Monthly Archives: May 2018

According to Law360,  Taxpayers who have offshore virtual currency accounts should report them on a Foreign Bank and Financial Accounts form despite a lack of clear guidance from the Internal Revenue Service, as staying silent could be support for allegations of willful nondisclosure.

Cryptocurrencies, including popular digital tokens like bitcoin and ethereum, are widely traded and their transaction recording technology, called blockchain, has drawn interest from banks and other established financial firms. However, the industry is still a virtual Wild West in some ways, to the point where the IRS has not yet issued guidance covering all facets of the technology’s use, including whether taxpayers should report offshore cryptocurrency accounts on their FBAR forms.

Taxpayers facing this ambiguity,  along with the fast approaching April 17 deadline for filing FBAR and other tax form, should play it safe and include offshore cryptocurrency accounts in their reports, said Victor Jaramillo, who is of counsel at Caplin & Drysdale Chtd. He said taxpayers could land in hot water for not reporting virtual currency accounts that they think might qualify for an FBAR, but there’s little downside to disclosing them.

Penalties for not reporting, can be significant. If the IRS believes a taxpayer willfully avoided filing an FBAR, rather than unknowingly neglected reporting requirements, the agency can lodge a civil penalty that is either $100,000 or 50 percent of the balance in the foreign account, whichever is more.

However, even if a taxpayer decides to include an offshore cryptocurrency account on an FBAR form, the process is not necessarily clear-cut. Jon Brose, a partner at Seward & Kissel LLP, pointed to the volatile nature of cryptocurrency valuations.

“It may be difficult to fill it out accurately because it’s so volatile,” he said. “It may be difficult for you to know what your highest balance was, because there’s no reporting on this, there’s no tracking. You can take a guess.”

“I think it’s pretty clear that if you have an account in an exchange and if that exchange is located overseas, then I’d be hard pressed to think why you’re not reporting that on an FBAR if it meets the $10,000 threshold,” said Jaramillo, referring to the minimum foreign account amount that triggers the reporting requirement.

Jaramillo pointed to the John Doe summons that the IRS has served virtual currency exchanger Coinbase Inc. to investigate whether the company’s customers avoided paying taxes on transactions made through the company.

In 2014, the IRS issued guidance saying it would treat bitcoin and other virtual currencies as property, not currency, for federal tax purposes. The agency’s stance means that taxpayers realize a gain or loss on the sale or exchange of virtual currencies, which they must report with the rest of their taxes.

While the IRS currently does not have cryptocurrency guidance when it comes to FBAR forms, it would be “foolish” for them not to put something out, said Rita Ryan, an associate at Vacovec, Mayotte & Singer.

As for what potential guidance could look like, Anthony Tu-Sekine of Seward & Kissel cited a July 2016 Ninth Circuit ruling. In the decision, a three-judge panel found that a California man’s online poker accounts did not count as foreign financial accounts that required disclosure, but that an online transfer account he held with the U.K.-based company FirePay should have been reported on an FBAR.

The case, USA v. John Hom, lays out different factors that someone with an offshore virtual currency account could look at, Tu-Sekine said. First, there’s the location test, which Tu-Sekine said was “fairly easy” because an account simply must be located outside of the U.S. to be reportable.

However, the question of what kind of accounts are required for disclosure gets a little bit trickier, Tu-Sekine said. He noted that the analysis will depend on a number of factors, such as whether the taxpayer can send currency that will be exchanged for bitcoin or if the account only trades in cryptocurrency.

"It becomes really fact specific, but I think if it’s the kind of account where you can send your money and then buy bitcoin on that exchange, or send your bitcoin there and then maybe you can sell it at that exchange and then transfer it back to your bank account, I think you’re probably much closer to a financial account,” Tu-Sekine said.

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According to Law360, The leader of a religious group objects to the federal criminal charges in New Jersey that he and another church official evaded taxes on about $5.3 million they took from the organization, blasting the case as part of a system designed to oppress blacks and Hispanics.

“And I’m part of that oppressing, but God is not gonna let that go down,” Grant said as the crowd erupted in applause.

After they pled not guilty at an arraignment inside a federal courthouse in Newark, Jermaine Grant, head of the Israelite Church of God in Jesus Christ, said outside the building that the charges are false, frivolous and “inconsistent with the facts of the case.”

Authorities Also Alleged They Used about $2.9 Million in Church Funds for Various Personal Expenditures Benefiting Grant and His Family Members.

The expenditures included buying luxury clothing, electronic products and home furnishings; purchasing and leasing real estate and luxury vehicles; and spending money on trips to Disneyland, according to the indictment.

Grant also used church funds to cover expenses related to some of his children’s private school education, “including daily transportation to the school in a chauffeured Mercedes Benz paid for with funds from an ICGJC bank account,” the indictment states.

 The case is USA v. Grant et al., case number 2:18-cr-00179, in the U.S. District Court for the District of New Jersey.

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On December 20, 2016 we posted Recklessness = Willful Failure ToFile FBAR For Partial Disclosure in OVDP Filings? where we discussed that a district court had found that the taxpayers' failure to timely file a Foreign Bank and Financial Accounts Report (FBAR) was willful where, among other things, they stopped employing a bookkeeper or keeping any books after opening a foreign bank account and made several misrepresentations under penalty of perjury when they applied to participate in IRS's Offshore Voluntary Disclosure Program (OVDP).

The taxpayers were Mr. and Mrs. Bohanec and Mr. Bohanec owned a camera shop in California. The Bohanecs arranged with Leica, a German camera manufacturer, to become an exclusive Leica dealer. Commissions for international sales were deposited into an account at UBS AG in Switzerland in the Bohanecs' name.

On Jan. 6, 2010, the Bohanecs executed an application to participate in the OVDP. The Bohanecs' application, submitted under penalty of perjury, represented that the "original balance and all funds deposited into the Swiss UBS account were after-tax earnings from our camera business." On May 19, 2011, the Bohanecs executed and filed FBARs and federal income tax returns for 2003, 2004, 2005, 2006, 2007, and 2008.
While those FBARs included the UBS account, they did not include the Austrian or Mexican accounts. The Bohanecs were ultimately rejected by IRS for the OVDP. In June 2013, IRS assessed a penalty of approximately $1.2 million penalty against Bussell for failing to disclose her financial interests in an overseas account on her 2006 tax return, which she was required to report in 2007. Bussell did not pay the penalty, and IRS filed suit. 

The District Court found that Bussell had willfully failed to file a FBAR, granting partial summary judgment to IRS, but reducing the fine. U.S. v. Bussell, DC CA 12/8/2015, 117AFTR 2d 2016-439. The court rejected all the various arguments offered by the taxpayer, including that the fine was excessive and violated treaty provisions.

• The district court was not persuaded by the taxpayer's argument that the fine was excessive under the Eight Amendment because the offense was solely a reporting offense, not a serious crime.
• The court reasoned that while the taxpayer's offense, tax evasion, was not as serious as some crimes that ultimately trigger civil forfeiture actions, it clearly fit into the class of persons targeted by the Bank Secrecy Act, namely those evading taxes through the use of offshore bank accounts.
• Further, the district court found that the taxpayer had not carried her burden to show that the money at issue was derived from a lawful source, which would trigger stronger Eight Amendment protections.

After weighing the factors relevant to the an excessive fines inquiry, the district court concluded that IRS's assessment raised some Eighth Amendment concerns because the assessment exceeded the maximum penalty set out in the applicable criminal and civil statutes. The maximum authorized penalty for a willful criminal FBAR violation was a five year sentence and a $250,000 fine. (31 U.S. Code § 5322(a)) The taxpayer's FBAR penalty was $1,221,806, which was almost five times the maximum amount allowed in the criminal statute. The district court decreased the penalty imposed from $1,221,806 to $1,120,513, which represented the maximum amount permitted under the applicable civil statute.

The district court also rejected the taxpayer's vague assertion that IRS illegitimately obtained information concerning her Swiss Account from the Swiss government. She contended that, pursuant to the treaty between the U.S. and Switzerland, the U.S. could only receive information from the Swiss government pertaining to tax violations. However, the district court concluded that the instant case was clearly a tax collection case, and it was unclear how IRS's conduct ran afoul of the treaty.

Bussell appealed the district court's decision and while she admitted that she willfully failed to disclose her financial interests in her overseas account on her 2006 tax return, she raised several arguments on appeal; the Ninth Circuit Court of Appeals affirmed the district court, rejecting all the arguments offered by the taxpayer. 

Bussell then petitioned the Supreme Court to review the Ninth Circuit's decision. She argued (1) that the Eighth Amendment prohibition against excessive fines did not allow a forfeiture of half of an account's value (in this case, more than $1 million) merely because of a failure to report the account; and (2) that the treaty between the U.S. and Switzerland on dual taxation, which was restricted to disclosure of tax information, couldn't be used to obtain information for non-tax uses, such as the existence of a foreign account held in violation of FBAR.

On Apr. 30, 2018, the Supreme Court refused to review the Ninth Circuit's decision. Accordingly, that decision is now final.

Source:
Thomson Reuters Tax & Accounting News