Yearly Archives: 2021

On Jan. 1, 2021, Congress enacted the Fiscal Year National Defense Authorization Act, which includes the Corporate Transparency Act (CTA), aimed at disclosing the identities of individuals, businesses and similar entities that use the U.S. financial system for legitimate, legal purposes or for illicit activities, such as hiding wealth from taxing authorities or engaging in money laundering. Under this new law, “reporting companies” will be required to file with the Financial Crimes Enforcement Network (FinCen) detailed reports containing the names, addresses, passport numbers and other personally identifiable information of all U.S. and foreign beneficial owners who have certain interests in those entities. An entity’s failure to report beneficial ownership information can result in fines of as much as $10,000 and up to two years in prison.

Over the past several years, the U.S. has gained a reputation around the world as one of the best jurisdictions for wealthy families to maintain privacy and keep their identities secret. While the impact of the CTA on that reputation remains to be seen, it is important to recognize that secrecy and anonymity are not necessarily nefarious objectives. Rather, most companies formed in the United States have been formed for perfectly legitimate business and asset-protection purposes. In many countries, individuals seek financial secrecy not to evade taxes or launder money but to provide for their personal safety and security. Knowledge of financial information in the wrong hands can put individuals and their families in danger.

WHO IS A BENEFICIAL OWNER?

The CTA defines “beneficial owners” of required reporting companies as individuals who directly or indirectly:

• exercise substantial control over an entity, or
• own or control at least 25 percent of the entity’s total ownership interests.

Specifically excluded from the definition of beneficial ownership are 1) minor children; 2) individuals acting as intermediaries, custodians or agent on behalf of another individual; 3) individuals acting as employees who assume control or ownership interest in the company solely due to their employment status; 4) individuals whose only interest in the entity is through a right of inheritance; and 5) creditors of the reporting entities that do not meet the substantial control and minimum ownership interest definition of a beneficial owner.

WHAT TYPES OF ENTITIES MUST MEET REPORTING REQUIREMENTS?

The law broadly defines a reporting company as a corporation, limited liability company or similar entity “created by the filing of a document with a secretary of state or similar office under the law of any U.S. state or Indian Tribe” or “formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a State or Indian Tribe.”

Under this definition, foreign entities that have not registered to do business in any state may be exempt from the reporting requirement. This will require further evaluation of an entity’s legal structure. Moreover, the law specifically excludes from the reporting requirements 1) most non-profits; 2) most financial institutions, including banks, credit unions and financial investment and securities trading firms; as well as 3) entities with a physical presence in the U.S. that employ more than 20 workers and report more than $5 million in annual revenue on their U.S. tax returns.

The treatment of trusts under the CTA is generally unknown and will likely remain so until the U.S. Treasury Department issues regulations. While not likely to be considered a reporting company, a trust is subject to being disclosed as the beneficial owner of a reporting company. It is unclear whether the trust, its trustee or its beneficiaries will be considered as the beneficial owners.

WHEN MUST COMPANIES BEGIN CTA REPORTING?

The CTA will become effective when the Treasury Department issues regulations, which is mandated to occur no later than one year after the law’s enactment on Jan. 1, 2020.

Once the CTA is in force, new entities will need to provide the required information at the time of formation or registration. Existing companies will have two years after the regulation’s effective date to submit the required information. If there is a change to an entity’s reported information, the reporting company will need to file an update with FinCen within one year from the date of the change.

DISCLOSURES OF INFORMATION

FinCen will maintain a private and encrypted database of reported beneficiary information, which it is not permitted to disclose except when a request is made through “appropriate protocols” from 1) a federal agency engaged in national security, intelligence or law enforcement activity, or state or local law enforcement agency pursuant to a court order; 2) a federal agency on behalf of a law enforcement agency, prosecutor or judge of another country under an international treaty or other agreement or, if not subject to a treaty or other agreement under other special procedures; 3) a financial institution subject to customer due diligence requirements with the consent of the reporting company; or 4) a federal functional regulator or other appropriate regulatory agency.

For individuals living in jurisdictions where anonymity is essential for purposes of personal safety and security, the risk of disclosing beneficial owner information will have to be evaluated when considering whether to continue to use U.S. entities for tax planning.

WHAT TO DO NOW?

Applicable entities will not need to begin complying with the CTA’s beneficial ownership reporting requirement until as early as January 2022. However, it is not too early for taxpayers to begin evaluating their exposure to the new law and gathering the specific information they will need to report to FinCen when the regulations go into effect, including the following details about each beneficial owner:

• Full legal name
• Current address (business or personal)
• Date of birth
• Acceptable identifying number, including those contained on a driver’s license issued by a U.S. state, a U.S. passport or a passport issued by a foreign country.

In planning for CTA compliance, non-resident aliens (NRAs) with beneficial ownership interests in U.S. entities should meet with their CPAs and advisors to assess their short- and long-term goals against the new law and consider the impact of restructuring their ownership interest for maximum tax efficiency.

Have IRS Tax Problems?

     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 improving the Internal Revenue Service's ability to combat high-income tax evasion could lead to $2.3 trillion in additional tax revenue over the next 20 years, according to a report published Thursday by the U.S. Treasury Department.

Boosting the budget for the IRS, allowing the agency to use third-party information reporting to verify businesses' income, overhauling antiquated agency technology and regulating paid tax preparers would all help close the tax gap, or revenue lost due to noncompliance, according to Treasury's report.

"Working to close the tax gap reflects a commitment to ending our two-tiered tax system, one where most American workers pay their full obligations, but high earners who accrue income from opaque sources often do not," the report said. 

The tax enforcement initiatives, if enacted, would lead to $700 billion in additional tax revenue raised over the next decade and $1.6 trillion in the second decade, according to Treasury's report. Those additional revenues in the first decade equate to about a 10% reduction in the tax gap, Treasury said.

Treasury released the report after President Joe Biden unveiled his American Families Plan last month, which included the tax enforcement initiatives and higher taxes on wealthy individuals to help offset plans to expand tax credits for child care, working adults and health insurance.

Biden's tax enforcement plan calls for an $80 billion investment in the IRS over the next 10 years to hire new enforcement officers, overhaul the agency's information technology infrastructure and improve taxpayer services, according to the report. Those investments would be directed toward combating tax evasion by those earning more than $400,000 in income, Treasury said.

He Increase In The IRS Budget Would Represent A Nearly 40% Increase Over Its 2011 Levels But Is "Necessary" Given The Breadth Of Responsibilities That The Agency Has, Which Have Only Increased Over Time, Treasury Said.

Biden's plan also calls for financial institutions to increase the information they report to the IRS on business income beginning in 2023, but those new reporting requirements wouldn't apply to smaller entities that fall under a "gross flow" threshold, according to the report. The new reporting regime would apply to banks and other financial institutions, including cryptocurrency exchanges, Treasury said.

"Specifically, the annual return would report gross inflows and outflows on all business and personal accounts from financial institutions, including bank, loan and investment accounts but carve out exceptions for accounts below a low de minimis gross flow threshold," the report said.

Allowing the IRS and Treasury to regulate paid tax preparers would also improve tax compliance, as oftentimes those tax preparers who are unregulated "make costly mistakes" inaccurately reporting income to the agency, the report said.

Senate Finance Committee Chair Ron Wyden, D-Ore., told Law360 in a statement that he is working on legislation to implement pieces of Biden's tax enforcement plan.

"The Treasury Department has put forward a comprehensive plan to rebuild the IRS and crack down on tax cheats who are stealing billions from the American people," Wyden said. "Increased funding and staffing, information reporting, and an emphasis on pass-through businesses are critical to making real progress in collecting taxes owed."

A spokesperson for the House Ways and Means Committee Democrats said that they support Biden's call for increasing the IRS' budget, and would work with the administration to develop legislation in accord with its tax enforcement plan.

Have IRS Tax Problems?

     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

J. Russell George, the Treasury inspector general for tax administration, testified before a Senate Finance Committee panel on May 11, 2021 to address the persisting problem of the tax gap.

The title given to the hearing was "Cl
osing the Tax Gap: Lost Revenue from Non-Compliance and the Role of Offshore Tax Evasion."

At the outset of his testimony, George made clear the issue warrants serious and immediate attention. "Finding effective solutions to address the tax gap and its components would yield substantial additional tax revenue," he said.

The tax gap is defined as the difference between the estimated amount taxpayers owe and the amount they voluntarily and timely pay for a tax year. The gross tax gap, which is the amount that is owed by taxpayers before collections resulting from IRS enforcement actions and other late taxpayer payments are taken into account, is estimated to be $441 billion annually, George noted.

According to George, the underreporting of income taxes comprises the largest component of the tax gap at $352 billion annually. Individual taxpayers are responsible for the largest share of the underreporting tax gap at $245 billion. 

However, Russell waved a cautionary flag in his testimony. "The tax gap estimates are generally outdated because they are for tax years of a decade earlier, so their usefulness may be limited," he said. "Recently, the IRS commissioner testified that he believes the annual tax gap is at least $1 trillion," George added.

George offered a series of recommendations which, in his opinion if taken together, would significantly improve tax compliance, including: 

• more effectively prioritizing high-income taxpayers; 
• a stronger impetus by the IRS Large Business and International Division to identify corporate non-compliance; 
• addressing the negative impact of Internet platform companies on tax compliance; 
• dealing with the ongoing problem of adequate resources for IRS and its potential impact on enforcement revenue (he highlighted the reductions in most types of examinations and the nonpayment of taxes owed); and 
• improving international tax compliance.

Have IRS Tax Problems?

     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

On March 24, 2021 we posted Some Cryptocurrency Investors Are Receiving A New Round of Letters From The Internal Revenue Service, where we discussed that 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 and on April 5, 2021 we posted In a 2nd Crypto Summons the Judge Orders US To Justify Broad Doc Request, where we discussed that the IRS found 5 US taxpayers used this cryptocurrency for their noncompliance, combined with a dearth of third-party reporting in cryptocurrency generally, has led the IRS to believe that there are more Kraken users who aren't compliant with their cryptocurrency tax reporting obligations, the government said.

Now the IRS recently selected TaxBit, subcontracting under DPI Inc., to provide data analysis and tax calculation support for taxpayers with cryptocurrency. TaxBit provides tax automation software to enterprises, consumers, and government entities.

"This is a milestone moment for the cryptocurrency industry. It indicates regulators are embracing the asset class, but doing so in a way that ensures a straightforward approach to conform with existing regulations. We believe this is an important step for the enablement of widespread cryptocurrency adoption." Austin Woodward, Co-Founder and CEO of TaxBit.

TaxBit’s Tax Automation Software Is Already Being Used By Companies, Consumers And Other Government Agencies, But The Deal With The IRS Represents A Major Step In Demonstrating How Seriously The IRS Is Taking Tax Compliance For Users Of Digital And Virtual Currencies Like Bitcoin, Ether And Dogecoin.

But With The Taxpayers Themselves, As Well As The CPAs
And Attorneys Who Represent Them During Audits.

The IRS has been cracking down on cryptocurrency users who fail to report their gains, adding a question to the top of the 1040 form in recent years asking if any time during the previous year, they received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency. 

The agency won a high-profile court case in 2018 against the popular crypto exchange Coinbase to get access to their customer information through John Doe summonses. Last week a federal court in California authorized the IRS to serve a John Doe summons on another popular cryptocurrency exchange, Kraken, and its owner Payward Ventures. TaxBit could be finding itself poring over the information made available through these efforts. However, much of it will come from the standard processes used by the IRS for selecting returns that set off red flags for further examinations and audits.

TaxBit will be helping the IRS scrutinize returns going back several years. “It really is case by case,” said Wilks. “These really can range from 2016 or 2017 and forward. Typically, if you think about an IRS audit cycle, they don’t start auditing taxpayers until usually a couple of years after they’ve filed, so these are not necessarily audits that are coming from 2020 or 2019 activity. These are really from the last few years.”

The Software Should Help Automate The Process
For IRS Auditors of Determining How Much Money
Was Made From Crypto Transactions.

It Will Generate A Report That Will Go To The IRS,
and In Turn To Taxpayers.

 “They’re just looking to get an accurate view of the gains and losses,” Wilks explained. “If you imagine a CPA trying to get through a million lines of data and calculating gains and losses using a FIFO methodology or something, that would take an unrealistic amount of time, so the idea is that we have technology that can do that in a matter of minutes. 

But beyond that we have CPAs and attorneys who work here and who can then look at that information and we can get further insights into what may be missing. This report is provided to the IRS, but it’s also reported to the taxpayer, so it’s a resource on both sides to help them make sure that they’re getting a complete picture.”

TaxBit expects  to start receiving the initial data and to begin sending the reports by early next year. “We’re Actually Expecting Them Any Day Now At This Point, So It Will Be Within The Next 12 Months,” Said Wilks.

Have an IRS Cryptocurrency 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) 

Sources:

accountingTODAY

TaxBit

Read more at: Tax Times blog