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IRS Can Issue Summons to Bank Serving as Crypto Broker in Search of Tax Evaders

The Internal Revenue Service (IRS) can issue a "John Doe" summons to a bank that provided services for customers of cryptocurrency prime broker SFOX, a New York judge ordered Thursday. The ruling will allow the tax agency to continue looking for potential tax evaders in an ongoing probe.

The summons requires M.Y. Safra Bank to provide information about the SFOX customers who may not have reported and paid taxes on crypto transactions. In August, the IRS received authorization from a California judge to serve a "John Doe" summons on SFOX itself.

A New York City bank must produce records on U.S. cus

tomers of a digital asset trading platform who may owe tax on unreported crypto transactions, a federal judge ordered.

The IRS was handed a win September 21 when the U.S. District Court for he Southern District of New York granted the agency's ex parte petition for leave to serve a so-called John Doe summons to M.Y. Safra Bank following an investigation into the crypto trading platform SFOX. Judge Paul Gardephe agreed there was a "reasonable basis for believing" at least 10 individuals may have failed to disclose and pay tax on crypto transactions conducted by the taxpayers via SFOX, which uses M.Y. Safra's banking services.

These currently unidentified taxpayers, and potentially others, may have failed to report to the IRS profits from crypto sales and pay tax on applicable gains, which the agency can determine by obtaining bank records from M.Y. Safra. The IRS, and the federal government overall, have become hawkish on tax evasion schemes that take advantage of Web 3.0 (the newest iteration of the World Wide Web, often denoted by decentralized platforms and blockchains) crypto technologies.

"The government's ability to obtain third-party information on those failing to report their gains from digital assets remains a critical tool in catching tax cheats," IRS Commissioner Chuck Rettig said. "The court's granting of the John Doe summons reinforces our ongoing, significant efforts to ensure that everyone pays their fair share. Taxpayers earning income from digital asset transactions need to come into compliance with their filing and reporting responsibilities."

As the IRS explained in its petition, taxpayers "must report income, gain, or loss from all taxable transactions involving virtual currency on their federal income tax returns for the year of the transactions, regardless of the amount or whether they received a payee statement or information return." Regarding its desire to crack down on crypto noncompliance, the agency argued that evaders are drawn in by the prospect of "pseudo-anonymity."

In a September 22 statement, the Justice Department described SFOX as "a cryptocurrency prime dealer and trading platform that connects digital currency exchanges, over-the-counter virtual currency brokers, and liquidity providers globally." The platform has more than 175,000 users and has facilitated over $12 billion since it was founded in 2014.

Although M.Y. Safra had been issued summonses, the Justice Department clarified there was "no allegation" that the bank engaged in any wrongdoing. The John Doe summonses serve only to identify the unknown individuals suspected of having outstanding tax liabilities.

The IRS previously was permitted to hand ndown summonses to SFOX itself pursuant to an order from the U.S. District Court for the Central District of California in another case. In a statement regarding that case, SFOX said it would review "internally and with external legal counsel around next steps," and "always adheres to the law."

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TIGTA Review of IRS Compliance With Guidelines When Issuing Levies

TIGTA reviewed levies issued for 57,775 taxpayers by Field Collection (48,781) and the Automated Collection System (8,994) during the period October 1, 2020, through September 30, 2021, and found that the IRS generally complied with legal and administrative requirements. However, there were some instances of noncompliance resulting in taxpayers’ rights being potentially violated: 

  • 51 taxpayers were not notified (44) or not timely notified (7) of their CDP rights.
  • 17 taxpayers did not receive a new CDP notice after an additional tax assessment was made. 
  • 105 (estimated) taxpayers had levies erroneously issued while a CDP hearing was pending.
  • 17 taxpayers with disqualified employment tax levies were not mailed or not timely mailed their post-levy CDP notice. 

For taxpayers with Field Collection levies (10,514) and Automated Collection System levies (1,762) and an open Power of Attorney authorization between March 1, 2020, and November 15, 2021, TIGTA identified: 

  • 753 (estimated) taxpayers whose authorized Power of Attorneys were not issued a copy of the CDP notice as required.
  • 421 (estimated) taxpayers who had a CDP notice issued to a representative that the taxpayer had not authorized to receive notices. 
TIGTA made eight recommendations to help improve the proper issuance of levies by the IRS, including that the IRS should remind all managers to consider disciplinary action for Collection employees whose failure to observe written regulations, orders, rules, or IRS procedures pertaining to levies resulted in a violation of taxpayers’ rights. 
The IRS agreed with seven recommendations and plans to take corrective actions.

Have an IRS Tax Problem?

Concerned That the Will Levy Your Assets?


 
    
Contact the Tax Lawyers at

Marini & Associates, P.A. 


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Read more at: Tax Times blog

TC Finds Fla Man Liable For Fraud Penalty For Not Disclosing Foreign Account

According to Law360, a Florida man's estate is liable for fraud penalties after the U.S. Tax Court found on September 14, 2022 that he failed to disclose over $1 million to the IRS, used foreign bank accounts to conceal funds and filed false tax forms.

The estate of Brett L. Clemons Sr. owes fraud penalties under Internal Revenue Code Section 6663, the Tax Court said in a memorandum opinion, finding he tried to swindle the Internal Revenue Service from 2003 through 2009 by failing to report income and filed misleading documents with the agency. The court largely affirmed the assessments the IRS made against Clemons, which included nearly $455,000 in taxes, according to the opinion.

That he failed to work with the IRS while it examined his taxes and relied on foreign bank accounts also indicates that he intended to commit fraud, the court said.

"Mr. Clemons' choice to open Swiss bank accounts with secretive features provides ample evidence of concealment," the opinion said.

Clemons died in 2021 after the Tax Court held a trial in his case. The IRS had assessed taxes against him for 2003 through 2009 based mostly on undisclosed income the agency had determined based on deposits in his bank account, according to the opinion.

It Also Assessed Nearly $322,000 In Fraud Penalties
Under Section 6663, According To The Opinion.


In 2001, Clemons opened his first account in Switzerland that he used to conceal income from the IRS, and he used several accounts overseas over the years to hide income that he never reported on his income tax returns, according to the opinion.

He failed to disclose the existence of those accounts on the annual Report of Foreign Bank and Financial Accounts form that he was obligated to file, and he also filed his tax returns late, according to the opinion.

Among the Tax Court's findings were that Clemons couldn't retroactively change the treatment of his passive foreign investment company income, that he couldn't deduct various expenses connected with his employment with Hewlett-Packard U.S., and that he wasn't entitled to various Schedule C deductions and the foreign tax credit. It also rejected arguments that the IRS was too late to assess taxes against Clemons. 

The typical three-year deadline for assessing taxes doesn't apply when a person files fraudulent returns, and the agency has proven that Clemons' actions were fraudulent, according to the opinion.

Have an IRS Tax Problem?

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Supervisor Approval of Penalty Not Required At Initial Penalty Communication – Only Actual Assessment Requires Approval

According to  Law360, the Eleventh Circuit reversed a U.S. Tax Court decision determining the Internal Revenue Service couldn't impose penalties on a man's $25 million in transfers, saying Tuesday that a supervisor wasn't required to approve the penalties until they were assessed.

The requirement that penalties are approved in writing by IRS supervisors under Internal Revenue Code Section 6751(b) doesn't apply to those early communications, the appeals court found. It instead applies to the actual assessment, meaning the penalty was properly approved by an agency supervisor in a second letter that followed the initial communication of the penalties to Burt Kroner, according to the opinion. 

"The statute prohibits assessing a penalty unless a condition has been met, supervisory approval of the initial determination of assessment," the opinion said. "But the statute regulates assessments; it does not regulate communications to the taxpayer."

"Because The IRS Did Not Assess Kroner's
Penalties Without A Supervisor Approving
An 'Initial Determination of Such Assessment,'
We Hold That The IRS Has Not Violated
Section 6751(B)," It Added.

The Tax Court found in June 2020 that Kroner couldn't treat $24.8 million in transfers from a British business partner as gifts for tax purposes. It determined that Kroner's story advocating for treating the funds as gifts wasn't credible, and they're better considered income, according to the opinion.

But the Tax Court found that a Letter 915 — a 30-day letter the IRS sends out that proposes tax adjustments and penalties — constituted an initial determination under Section 6751(b). Since that letter was sent in August 2012, before an IRS supervisor signed off on the penalties in October 2012, the penalties can't stand, the court said.

In its opinion Tuesday, the Eleventh Circuit said the Tax Court's interpretation didn't pass muster based on the text of the statute. Communications to taxpayers and actual tax assessments are distinct from each other, and Section 6751(b) doesn't address communications, according to the opinion.

The Ninth Circuit has also determined that Section 6751(b) doesn't require initial IRS determinations of penalties to be approved by IRS supervisors, but instead requires actual assessments to be authorized with a manager's signature.


Have an IRS 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) 

 









Read more at: Tax Times blog