Monthly Archives: September 2023

According to Law360, in the case Piper Trucking & Leasing LLC v. Commissioner, docket number 20468-21L, the U.S. Tax Court ruled that digitally calculated penalties imposed on employers who fail to file certain tax forms do not require supervisory approval.

The Internal Revenue Service may proceed with its plan to collect penalties assessed to Piper Trucking & Leasing by the agency's combined annual wage reporting program after the company failed to file Forms W-2 and W-3 with the Social Security Administration.

The SSA twice attempted to reach out to the company to remedy the issue, the opinion said, but after the Ohio-based company failed to respond, the SSA referred the matter to the IRS. Using the software, the agency then assessed Piper a penalty under Internal Revenue Code Section 6721(e), an assessment Piper argued was invalid.

Under Section 6751 of the IRC, no penalties shall be assessed unless the initial determination is approved by the immediate supervisor of the person making the decision. 

Read more at: Tax Times blog

In IR-2023-166 The IRS announced sweeping effort to restore fairness to tax system with Inflation Reduction Act funding; new compliance efforts focused on increasing scrutiny on high-income, partnerships, corporations and promoters abusing tax rules.

Capitalizing on Inflation Reduction Act funding and following a top-to-bottom review of enforcement efforts, the Internal Revenue Service announced on  Sept. 8, 2023 the start of a sweeping, historic effort to restore fairness in tax compliance by shifting more attention onto high-income earners, partnerships, large corporations and promoters abusing the nation's tax laws.

The effort, building off work following last August's IRA funding, will center on adding more attention on wealthy, partnerships and other high earners that have seen sharp drops in audit rates for these taxpayer segments during the past decade. 

The changes will be driven with the help of improved technology as well as Artificial Intelligence that will help IRS compliance teams better detect tax cheating, identify emerging compliance threats and improve case selection tools to avoid burdening taxpayers with needless "no-change" audits.

As Part of the Effort, the IRS Will Also Ensure Audit Rates Do Not Increase for Those Earning Less Than $400,000 a Year... 

"This New Compliance Push Makes Good On The Promise
Of The Inflation Reduction Act To Ensure The IRS
Holds Our Wealthiest Filers Accountable To Pay The
Full Amount Of What They Owe,"
Said IRS Commissioner Danny Werfel.

"The years of underfunding that predated the Inflation Reduction Act led to the lowest audit rate of wealthy filers in our history. I am committed to reversing this trend, making sure that new funding will mean more effective compliance efforts on the wealthy, while middle- and low-income filers will continue to see no change in historically low pre-IRA audit rates for years to come."

 "There is a sea change taking place at the IRS in every aspect of our operations. Anchored by a deep respect for taxpayer rights, the IRS is deploying new resources towards cutting-edge technology to improve our visibility on where the wealthy shield their income and focus staff attention on the areas of greatest abuse. 

We will increase our compliance efforts on those posing the greatest risk to our nation's tax system, whether it's the wealthy looking to dodge paying their fair share or promoters aggressively peddling abusive schemes. These steps are critical for the future of the nation's tax system."

For the broader compliance work going on across the IRS, this will be an expansive effort with more details to be announced in the weeks and months ahead. Key elements of this new effort include:

Prioritization of high-income cases. In the High Wealth, High Balance Due Taxpayer Field Initiative, the IRS will intensify work on taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt. Building off earlier successes that collected $38 million from more than 175 high-income earners, the IRS will have dozens of Revenue Officers focusing on these high-end collection cases in FY 2024. The IRS is working to expand this effort, contacting about 1,600 taxpayers in this category that owe hundreds of millions of dollars in taxes.

More scrutiny on FBAR violations. High-income taxpayers from all segments continue to utilize Foreign Bank accounts to avoid disclosure and related taxes. A U.S. person with a financial interest over a foreign financial account is required to file a Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate value of all foreign financial accounts is more than $10,000 at any time. IRS analysis of multi-year filing patterns has identified hundreds of possible FBAR non-filers with account balances that average over $1.4 million. The IRS plans to audit the most egregious potential non-filer FBAR cases in Fiscal Year 2024.

Have Unreported Income?

 

Read more at: Tax Times blog

According to CoinTracker, to improve crypto tax compliance, starting the 2025 tax year, the IRS has proposed crypto brokers issue a new tax form called Form 1099-DA (similar to stock brokers) showing capital gains and losses.

1099-DA forms will make crypto tax compliance easier if your transactions are contained within an exchange with no transfers in or out.

Moderate and advanced crypto users will need CoinTracker to compute gains & losses and supplement 1099-DAs with data gaps.

The bipartisan Infrastructure Investment and Jobs Act passed in November 2021 required digital assets “brokers” to report users’ gain & loss information to the IRS in the way that stock brokers already do. On August 25, 2023, the IRS issued proposed regulations (Regs) defining the term “broker” and outlining requirements brokers must follow to comply with tax reporting rules related to cryptocurrency transactions.

Who are brokers?

According to the proposed Regs, a broker is “any person that in the ordinary course of a trade or business stands ready to effect sales to be made by others.” There are five potential categories of brokers.

• 

  Digital asset platforms: This category includes centralized exchanges, cryptocurrency ATMs, and certain DeFi platforms where the operator is in a “position to know the identity of the party that makes the sale” and “maintains sufficient control or influence” over the service provided.

• Digital asset-hosted wallet providers: This category includes web3 wallet providers that allow users to swap digital assets directly. Note: If the wallet does not offer a swap feature, it is not a broker.  
• Digital asset payment processors: This category includes products and services that intake cryptocurrency, convert it into USD, and send it to merchants.
• Other brokers: This category includes stablecoin issuers.
• Real estate persons: This category includes middlemen involved in real estate transactions involving cryptocurrency payments.

Merchants who sell goods or services in exchange for digital assets, Proof of Work (PoW) and Proof of Staking (PoS) validation providers, and people who sell hardware and software wallets (without any crypto swap features), are not classified as brokers.

What transactions are subject to broker reporting?

The proposed regulations subject cryptocurrency sold for cash and crypto-to-crypto trades, including the payment of transaction fees in crypto, to broker reporting. Non-fungible token (NFT) transactions are also subject to reporting. Brokers are expected to report gains and losses generated from these activities to users and the IRS on a new tax form called Form 1099-DA.

Note that airdrops, hard forks, and gains & losses related to loan transactions, transferring assets into liquidity pools, and wrapping and unwrapping transactions are not addressed in the proposed regulations due to an absence of guidance in these areas.

It is possible, however, that these transactions will be included in future iterations of 1099-DAs or other tax forms. Note that these transactions are still reportable on your tax return and may be taxable even though they are not immediately reported on 1099-DAs.

Timing of the rules

The crypto community has a 60-day comment period ending on October 24, 2023, to respond to the proposed regulations published by the IRS and the Treasury. After the comment period ends, the IRS will take all comments into consideration, make whatever changes it deems appropriate based on those comments, and issue final regulations, most likely in 2024.

If the proposed Regs become finalized with no changes, for the 2025 tax year, brokers will be required to issue 1099-DA forms with only gross proceeds (sales) amount. For the 2026 tax year and onwards, brokers must issue complete 1099-DAs that report process, cost basis, and gains & losses to taxpayers.

Impact on you & why you need CoinTracker

Tax compliance will be easier for simple crypto users

If you are a single-exchange user, the proposed 1099-DAs will simplify your crypto tax compliance. If implemented effectively (similar to in the stock world), you can rely on the gains & losses reported on these forms to complete your tax return without relying on a crypto tax tool like CoinTracker. Expect to receive complete 1099-DAs for the 2026 tax year.

Moderate & advanced users will need CoinTracker

In the following scenario(s) you will need CoinTracker to reconcile your crypto transactions and compute gains & losses accurately.

You have crypto & NFT transactions in the 2023, 2024, and 2025 tax years
Complete 1099-DAs will not roll out until at least the 2026 tax year. You will need CoinTracker to track your cost basis and gains & losses until you receive complete 1099-DAs from brokers.

You have transactions not reported on the early phases of 1099-DAs.
For example,  airdrops, hard forks, loan transactions, wrapping/unwrapping coins & adding/removing liquidity to/from liquidity pools will not be reported on early 1099-DAs. You will need to compute income and gains & losses related to these transactions using CoinTracker.

You have transferred assets from one broker to another broker.
For example,  Shehan buys 1 BTC on Coinbase, then transfers it to Gemini to sell it there because it offers cheaper trading fees. Under the current implementation of the proposed Regs, Coinbase is not required to share cost basis information with Gemini, so Gemini will not know the cost basis of your BTC unless you track it using CoinTracker. If you don’t keep track of the cost basis, you will likely inflate your capital gains and overpay taxes in this scenario.  

You have transferred assets from a broker to your self-custody wallet.
For example,  Shehan buys $100 of BTC every Friday on Coinbase. At the end of each month, he transfers these coins to his ledger wallet for long-term secure storage. To keep track of the cost basis for each coin and the date purchased (which is required for future capital gain calculations), Shehan will need CoinTracker.

You have transferred assets from your self-custody wallet to a broker.
Continuing with the above example, Shehan transfers 0.1 BTC to Coinbase towards the end of the year and sells it for cash (or exchanges it with another coin). Shehan will need CoinTracker to compute the correct gain & loss by taking the right cost basis into account. Coinbase will not have the cost basis information in this scenario.

You have transferred assets from one self-custody wallet you own to another self-custody wallet you own.
For example, Shehan transfers 0.1 BTC (cost basis $1,000) from self-custody wallet A to Self-custody wallet B. In order to properly maintain the cost basis lots on a per-wallet basis and accurately apply HIFO or LIFO identification methods, Shehan will need to use CoinTracker.

You have staking or mining income directly credited into your self-custody wallet.
For example,  Shehan stakes Cardano and receives rewards directly to his self-custodial wallet. Here, Shehan will need CoinTracker to compute income at the time of receipt and calculate gains & losses when he sells the rewards in the future.

You have transactions in non-broker platforms
For example, Shehan trades cryptocurrency in an overseas exchange (like Binance.com) or a DeFi platform not classified as a broker. In this scenario, Shehan will not receive any 1099-DAs at all. He will need CoinTracker to reconcile his activity and compute gains & losses accurately.

The proposed Regs also require you to maintain cost basis lots on a per-wallet basis. CoinTracker already supports this feature. Moreover, Specific identification of lots such as Highest-in-First-Out (HIFO) or Lowest-in-First-Out (LIFO) is allowed as long as you keep detailed records of your lots held in your self-custodial wallet. You can already keep detailed track of your lots and identify them under HIFO or LIFO methods using CoinTracker. (If you don’t have CoinTracker or another way to accurately identify the lots, your tax lot ID method defaults to First-in-First-out (FIFO), which is not generally tax advantageous).

Overall, the IRS is planning to narrow the tax gap by requiring brokers to report your crypto gains and losses directly to the IRS and compare these reported amounts with the numbers you report on your Form 1040. 

If there is a discrepancy, the IRS system will automatically send you a notice to correct your error. This new system will ultimately allow the IRS to focus its audit efforts on bad actors while giving compliant good actors peace of mind with crypto taxes.

Have An IRS Tax Problem?

 

Read more at: Tax Times blog

On August 8, 2023 we posted IRS Releases Inflation Reduction Act 1-year report card Including Efforts To Pursues High-Income Individuals Tax Evaders where we discussed that the IRS is working to ensure high-income filers pay the taxes they owe. Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to hide their income and evade paying their share. The IRS is now taking swift and aggressive action to close this gap.

Now TIGTA has released its report stating that the IRS Needs to Leverage the Most Effective Training for Revenue Agents Examining High-Income Taxpayers.

In August 2022, The Secretary Of The Treasury Stated
That IRA Funding Was Intended In Part To Increase Examination Of High-Income Taxpayers.

The Secretary also directed that no additional resources, including any new hires, shall be used to increase the share of small businesses or households below the $400,000 threshold that are audited relative to historical levels. 

The Large Business and International (LB&I) Division has expertise in training revenue agents on examining high-income taxpayers. However, the IRS’s efforts to train new hires do not appear to be fully leveraging this expertise. The IRS treats this training as specialized and only offers it when necessary for employees auditing in this specialized area. Commensurate with the new IRA funding, the IRS should revise its training paradigm and expose new hires to the types of issues associated with high-income taxpayer returns. 

The Small Business/Self-Employed Division’s Fiscal
Year 2023 Examination Plan Showed No Significant Increase
In The Number Of High-Income Individual Audits.

Additionally, the LB&I Division’s resource allocation plan is not detailed enough for TIGTA to assess the IRS’s intended efforts to examine high-income individuals with the increased enforcement funding. 

The IRS does not have a unified or updated definition for individual high-income taxpayers. The Tax Reform Act of 1976 required annual publication of data on individual income tax returns reporting income of $200,000 or more. The current examination activity code schema still uses $200,000 as the main threshold. The IRS’s Inflation Reduction Act Strategic Operating Plan sets forth leveraging data analytics to improve the IRS’s understanding of the tax filings of high-wealth individuals and to address potential noncompliance. Consequently, the IRS needs to update its high-income taxpayer definition to better identify and track examination results and manage examination priorities. 

TIGTA made six recommendations, including that the IRS leverage the LB&I Division’s extensive knowledge base by embracing its current high-income individual training content and ensure that examination plans follow the Secretary of Treasury’s Directive to prioritize coverage of individual high-income earners over $400,000.

The IRS agreed or partially agreed with five of the six recommendations and disagreed with one recommendation. 

Have Unreported Income?

 

Read more at: Tax Times blog