Monthly Archives: April 2021

The Treasury and the IRS released on April 30, 2021 updated early drafts of new Schedules K-2 and K-3 for Forms 1065, 1120-S, and 8865 for tax year 2021 (filing season 2022). The schedules are designed to provide greater clarity for partners and shareholders on how to compute their U.S. income tax liability with respect to items of international tax relevance, including claiming deductions and credits.

The early release drafts of the schedules are intended to give a preview of the changes before final versions are released.  The release of an early draft of the instructions for the schedules is planned for this summer.

The redesigned forms and instructions will also give useful guidance to partnerships, S corporations and U.S persons who are required to file Form 8865 with respect to controlled foreign partnerships on how to provide international tax information.  The updated forms will apply to any persons required to file Form 1065, 1120-S or 8865, but only if the entity for which the form is being filed has items of international tax relevance (generally foreign activities or foreign partners).

The Changes Do Not Affect Partnerships And S Corporations With No Items Of International Tax Relevance.

The Treasury Department and the IRS released prior drafts of Schedules K-2 and K-3 for the Form 1065 in July 2020 and engaged with stakeholders to solicit input on the changes.  Helpful comments were received, and changes have been made to the schedules and instructions as appropriate.

To promote compliance with adoption of Schedules K-2 and K-3 by affected pass-through entities and their partners and shareholders, the Treasury Department and the IRS intend to provide certain penalty relief for the 2021 tax year in future guidance. 

Read more at: Tax Times blog

The IRS has updated its Practice Unit on the reasonable cause defense to certain penalties. This Practice Unit provides auditors with information on how to determine whether a taxpayer has a reasonable cause defense to a proposed penalty. 

Certain penalties are not imposed if the taxpayer can prove “reasonable cause” for the return position giving rise to the penalty (“reasonable cause defense”). Penalties that have a reasonable cause defense include:

• Most accuracy related penalties under Code Sec. 6662, and the civil fraud penalty under Code Sec. 6663. (Code Sec. 6664(c))

• The Code Sec. 6662A reportable transaction understatement penalty (when the transaction is adequately disclosed). (Code Sec. 6664(d))

• The penalty for erroneous claims for refund or credit. (Code Sec. 6676(a))

• Failure to file and/or failure to pay under Code Sec. 6651. (Code Sec. 6651(a)(1))

• Understatement of taxpayer's liability by return preparer under Code Sec. 6694. (Code Sec. 6694(a)(3))

In some cases, to take advantage of the reasonable cause defense, the taxpayer must also show that they acted in good faith or that their failure to comply was not due to willful neglect. 

Whether the taxpayer has a reasonable cause defense to a penalty depends on which penalty the IRS seeks to impose. However, in general, reasonable cause depends on all the facts and circumstances. 

According to the Practice Unit, an auditor should determine whether the taxpayer acted with reasonable cause on a case-by-case basis. The most significant of the facts and circumstances the auditor must consider is the taxpayer’s effort to report their proper tax liability.

• Example 1. On their return, a taxpayer reports amounts from an erroneous information return but does not know the amounts are incorrect. This type of error may indicate that the taxpayer has reasonable cause for reporting the incorrect amounts on their return. However, there must be additional facts suggesting the taxpayer made a reasonable effort to ascertain the correct amounts. 
• Example 2. On their return, the taxpayer makes an isolated computation or transposition error. This type of error may indicate the taxpayer’s good faith effort to report their proper tax liability. 

Other factors for an auditor to consider are the taxpayer’s experience, knowledge, education, and whether the taxpayer relied on the advice of a tax advisor.

When the auditor considers a taxpayer’s reliance on the advice of a tax advisor, the auditor should consider whether:

1. The taxpayer's reliance on the advice of a tax advisor was objectively reasonable.
2. The taxpayer provided their tax advisor with all the necessary information to evaluate the tax matter.
3. The tax advisor had enough knowledge and expertise related to the tax matter to provide advice.
4. The taxpayer "actually relied" on their tax advisor's advice.
5. The taxpayer exercised the care that a reasonably prudent person would have used under the circumstances when relying on the tax advisor's advice.

The taxpayer is responsible for timely filing and payment, and this responsibility cannot be delegated. However, an auditor should consider factors that might excuse late filing or late payment such as whether the taxpayer's records were unavailable (for example, due to disaster or casualty) or whether there was a law change of which the taxpayer could not reasonably have been expected to be aware.

In addition, a taxpayer's forgetfulness is not generally a basis for reasonable cause; however, it could be if there is a medical reason for such forgetfulness (e.g., the taxpayer has dementia).

Read more at: Tax Times blog

Read more at: Tax Times blog

According to Law360, the purported operator of cryptocurrency mixing service Bitcoin Fog was arrested in Los Angeles on April 27, 2021and accused of laundering hundreds of millions of dollars worth of bitcoin.

Roman Sterlingov, a citizen of Russia and Sweden, is facing money laundering and unlicensed money transmission charges in Washington, D.C., federal court for running what the FBI and IRS say is an "illicit bitcoin money transmitting and money laundering service."

According to the government, Bitcoin Fog operates as a "tumbler" or "mixer" service, which allows customers to send bitcoin to recipients in a way that conceals the source of the cryptocurrency. The process disassociates incoming bitcoin from certain bitcoin addresses or transactions and then commingles that bitcoin with other incoming bitcoin prior to conducting further transactions.

This Procedure Allows Criminals To Launder Their Funds
By Concealing The Source And Location
Of Their "Dirty" Bitcoin, Authorities Say.

Bitcoin Fog, one of the original bitcoin tumbler services operating on the darknet, has been for around a decade and has processed total transactions valued at roughly $336 million, according to a statement of facts filed by an IRS special agent. The darknet is a hidden network of websites that are not accessible through normal means, but rather through browsing tools such as Tor.

The largest senders of bitcoin through Bitcoin Fog have been illicit darknet markets, the government says, such as Silk Road, Agora, Evolution and AlphaBay, which trafficked in drugs and other illegal goods.

"Investigators obtained records of Sterlingov's true-name accounts at several cryptocurrency exchanges," the statement of facts says. "Sterlingov's accounts revealed the vast majority of cryptocurrency deposited into his accounts was originally sourced and traced back to Bitcoin Fog clusters."

Neither Sterlingov nor Bitcoin Fog have registered with the Treasury Department as a money services business despite conducting transactions with U.S. customers, as required under federal law, the government says.

Sterlingov made his initial appearance in L.A. federal court on April 27, 2021, according to the U.S. Attorney's Office for the Central District of California, and his detention hearing has been continued to May 4. He remains in federal custody.

Investigators say based on the bitcoin tumbler's transaction activity over time, Sterlingov would have made about $8 million in commissions if he cashed out the administrative fees around the time of the transactions.

However, given that the value of bitcoin has skyrocketed since Bitcoin Fog launched in the fall of 2011, going from $2 per bitcoin to a current value of $50,000, Sterlingov's profits that were kept in bitcoin would have appreciated significantly, according to the government. The current value of the Bitcoin Fog "cluster," including customer funds under Sterlingov's control as well as his own money, is almost $70 million, investigators say.

The case is U.S. v. Sterlingov, case number 1:21-mj-00400, in the U.S. District Court for the District of Columbia.

 Have a Virtual Currency Tax Problem?

Read more at: Tax Times blog