Yearly Archives: 2021

A Florida resident should have known about the requirement to report his offshore bank accounts to the Internal Revenue Service, U.S. government attorneys told a Miami federal court, contending he should hand over unpaid penalties for late filings. (U.S. v. Slochowski, case number 1:21-cv-22596, in the U.S. District Court for the Southern District of Florida).

Avishai Slochowski either knew or should have known about his obligation to file a foreign bank and financial account form, or FBAR, for Swiss and Peruvian accounts he held from 2005 through 2012, the government told the court in a complaint Wednesday. Government attorneys asked the judge to order Slochowski to pay slightly more than $888,000 in civil penalties for willfully failing to timely file FBARs, including interest and late payment penalties.

Slochowski applied in 2014 for the IRS' Offshore Voluntary Disclosure Program, designed for willful nonfilers to come forward in exchange for protection from potential criminal liability and terms for resolving civil tax and penalty obligations, according to the government. As part of the program, Slochowski filed untimely FBARs and was later removed from the OVDP due to his failure to provide truthful answers regarding his dual U.S.-Peru citizenship, among other matters, the government said.

Read more at: Tax Times blog

The U.S. government urged the Ninth Circuit to not revive a couple's challenge against the 2017 federal tax overhaul's repatriation provision, arguing the pair has mischaracterized the levy on foreign income as an unconstitutional direct tax on property. (Charles G. Moore et al. v. U.S., case number 20-36122, in the U.S. Court of Appeals for the Ninth Circuit).

Government attorneys asked the appellate court to uphold a Washington federal judge's November order that dismissed a tax refund suit brought by Charles and Kathleen Moore, who had contended that the Tax Cuts and Jobs Act 's repatriation provision violated the U.S. Constitution. The Moores argued that the measure was a direct tax on personal property, specifically, their shares in a foreign corporation,  that violated the U.S. Constitution's Sixteenth Amendment, which requires direct taxes to be apportioned based on state population.

In asking the Ninth Circuit to uphold the Washington court's order, the government said the measure is not a tax on property but a tax on U.S. shareholders' income from their controlled foreign corporations, or CFCs. The apportionment requirement under the 16th Amendment does not apply to income taxes, the government said.

As part of the TCJA's shift to a quasi-territorial system, which exempts some worldwide profits of U.S. corporations, Congress enacted a repatriation provision under Internal Revenue Code Section 965. Under this measure, companies would pay a one-time mandatory transition tax on deferred earnings held abroad.

According to the Moores' complaint, filed in September 2019, the Seattle-area couple paid about $15,000 in taxes under Section 965 based on their small stake in a CFC, KisanKraft Ltd., that provides affordable equipment to India's small-scale farmers. In seeking a refund, the Moores said the tax bill was based on earnings retained and invested by KisanKraft, earnings they never received.

The couple cited a U.S. Supreme Court case from 1920 called Eisner v. Macomber, that said a stock dividend was not taxable income because it didn't involve an actual gain realized by the shareholder. According to the Moores, the repatriation tax is "no different from an unapportioned tax on capital itself and equally beyond Congress' power to enact."

In dismissing the couple's case, U.S. District Judge John Coughenour in November found that "subsequent decisions dealing with foreign income have routinely departed from Macomber's realization standard."

The government told the Ninth Circuit the notion that the Constitution requires income to be "clearly realized" before it can be taxed conflicts with court decisions upholding related measures "against similar constitutional attack."

The government added, "the Constitution does not bar Congress from attributing U.S. taxpayers' foreign corporate earnings to them and taxing them on those earnings."  

The government also asked the Ninth Circuit to not revive the Moores' claim that the repatriation provision was the retroactive application of a new tax in violation of the due process clause in the Constitution's Fifth Amendment.

It was reasonable for Congress to apply Section 965 to offshore profits that accumulated after 1986, according to the government's attorneys. They noted that Judge Coughenour also found it was reasonable due to "the shift in international tax law and of the result, which would occur without a transition tax, of allowing previously undistributed CFC earnings to 'escape the imposition of U.S. taxation.'"

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The Internal Revenue Service closed the most recent filing season with more than 35 million in unprocessed tax returns, as the agency’s backlog grew markedly amid a crush of challenges related to the pandemic and economic relief efforts, a government watchdog said Wednesday.

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On August 12, 2019 we posted DC Magistrate Ruled That Willful FBAR Regulations are Invalid, where we discussed that on July 31, 2018 in Norman v. United States, Ct. Fed. Cl. Dkt 15-872, the Court held that the taxpayer Norman was liable for the FBAR willful penalty and this Court rejected the Colliot holding that the FBAR willful penalty was limited to a maximum of $100,000, because the regulations had not been changed to reflect the statutory amendment increasing the maximum FBAR willful penalty and that another DC court has also rejected Colliot & Wadhan and concluded that the Willful FBAR Penalty Not Limited to $100,000 in Rum, (DC FL 8/2/2019) 124 AFTR 2d ¶2019-5113

Here again the Second Circuit in Kahn, (CA 2 7/13/2021) 128 AFTR 2d ¶2021-5043, affirmed a district court decision and has held that statutory changes that increased the penalty for willful failure to file an FBAR applied, and prior regs which are still codified in the Code of Federal Regulations, imposing a smaller penalty did not.

In general, a U.S. person that has a financial interest in or signature authority over foreign financial accounts must file a FinCEN Form 114 - Report of Foreign Bank and Financial Accounts, commonly referred to as an FBAR, if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. 

Under 31 USC § 5321(a)(5)(C), as amended in 2004, the maximum penalty for the willful failure to failure to file an FBAR is the greater of $100,000 (adjusted for inflation) or 50% of the aggregate balance in the accounts that should have been reported in the FBAR at the time of that failure.

But a final reg, reflecting the statutory penalty amount in effect prior to the 2004 amendment, issued by the Treasury in 1987, says that the maximum penalty was merely $100,000 per account. (31 CFR §1010.820(g)(2)) This reg is still codified in the Code of Federal Regulations.

District courts in Texas and Colorado have held that, in view of the Treasury's failure to update the regs, penalties couldn't be imposed in excess of the amounts provided for in regs issued before the 2004 law change authorizing higher penalties. (U.S. v. Colliot, (DC TX 2018) 121 AFTR 2d 2018-1834; U.S. v. Wadhan, (DC CO 2018) 122 AFTR 2d 2018-5208)

The Court of Appeals for the Federal Circuit has disagreed and held that the amendment to the statute superseded the regs which were thus no longer valid. (Norman, (CA Fed Cir 2019) 124 AFTR 2d 2019-6595) Connecticut and Pennsylvania district courts have also held that the penalty cap in the 2004 amended statute is the correct limitation. (U.S. v. Garrity, (DC CT 2019) 123 AFTR 2d 2019-941; U.S. v. Collins, (DC PA 2021) 127 AFTR 2d 2021-854)

A district court ruled that the penalty limitation provided in the 1987 reg was superseded by the 2004 statutory amendment increasing the penalty maximum.

The Court of Appeals for the Second Circuit affirmed the district court's decision. The Circuit Court said that the language of the 2004 amended statute was clear and thus the 1987 reg was not in harmony with the statute. Thus the reg does not apply any more. It cited Iglesias, (CA 2 1988) 61 AFTR 2d 88-1264 ("[a] regulation which does not" implement "the will of Congress as expressed by the statute" and instead "operates to create a rule out of harmony with the statute, is a mere nullity.").

Read more at: Tax Times blog