Yearly Archives: 2023

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. 

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Marini & Associates, P.A. 

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The case below indicates exactly how NOT to handle an IRS audit and the implications of such actions. According to Law360, an owner of a media brokerage firm agreed to pay $2.5 million in restitution for back taxes after admitting she failed to report $9.5 million in personal income and $10 million in gross receipts from her company, according to a plea filed in Maryland federal court in the case of U.S. v. Susan K. Patrick, case number 1:23-cr-00254-GLR, in the U.S. District Court for the District of Maryland. 

Susan Patrick, who co-owns Patrick Communications with her husband, pled guilty to one count of filing a false individual tax return for 2013, reporting an income loss of $773,000 when the couple actually had earned $4.3 million that year, according to the plea agreement filed on August 31, 2023.

Patrick also admitted to lying to Internal Revenue Service agents who began investigating her company in 2016 for unfiled employment tax returns, according to the plea, which she signed in March.

During the collections investigation, the IRS discovered she and her husband had not filed corporate returns for 2012 through 2014. Patrick told the IRS that the couple had filed the returns on time and that the returns had been prepared by their accountants, according to the plea.

• Patrick then sent the IRS doctored versions of the returns that had been accurately prepared by the accountants, but never filed by the couple, for the missing years, according to the plea. Patrick falsely reduced the couple's income by more than $9.5 million for the three years and hid $10 million in their company's gross receipts, according to the plea.
• Patrick backdated her signature on the falsified returns to make it look as if she had signed them for on-time submission, according to the plea.
• Additionally, Patrick never filed corporate or personal returns for 2015, despite her accountants having prepared them for her, according to the plea. 

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     Contact the Tax Lawyers at

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or Toll Free at 888 8TAXAID (888-882-9243)

 

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According to Law360, a Holocaust survivor who refused to pay $8.8 million in tax penalties for failing to disclose two Swiss bank accounts has agreed to pay $6 million following settlement delays, ending the government's lawsuit against him, according to a New York federal court in U.S. v. Walter Schik, case number 1:20-cv-02211, in the U.S. District Court for the Southern District of New York.

Walter Schik, a retired tie salesman and business owner, agreed to the settlement almost a year after the government announced a deal, according to an order filed on August 23, 2023. The government sued Schik in 2020 for failing to pay $8.8 million in FBAR penalties for 2007. The $16 million in his unreported Swiss accounts, from which he made no withdrawals, had been inherited from relatives killed in Nazi Germany's concentration camps, Schik said.

Schik, who became a U.S. citizen in 1957 after escaping to New York City as a teenager, had argued that he shouldn't have to pay the penalties. He had little formal education, he said in filings, and his accountant never told him about the legal requirement to file a Report of Foreign Bank and Financial Accounts, or FBAR, with the Internal Revenue Service. 

The government announced that it had reached a settlement with him in August 2022. But when negotiations dragged on, U.S. District Judge Mary Kay Vyskocil threatened to dismiss the suit for failure to prosecute, calling the government's failure to finalize the deal "unacceptable" in a July order threatening sanctions.

Judge Vyskocil had rejected the government's request to reduce the case to judgment, saying in March 2022 that it was for a jury to decide whether Schik "was willful rather than merely negligent," therefore triggering the steep penalties, when he didn't file the FBAR.

Schik opened one bank account in Switzerland in the 1960s to deposit money recovered from relatives who had died in the concentration camps, according to filings. His Swiss money manager continued to open and close accounts on his behalf, the filings said, with Schik only signing his name to forms he never himself filled out.

The manager's opening and closing of accounts resulted in the two bank accounts that were ultimately targeted by the IRS.

The Swiss money manager was indicted in 2010 on charges of conspiring with U.S. taxpayers and foreign financial institutions to enable his clients to hide Swiss bank accounts from the IRS. After finding out about the indictment, Schik filed a voluntary disclosure to the IRS, according to filings.

Schik told the court that his opening of the Swiss accounts, and even his initial hiding of their contents,  was understandable and traceable to his suffering from a "Holocaust mentality," according to a September 2021 filing. 

Schik believed he needed secret funds in case he ever needed to flee persecution again, they said.

Born in Austria, Schik was 13 when his family was sent to concentration camps, he told the court. He was sent to a camp near Budapest, Hungary, where he was released with the sons of a wealthy Jewish business owner who had made a deal with the Nazis, while Schik's parents and siblings died at Auschwitz, he said. He escaped the Nazis a second time, tearing the Star of David from his jacket to hide after being captured, and later immigrated to the U.S. at age 16 under the identity of another child, he said.

"This deeply traumatic experience has affected Mr. Schik's entire life and, as relevant in this case, he justifiably believed that it was important to always maintain some funds in Switzerland, a neutral country during World War II," he said in a 2021 memorandum seeking to block the government's motion to reduce the penalties to judgment.

"This is a far cry from the typical offshore banking case, where secret accounts are used to skim cash profits and avoid tax," the memo said.

Been Assessed a 50% Willful FBAR Penalty?

 

 

Contact the Tax Lawyers at 

Marini& Associates, P.A. 

 

 

for a FREE Tax Consultation

at: www.TaxAid.com or www.OVDPLaw.com or

Toll Free at 888-8TaxAid (888) 882-9243

 

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According to Law360, brokers of digital assets would face tax reporting requirements similar to those for brokers of securities and other financial instruments under the first-ever proposed rules governing assets such as cryptocurrency and nonfungible tokens, released Friday by the Internal Revenue Service.

Digital asset brokers would need to file information returns and payee statements on the sale of the assets for customers in certain transactions under Internal Revenue Code Section 6045, according to the proposed rules. These brokers include trading platforms, payment processors, wallet providers and individuals who offer to redeem assets that were created or issued by that individual. 

The Rules Would Begin Applying In 2026
For Transactions From The Previous Year.

By completing a new form called Form 1099-DA, brokers can assist taxpayers in assessing their tax obligations and avoiding complicated calculations or pay digital asset tax preparation services to file tax returns, according to the IRS. The 282-page proposal also recommended that brokers in certain circumstances include gain or loss and basis information for sales that take place on or after Jan. 1, 2026, so that customers have the information they need to prepare their tax returns.

The proposed rules are in line with tax reporting regulations on other types of assets to avoid preferential treatment, and they are part of broader enforcement on wealthy taxpayers seeking to circumvent tax rules and payments, Internal Revenue Commissioner Daniel Werfel said in a statement.

"We Need To Make Sure Digital Assets Are Not Used To Hide Taxable Income, And The Proposed Regulations Are Designed
To Provide A Clearer Line Of Sight Into Activities By High-Income People As Well As Others Using Them," Werfel Said.

The rules implement a provision of the Infrastructure Investment and Jobs Act, enacted in 2021, that called for increased reporting on digital asset brokers. In a July revenue ruling, the IRS clarified that a cryptocurrency holder who earned additional tokens or coins from validating transactions in a blockchain or crypto exchange, a process called staking, should report the value of those rewards as part of gross income. The guidance speaks to a pending lawsuit in the Sixth Circuit against the agency's treatment of a couple's income earned from staking activities.

Much of the digital asset reporting provision in the 2021 law is drawn from the Organization for Economic Cooperation and Development's crypto-asset reporting framework that members approved in 2022 to address the rapid adoption of such assets that can be transferred and held without banks and other traditional financial intermediaries.

Real estate brokers, mortgage lenders, title companies and closing attorneys would also need to disclose in their tax returns transactions that use digital assets to purchase real estate, as well as supply payee statements on the assets' fair market value from the sellers, according to the proposal.

Who Needs to Submit Form 1099-DA?

Anyone who is considered a digital asset broker will need to submit Form 1099-DA to both customers and the IRS.

The IRS’s proposed regulations go into extensive detail about who should be considered a broker. They emphasize entities that are “in a position to know” the identities of the parties involved in digital asset transactions. Their proposal would categorize all of the following as brokers:

• Centralized exchanges (such as Coinbase)
• Decentralized exchanges (such as Uniswap)
• Wallets that allow users to buy, sell, and trade digital assets (such as Metamask)
• Bitcoin ATMs and other physical kiosks

Although the crypto community is likely to push back against decentralized exchanges (DEXes) having to report to the IRS, we anticipate that the IRS will not be flexible on this requirement. DEXes do not currently collect tax information about their customers, but the IRS is likely to argue that they are, in fact, “in a position to know” users’ identities and will enforce Know Your Customer (KYC) requirements.

Notably, the IRS’s proposed regulations do not consider any of the following to be brokers:

• Miners, node operators, or others who are simply maintaining the blockchain
• Hardware wallets that do not directly allow users to buy, sell, and trade digital assets (for example, a wallet that must be connected to an exchange in order to complete any of these transactions)
• Software developers who indirectly facilitate digital asset transactions (for example, by developing code for a company like Coinbase)
• Smart contract developers who receive income from a smart contract they created, but do nothing to maintain or update it

Previously, due to the broad language of the Infrastructure Act, there was a great deal of concern that these parties would be considered brokers and would face reporting requirements that they couldn’t possibly fulfill.

What Will Be Reported on Form 1099-DA?

Form 1099-DA will report information about the sale or disposition of digital assets. The IRS specifies that this includes cryptocurrencies, NFTs, and stablecoins.

Form 1099-DA will report the same information that’s currently reported on Form 1099-B for stocks:

• When you got the digital asset (Acquisition date)
• How much you paid for it (Cost basis)
• When you sold or swapped it (Sale or disposition date)
• How much money you got from selling or swapping it (Sales proceeds)
• Gross proceeds (Total proceeds from that exchange or broker, not taking cost basis into account)

This will apply to sales made after January 1, 2025, so you can expect your first 1099-DA form in January of 2026.

Although the U.S. Department of the Treasury acknowledged that nonfungible tokens are different from other digital assets such as cryptocuWill wrap this thing up and saidrrencies, the proposal ultimately deemed that transactions that use NFTs are subject to the additional reporting requirements. Back in March, the IRS announced that it plans to float guidance treating NFTs as collectibles under IRC Section 408(m).

NFTs, which may represent artwork, antiques, music, films, fashion design and other entertainment memorabilia, are bought, sold and traded on digital asset trading platforms similar to other digital assets, and such transactions will trigger a gain or loss, the proposal said.

"The Reporting Of Gross Proceeds And Basis Information
 Is Equally Useful To Taxpayers And The IRS As
Reporting On Other Digital Assets," The Proposal Said.

The inclusion of NFTs in the proposed rules may be concerning for stakeholders because there has not been a lot of IRS guidance on the matter, according to Joshua Smeltzer, partner at Gray Reed.

Have An IRS Tax Problem?

Marini & Associates, P.A. 

Read more at: Tax Times blog