Yearly Archives: 2018

According to JDSUPRA, The American Bar Association has written to the US Internal Revenue Service, asking it clarify whether assets held as cryptocurrencies such as Bitcoin are subject to the Foreign Bank Account Reports (FBAR) and Form 8938 reporting rules.  

“It is unclear whether a taxpayer holding cryptocurrencies on a foreign cryptocurrency exchange (e.g., Xapo.com or Binance.com) or in a wallet maintained by a foreign wallet service provider (e.g., Blockchain.com) is required to report the account(s) on an FBAR as it is unclear whether cryptocurrencies may qualify as a reportable account for FBAR purposes.

There is tension between the Service’s classification of cryptocurrency as “property,” the Securities Exchange Commission’s (“SEC”) classification of cryptocurrency, in certain circumstances, as a “security,” and the Commodity Futures Trading Commission’s (“CFTC”) classification of  cryptocurrency as a “commodity.”

• On the one hand, if cryptocurrency is property, then it is arguably not subject to FBAR reporting requirements because it is not, under the current regulatory definitions, a “bank, securities, or other financial account.” 

• On the other hand, if cryptocurrency is a “security,” then FBAR reporting requirements may apply under the general rule: “each United States person having a financial interest in, or signature authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner…”

• Moreover, by treating cryptocurrency as “property,” the answer to whether cryptocurrency held in foreign wallets must be reported likely depends on what functions the wallet provider actually provides, which may be difficult for taxpayers to determine in many cases. 

• Furthermore, it is unclear how these requirements may apply to taxpayers who hold cryptocurrencies directly on a distributed blockchain.

We previously discussed, that an abundance of caution, a taxpayer may want to report their investments in cryptocurrencies on their FBAR and Form the 8938, since Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest. 

According to Law360, the Internal Revenue Service announced on May 14, 2018 that it will undertake a campaign to increase compliance for rules involving nonresident aliens' tax treaty exemption claims.

Because the statutes involving income-based tax treaty exemption claims can be confusing, the IRS' Large Business and International Division will focus on education and outreach to increase awareness and compliance, according to a statement.

“Some nonresident alien taxpayers may either misunderstand or misinterpret applicable treaty articles, provide incorrect or incomplete forms to the withholding agents or rely on incorrect information returns provided by U.S. payors to improperly claim treaty benefits and exempt U.S. source income from taxation,” the statement said.

Under the provisions of certain treaties, some payments from U.S. residents to nonresident aliens are not subject to the complete withholding obligation of 30 percent, as defined under Internal Revenue Code Section 1441.

Nonresident aliens will also be the subject of additional campaigns, designed to encourage compliance in instances when they inappropriately apply for education tax credits, which are available only to U.S. residents, and income-oriented credits, for which they are also not eligible.
The announcement highlighted the agency's priority in ensuring compliance with both effectively connected and fixed, determinable, annual periodical tax treaty-based income credits.

The Agency Will Also Pursue Campaigns to Increase Compliance with Withholding, Deposit and Reporting Requirements per IRS Form 1042 and

Compliance with the Reporting of Transactions with Foreign Trusts, per IRS Form 3520, According to the Announcement.

The process for ensuring compliance may include "examinations and penalties assessed by the campus when the forms are received late or are incomplete," the announcement stated.

According to Law360, the Internal Revenue Service went beyond the cap on civil penalties it can assess for undisclosed offshore bank accounts, a Texas federal judge has ruled, rejecting the agency’s argument that regulations limiting the amount are implicitly invalid.

The IRS had sued a Texas man to collect hundreds of thousands of dollars in unpaid civil penalties, plus interest, for the taxpayer’s allegedly willful failure to report offshore accounts on Foreign Bank and Financial Accounts forms for 2007 through 2010.

But U.S. District Judge Sam Sparks was not swayed, concluding in a decision filed on May 16, 2018 that there is little reason to believe the legislative amendment in 2004 “implicitly superseded or invalidated” the 1987 regulation under 31 CFR § 103.57, which was later renumbered as CFR § 1010.820.In granting partial summary judgment to the taxpayer, Dominique Colliot, Judge Sparks found that the section at issue is a valid regulation that caps penalties for willful violations of foreign bank account reporting at $100,000.

According to the IRS’ December 2016 complaint, Colliot failed to report several foreign bank accounts, including Barclays in the U.K, UBS AG in Switzerland and Societe Generale in France. Accusing Colliot of willfully skirting FBAR requirements, the agency claimed he owed $917,447 in penalties, plus interest.

The IRS had calculated the penalties under 31 U.S.C. § 5321, which Congress in 2004 had amended to increase the maximum civil penalties for willful failure to file a FBAR. Under the revised statute, willful violations can lead to a penalty that is either $100,000 or 50 percent of the balance in the foreign account, whichever is more.

However, Judge Sparks concluded that the regulations under CFR § 1010.820, promulgated under the prior version of 31 U.S.C. § 5321, remained unchanged. Thus, he said, the rules kept the maximum civil penalty for willful failure to file an FBAR at $100,000.

Judge Sparks added that the Financial Crimes Enforcement Network, a branch of the Treasury Department, did not revise § 1010.820 to account for the increased maximum penalty now allowed under the changes to 31 U.S.C. § 5321.

“Nevertheless, the IRS did not let § 103.57 (now § 1010.820) constrain its enforcement authority, and since 2004, the IRS has repeatedly levied penalties for willful FBAR violations in excess of the $100,000 regulatory cap,” Judge Sparks said.

“And § 1010.820, a regulation validly issued by the Treasury via notice-and-comment rulemaking, purports to cabin that discretion by capping penalties at $100,000,” he said.

While Judge Sparks found the IRS cannot exceed the $100,000 penalty threshold, he declined Colliot’s bid to toss the case entirely, instead ordering the parties to provide additional briefing on the appropriate next steps.

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