Monthly Archives: March 2022

In FS-2022-18 the IRS spotlights IRS Criminal Investigation (CI) serves the American public by investigating potential criminal violations of the Internal Revenue Code and related financial crimes in a manner that fosters confidence in the tax system and compliance with the law. 

It is the only federal law enforcement agency authorized to investigate federal criminal tax violations and pursues related financial crimes, such as money laundering, currency violations, and terrorist financing. 

In recent years, CI has significantly expanded its presence in areas of emerging importance. Since 2015, it has built up a world-class cybercrimes program to address the exponential growth of cybercrimes impacting the tax, financial, and economic systems of the U.S. This group successfully seized more than $3.5 billion of illicit cryptocurrency in fiscal year 2021, and they have already seized more than this amount in fiscal year 2022.

 

A snapshot of recent IRS CI work 

1. Russian Bank Founder Sentenced For Evading Taxes
 

In 2013, when the value of Oleg Tinkov’s investment in his Russian bank’s stock rose to over $1 billion, he quickly renounced his U.S. citizenship and substantially understated his wealth on tax filings with the IRS to avoid exit taxes. Expatriation law requires that those with a net worth of more than $2 million pay taxes on their assets as if they were sold on the day before expatriation, but despite the value of his post-Initial Public Offering assets rising to above $1.1 billion, Tinkov claimed he did not have assets above $2 million. In addition, he did not report any gain from the constructive sale of his property worth more than $1.1 billion, causing a tax loss of nearly $250 million. A year after his expatriation, Tinkov was the 15th richest oligarch in Russia, with an estimated net worth of over $8 billion.

 

Tinkov was indicted in September of 2019 for willfully filing false tax returns following an investigation by CI agents, and he was arrested in February 2020. As part of his restitution, Oleg Tinkov paid $508,936,184, which is more than double the amount he sought to escape paying to the U.S. Treasury through renouncing his U.S. citizenship and concealing from the IRS large stock gains, which he knew were reportable. This payment includes $248,525,339 in taxes, statutory interest on that tax, and a nearly $100 million fraud penalty.

2. $1.3 Billion Tax Shelter Scheme

 

IRS-CI’s primary resource commitment involves the investigation of tax crimes, which constitute over 70% of investigative time by CI agents. Resources are especially focused on unpacking complex structures that facilitate abusive tax schemes by wealthy individuals and corporations.

 

To take a recent example, in February 2022, a grand jury returned an indictment of seven individuals with conspiracy to defraud the United States and other crimes because of their promotion of fraudulent tax shelters involving syndicated conservation easements for at least two decades. The co-conspirators allegedly guaranteed a 4-to-1 tax deduction ratio to their clients and invoked various schemes to value easements as necessary to deliver the ratio promised. The indictment charged that these were abusive tax shelters lacking in economic substance and further contended that the defendants helped clients claim illicit charitable deductions after the conclusion of tax years through backdating documents. In total, the defendants allegedly sold over $1.3 billion in false and fraudulent tax deductions through their crimes.

 

Over the course of a four-year investigation, IRS-CI agents dedicated thousands of hours to unpacking the schemes these perpetrators allegedly facilitated to help their wealthy clients skirt tax obligations. These kinds of investigations involve incredibly complicated work for the CI team, as the tax shelters are often intentionally designed to impede the ability of the IRS to detect their fraudulent nature, including through appraisals that overinflate land values and fake votes among participants meant to create the illusion that the transactions are legitimate real estate investment opportunities and not abusive tax shelters. With additional resources and investigative support, IRS-CI could reduce the investigative time and ensure that criminals are held accountable quicker.

 

3. $3.6 Billionof Stolen Cryptocurrency Seized In FY 2021 (Already Surpassed In FY 2022)

 

Over the last several years, CI has observed significant growth in the number of criminals using the cyber environment for fraud and illicit transactions. This criminality is made possible by an underlying technological ecosystem that facilitates remaining anonymous and eluding law enforcement while concealing financial transactions, ownership of assets, or other evidence. The possibility that these technologies will be deployed to facilitate sanctions evasion is also top-of-mind for CI investigators at present.

 

In order to navigate this landscape, CI must deploy sophisticated blockchain analysis tools to unweave darknet transactions. For example, following the prosecution of Silk Road creator Ross Ulbricht in 2015 for several criminal counts, CI agents were tasked with the persistent investigation of stolen funds from this and other dark net marketplaces. As a result of their determined and resolute action, CI agents seized approximately $1 billion of Bitcoin in 2020. Finding these funds required the efforts of several CI agents and contractors, including the use of third-party analytic tools to trace assets to individuals who had hacked Silk Road to pocket illicit gains.

 

Even more recently, in February of this year, two individuals were arrested for laundering cryptocurrency stolen during a 2016 hack of a digital asset exchange. Thus far, $3.6 billion has been seized by CI agents who managed to track unauthorized transactions that sent stolen Bitcoin from this hack to digital wallets under the control of the launderers. The defendants allegedly employed numerous complex techniques to hide these funds, including automating transactions to quickly move funds and then deposit them into a variety of currency exchanges and darknet markets and withdrawing funds to break the chain of transactions and impeded detection.

 

Despite this complexity, today CI currently devotes only about six percent of its investigative time to cybercrimes/crypto currency, so it is just scratching the surface of the amount of criminal activity that is being detected.

Click IRS-CI Highlights for more examples of the types of cases in which CI has led or been significantly involved in over the last few years.

 

Given the magnitude of the challenge it faces, it is imperative for CI to be adequately funded to investigate and prosecute criminals. CI, like the rest of the IRS, is in desperate need of stable, long-term funding to develop a deeper understanding of the global financial landscape and trace and seize assets that today are in the hands of criminals.

Failed To File or Pay Your Taxes?

Read more at: Tax Times blog

The U.S. Tax Court has held in AptarGroup Inc., 158 TC No. 4, that the American shareholder of a controlled foreign corporation (CFC) had to use the same method to characterize the stock of the CFC that the corporation used to apportion its own interest expense.

Read more at: Tax Times blog

According to Law360, Despite a continuing trend of employees working from home during the pandemic, congressional lawmakers have shown little interest this year in expanding a popular tax deduction to telecommuters forced to abandon their office cubicles.

Tax pros and Capitol Hill tax aides say the renewal of the home office deduction is not on Congress' radar, especially since the provision's elimination was tied to eliminating all other miscellaneous deductions and doubling the standard deduction as part of the GOP's 2017 Tax Cuts and Jobs Act.

The tax law has had the dual impact of providing larger tax refunds for American workers while also lowering the number of Internal Revenue Service audits of tax returns claiming the deduction under Internal Revenue Code Section 67(g), they said.

Under the TCJA, Republicans eliminated the miscellaneous itemized deduction from 2018 to 2025, thereby raising $668.4 billion in revenue. Before that change, employees with home offices were allowed to deduct eligible work-related expenses above 2% of their adjusted gross income. Eligible expenses included legal fees, professional subscriptions, uniforms, medical examinations required by an employer, tools and job search costs.

Even though the deduction isn't currently available to teleworkers, who have used their own money to make their remote home offices workable for their employer, other taxpayers are still benefiting from the tax break. 

Self-employed business owners, independent contractors and gig workers never lost their ability to write off their home office expenses even as federal and state governments began mandating that office buildings close and employees work from home.

Rep. Joseph Morelle, D-N.Y., said he is working to add the tax deduction back to the code for employees who work from home.

So far, Morelle's bill hasn't drawn any lawmakers willing to co-sponsor it and the House Ways and Means Committee has not considered the legislation. 

If the deduction is restored, it could prove useful to millions of American workers who are growing used to not traveling outside their homes for work.

Read more at: Tax Times blog

The IRS will see a $675 million funding increase in fiscal year 2022 that will allow it to focus more resources on providing taxpayer services under a $12.6 billion budget that President Joe Biden is expected to sign by Tuesday. 

House lawmakers voted to give the agency its largest budget increase in two decades in an early morning vote Wednesday and the Senate put its stamp of approval on the budget legislation a day later, sending the measure to the White House.  

The Measure Includes A Hefty 6% Increase Overall
For The IRS Although That Figure Falls Short Of The
Original 14% Increase Originally Proposed.

The measure does not include a tax title or provisions extending retirement security legislation.

The Internal Revenue Service budget was included in a $1.5 trillion omnibus appropriations bill, or H.R. 2471, to fund operations of the entire federal government through the end of September. Biden is expected to sign the legislation next week, a White House spokesperson said, adding that he plans to sign a separate, short-term continuing resolution bill Friday to keep the government open through March 15. 

The House voted 260-171 to pass the bill, and the Senate passed it in a 68-31 vote.

• The IRS budget would direct $2.7 billion to fund taxpayer services, which includes processing tax returns and answering telephone inquiries. That amounts to $225 million more than the last fiscal year, but $160 million less than what Biden and the Democrats had sought.
• The budget would also provide $5.5 billion for enforcement activities, roughly $173 million more than in 2021; $4.1 billion for operational support, about $172 million more than last year; and $275 million for business systems modernization, about $52 million more.

The IRS budget also includes several policy directives added by lawmakers to increase their oversight of the agency's activities.

• Within 30 days of Biden signing the legislation, the IRS would have to brief Congress on the status of the backlog in tax returns and correspondence, and provide a strategy and time frame for corrective action. 
• Within 60 days of the bill's signing, the IRS would have to brief Congress on the tax gap, focusing on its composition and the taxpayers that are neglecting to pay their tax liabilities. It would also have to provide a report on how the agency determines its audit policies.

The legislation also would allow the agency to increase funding for taxpayer services by transferring funds from enforcement and operation support activities. It would also give the agency the authority to hire additional staff to work on the backlog.

Have an IRS Tax Problem?

 

Read more at: Tax Times blog