 2019 for willfully filing false tax returns following an investigation by CI agents, and he was arrested in February 2020. As part of his restitution, Oleg Tinkov paid $508,936,184, which is more than double the amount he sought to escape paying to the U.S. Treasury through renouncing his U.S. citizenship and concealing from the IRS large stock gains, which he knew were reportable. This payment includes $248,525,339 in taxes, statutory interest on that tax, and a nearly $100 million fraud penalty.

2. $1.3 Billion Tax Shelter Scheme

 

IRS-CI’s primary resource commitment involves the investigation of tax crimes, which constitute over 70% of investigative time by CI agents. Resources are especially focused on unpacking complex structures that facilitate abusive tax schemes by wealthy individuals and corporations.

 

To take a recent example, in February 2022, a grand jury returned an indictment of seven individuals with conspiracy to defraud the United States and other crimes because of their promotion of fraudulent tax shelters involving syndicated conservation easements for at least two decades. The co-conspirators allegedly guaranteed a 4-to-1 tax deduction ratio to their clients and invoked various schemes to value easements as necessary to deliver the ratio promised. The indictment charged that these were abusive tax shelters lacking in economic substance and further contended that the defendants helped clients claim illicit charitable deductions after the conclusion of tax years through backdating documents. In total, the defendants allegedly sold over $1.3 billion in false and fraudulent tax deductions through their crimes.

 

Over the course of a four-year investigation, IRS-CI agents dedicated thousands of hours to unpacking the schemes these perpetrators allegedly facilitated to help their wealthy clients skirt tax obligations. These kinds of investigations involve incredibly complicated work for the CI team, as the tax shelters are often intentionally designed to impede the ability of the IRS to detect their fraudulent nature, including through appraisals that overinflate land values and fake votes among participants meant to create the illusion that the transactions are legitimate real estate investment opportunities and not abusive tax shelters. With additional resources and investigative support, IRS-CI could reduce the investigative time and ensure that criminals are held accountable quicker.

 

3. $3.6 Billionof Stolen Cryptocurrency Seized In FY 2021 (Already Surpassed In FY 2022)

 

Over the last several years, CI has observed significant growth in the number of criminals using the cyber environment for fraud and illicit transactions. This criminality is made possible by an underlying technological ecosystem that facilitates remaining anonymous and eluding law enforcement while concealing financial transactions, ownership of assets, or other evidence. The possibility that these technologies will be deployed to facilitate sanctions evasion is also top-of-mind for CI investigators at present.

 

In order to navigate this landscape, CI must deploy sophisticated blockchain analysis tools to unweave darknet transactions. For example, following the prosecution of Silk Road creator Ross Ulbricht in 2015 for several criminal counts, CI agents were tasked with the persistent investigation of stolen funds from this and other dark net marketplaces. As a result of their determined and resolute action, CI agents seized approximately $1 billion of Bitcoin in 2020. Finding these funds required the efforts of several CI agents and contractors, including the use of third-party analytic tools to trace assets to individuals who had hacked Silk Road to pocket illicit gains.

 

Even more recently, in February of this year, two individuals were arrested for laundering cryptocurrency stolen during a 2016 hack of a digital asset exchange. Thus far, $3.6 billion has been seized by CI agents who managed to track unauthorized transactions that sent stolen Bitcoin from this hack to digital wallets under the control of the launderers. The defendants allegedly employed numerous complex techniques to hide these funds, including automating transactions to quickly move funds and then deposit them into a variety of currency exchanges and darknet markets and withdrawing funds to break the chain of transactions and impeded detection.

 

Despite this complexity, today CI currently devotes only about six percent of its investigative time to cybercrimes/crypto currency, so it is just scratching the surface of the amount of criminal activity that is being detected.

Click IRS-CI Highlights for more examples of the types of cases in which CI has led or been significantly involved in over the last few years.

 

Given the magnitude of the challenge it faces, it is imperative for CI to be adequately funded to investigate and prosecute criminals. CI, like the rest of the IRS, is in desperate need of stable, long-term funding to develop a deeper understanding of the global financial landscape and trace and seize assets that today are in the hands of criminals.

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US Shareholder Must Use CFC Method To Characterize Stock

The U.S. Tax Court has held in AptarGroup Inc., 158 TC No. 4, that the American shareholder of a controlled foreign corporation (CFC) had to use the same method to characterize the stock of the CFC that the corporation used to apportion its own interest expense.

AptarGroup, a U.S. shareholder, owned stock in a CFC that apportioned interest expense under the Reg §1.861-9T(j) modified gross income method. AptarGroup claimed a foreign tax credit under Code Sec. 904 with respect to tax imposed on its income from the CFC.

To determine the amount of the foreign tax credit, AptarGroup characterized its stock in the CFC using the Reg §1.861-9T(g) asset method. Thus, AptarGroup didn't use the same method that the CFC used for interest expense apportionment.

The IRS issued a notice of deficiency to AptarGroup denying the foreign tax credit.

The issue before the court was whether AptarGroup must use the modified gross income method to characterize the stock of its CFC for purposes of computing the foreign tax credit, as that was the method the CFC used to apportion interest expense.

The court held that AptarGroup's position is inconsistent with the proper application of Reg §1.861-9T(f)(3)(iv), which requires the U.S. shareholder of a CFC to characterize the stock of the CFC using the same method the CFC used to apportion its interest expense.

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Home Office Tax Deduction For Employees Who Continue to Work at Home Not Likely

According to Law360, Despite a continuing trend of employees working from home during the pandemic, congressional lawmakers have shown little interest this year in expanding a popular tax deduction to telecommuters forced to abandon their office cubicles.

Tax pros and Capitol Hill tax aides say the renewal of the home office deduction is not on Congress' radar, especially since the provision's elimination was tied to eliminating all other miscellaneous deductions and doubling the standard deduction as part of the GOP's 2017 Tax Cuts and Jobs Act.

The tax law has had the dual impact of providing larger tax refunds for American workers while also lowering the number of Internal Revenue Service audits of tax returns claiming the deduction under Internal Revenue Code Section 67(g), they said.

Under the TCJA, Republicans eliminated the miscellaneous itemized deduction from 2018 to 2025, thereby raising $668.4 billion in revenue. Before that change, employees with home offices were allowed to deduct eligible work-related expenses above 2% of their adjusted gross income. Eligible expenses included legal fees, professional subscriptions, uniforms, medical examinations required by an employer, tools and job search costs.

Even though the deduction isn't currently available to teleworkers, who have used their own money to make their remote home offices workable for their employer, other taxpayers are still benefiting from the tax break. 

Self-employed business owners, independent contractors and gig workers never lost their ability to write off their home office expenses even as federal and state governments began mandating that office buildings close and employees work from home.

Rep. Joseph Morelle, D-N.Y., said he is working to add the tax deduction back to the code for employees who work from home.

So far, Morelle's bill hasn't drawn any lawmakers willing to co-sponsor it and the House Ways and Means Committee has not considered the legislation. 

If the deduction is restored, it could prove useful to millions of American workers who are growing used to not traveling outside their homes for work.

The Pandemic Has Boosted Telecommuting In Almost 40% Of U.S. Households, According To A Blog Post From The U.S. Census Bureau, Based On Its Household Pulse Survey Collected Between August And December 2020.

Most telecommuters are from wealthier households with income above $200,000 while households with incomes under $25,000 were less likely to telecommute, the Census Bureaus figures show.

Keith Hall, president of the National Association for the Self-Employed, estimated that roughly one-third of all small-business owners do not claim the home office deduction because they think it's too complicated, or it's a red flag that will cause the IRS to automatically audit them. However, he said the rules for the deduction allow a simple calculation based on the amount of space used in the home.

"I'm confident that every single one of those self-employed business owners is doing some work from home" and should be claiming the deduction, Hall said.

Have an IRS Tax Problem?

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