Monthly Archives: March 2021

On June 19, 2019 we posted Negligent FBAR Penalty NOT Limited to $10K Per Year, where we discussed that the federal district court of California, upheld the IRS’ imposition of separate non-willful penalties against 13 foreign accounts disclosed on a single late FBAR return. In United States vs. Jane Boyd, the taxpayer had a financial interest in and/or otherwise controlled 14 financial accounts in the United Kingdom with balances collectively exceeding $10,000. The IRS assessed 13 separate FBAR penalties against Boyd, treating each reported account as a separate non-willful violation.  One account was not penalized based on IRS mitigation rules and the District Court agreed with the IRS assessment.

The Court of Appeals for the Ninth Circuit, reversed the district court decision and has held that the $10,000 non-willful FBAR penalty (for failure to file the FBAR) applies per FBAR form, not per the number of financial accounts (e.g., bank accounts) required to be reported on the form. This ruling aligns with all district court rulings concerning this issue.

The penalty for violating the FBAR requirement is set forth in 31 USC § 5321(a)(5). The amount of the penalty depends on whether the violation was non-willful or willful.

The maximum penalty amount for a non-willful violation of the FBAR requirements is $10,000 (adjusted for inflation for violations after 2015). (31 USC § 5321(a)(5)(B)(i))

Since one FBAR can contain reports on multiple financial accounts, each containing more than $10,000, it is unclear if the $10,000 non-willful penalty under 31 USC § 5321(a)(5)(B)(i) applies per account or only per the one form that should have been filed.

The district court hearing the Boyd case had held that the penalty for a non-willful FBAR violation relates to each account required to be shown on the FBAR. Thus, IRS could impose the statutory maximum penalty of $10,000 for each of the taxpayer's thirteen accounts that should have been reported on one FBAR. (US v. Boyd, (DC CA) 123 AFTR 2d 2019-1651)

But subsequent to the district court's decision in Boyd, three other district courts came to the opposite conclusion. They found that the $10,000 non-willful penalty applies only to the FBAR form itself, not the number of accounts required to be shown on the FBAR. (US v. Bittner (DC TX) 126 AFTR 2d ¶2020-5011, US v. Kaufman, (DC CT) 127 AFTR 2d ¶2021-342, and US v. Giraldi, (DC NJ) 127 AFTR 2d ¶2021-510)

Ms. Boyd had a financial interest in multiple financial accounts in the United Kingdom during 2010. She was required to report these accounts on a timely-filed FBAR, but she did not.

The IRS found that that she had committed 13 non-willful violations of the FBAR reporting requirements, i.e., one for each account she failed to report. And the IRS assessed a penalty totaling more than $10,000, for the 13 violations.

The Court of Appeals for the Ninth Circuit, in reasoning that was similar to the reasoning in Bittner, Kaufman, and Giraldi, reversed the district court and found that the FBAR non-willful penalty applies per form, not per account. Therefore "the maximum penalty for such a violation shall not exceed $10,000."

Read more at: Tax Times blog

According to Law360, the IRS underestimated the income that the top 1% of earners fail to report to the agency in its random audit program, finding they fail to report more than 20% of their income, according to a paper released on March 22,2021.

The paper was prepared by researchers at the National Bureau of Economic Research in conjunction with researchers at the Internal Revenue Service. They examined the agency's National Research Program, which conducts the random audits, between 2006 and 2013 and found that those examinations often don't uncover the full extent of wealthy individuals' tax avoidance.

The report estimated that about 21% of the top 1% of earners' income goes unreported in the program, almost a third of which can be attributed to "sophisticated evasion" that is undetected by the agency's random audits. The share of taxpayers' income that goes unreported is greater for upper-income earners, most likely due to a lack of IRS information on foreign bank accounts and resources at the agency to examine more complex tax planning, according to the report.

"Offshore tax evasion goes almost entirely undetected in random audits," according to the report.

The wealthiest Americans are able to evade paying their full share of taxes because the IRS' random audit process isn't equipped to examine more complicated pass-through entities, according to the report.

The authors noted that the IRS might be limited in the resources needed to conduct audits of high-income earners who may have engaged in complex tax planning. They also said that conducting those kinds of examinations can be costly, whether they lead to litigation or a more strenuous audit process. Those factors "can pose practical limits on the extent to which the tax authority can pursue these types of tax evasion by high-income people," according to the report.

The IRS should invest in new audit tools that could help the agency uncover unreported income in the most complex scenarios involving wealthy taxpayers, as that may help the agency "generate substantial tax revenue," the report said.

The report detailed how wealthy taxpayers may be avoiding taxes through foreign bank accounts and pass-through entities. But there could be other ways that high-income earners evade taxes, such as the use of syndicated conservation easements or microcaptive insurance schemes, the report said.

"The potential existence of many more such schemes underscores the main point of our theoretical results, that we should expect sophisticated evasion to be concentrated at the top of the income and wealth distribution," the report said.

Another group published a report that found audits of high-income individuals and corporations by the IRS to be at an all-time low. The Transactional Records Access Clearinghouse, a research organization associated with Syracuse University, said less than two out of every 100 taxpayers reporting more than $1 million of income were audited last year. The group attributed the decline in audits to fewer revenue agents at the IRS.

 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) 

Read more at: Tax Times blog

According to Law360, a New Hampshire man cannot block the Internal Revenue Service from obtaining his records from cryptocurrency platforms because it would unlawfully impede the collection of tax, a federal judge said on  3/23/21 in dismissing his case challenging the agency's summons.

James Harper cannot force the IRS to expunge records it obtained on his accounts with Coinbase or block the agency from seeking information on his digital currency holdings from other platforms because it would prevent the U.S. from assessing or collecting federal taxes, which is prohibited by the Anti-Injunction Act, U.S. District Judge Joseph A. DiClerico Jr. said in an order.

"The effect of Harper's requested declaratory and injunctive relief would be to prevent the IRS from assessing Harper's or others' taxes using the information it has obtained through the John Doe third-party process," Judge DiClerico said.

In August 2019, Harper was one of more than 10,000 digital currency owners who received letters from the IRS outlining that the agency obtained information on their digital currency holdings without specifying any wrongdoing. The letters were received as the federal tax agency began examining potential reporting errors or omissions by digital currency owners on their tax returns.

Harper originally sued the IRS in July, claiming the agency violated his constitutional rights when it obtained personal financial information related to his digital currency accounts directly from third parties.

Over the course of a few years, Harper used the Coinbase, Abra and Uphold cryptocurrency exchanges to hold and liquidate his bitcoin holdings, according to court documents. The exchanges are not named defendants, but the complaint said they might have violated their terms of service by providing Harper's financial records to the IRS without a "valid subpoena, court order or judicial warrant based on probable cause."

Harper said in his initial complaint he disclosed all his trades and paid all relevant taxes on his digital currency holdings since he first invested in bitcoin in 2013. He argued the IRS obtained financial information from thousands of taxpayers holding digital currency without first obtaining a warrant or lawful subpoena.

Harper argued that the IRS violated his rights under the Fourth and Fifth Amendments of the U.S. Constitution by demanding his information from third parties without any specific suspicion of wrongdoing and doing so without notifying him or allowing him to challenge the seizure of such property, according to court documents.

Harper asked the court to order that the IRS expunge the information it received on his digital currency accounts from its summons, award him money damages and grant injunctive relief against the agency, according to the complaint.

In his Tuesday order, Judge DiClerico said Harper's claim that he paid all taxes related to his digital currency holdings was unfounded after he noted in his complaint the IRS might have obtained information in its summons that could lead to assessment of additional tax liabilities.

The summonses were also issued to determine whether taxpayers who may hold digital currency are complying with federal tax laws, which the court found to be a legitimate purpose.

The court also found Harper's arguments too broad to prove that any of the IRS officials named in his suit should be liable for money damages related to their involvement in issuing the summons. The judge dismissed those claims.

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) 

Read more at: Tax Times blog

Some cryptocurrency investors are receiving a new round of letters from the Internal Revenue Service telling them that their federal tax returns don’t match the information received from virtual currency exchanges, a new front in the agency’s burgeoning scrutiny of the industry.

 
The letters acknowledge that trading exchanges, not the taxpayers, may have made the errors.
 
The letters are a fresh signal that the IRS is increasing its focus on cryptocurrency tax compliance, after first being slow to stay abreast of the growing industry.
 
The agency’s top criminal chief has described digital and virtual currencies as a “significant threat” to tax collection and said the agency will soon announce criminal tax evasion cases.
 
In 2017, the IRS won a landmark lawsuit that required digital currency exchange Coinbase to hand over data on customers who bought or sold at least $20,000 in cryptocurrency from 2013 to 2015.

The letters, which accountants say clients began receiving in recent weeks, are in addition to mailings the IRS began sending to more than 10,000 investors warning that they may owe taxes on cryptocurrency transactions.

Some letters told recipients that they may be unaware of their tax obligations and urged them to file amended or delinquent returns. A harsher version gave other recipients a deadline to respond in writing and disclose crypto dealings from 2013 through 2017.

Unlike its release of the three letter types, the IRS didn’t formally announce its mailing of the latest letters. Instead, a page about what the latest letters mean and require appeared on the agency’s website.

"We Received Information From A Third Party (Such As Employers Or Financial Institutions) That Doesn’t Match The Information You Reported On Your Tax Return,"

the website says.

 

It adds that “this discrepancy may cause an increase or decrease in your tax, or may not change it at all.”

The latest letters are “unusual, because they are targeting a class of investors. The first volume of letters were ‘warning’ letters. Now it’s the IRS saying, we’ve got the records and they do not match what you have reported on your tax returns.

A spokesman for the IRS, who requested anonymity because of agency rules, said that the latest letters will go out to a taxpayer any time the agency detects a mismatch between the trading profits or losses that taxpayers report on their returns and what third parties report to the IRS through forms known as 1099-B.

The person declined to say how many crypto taxpayers had received the latest letter, but added that they typically go out one or two years after a taxpayer has filed a return.

The IRS deemed crypto assets to be property rather than currency in 2014, the last time its only substantive guidance came out. That means the agency taxes crypto profits and losses like those for stocks, at capital gains rates.

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) 

 

Read more at: Tax Times blog