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On August 7, 2023  we posted New Beneficial Ownership Information Requirement for Most Businesses Beginning January 1, 2024, where we discussed that neginning on January 1, 2024, many corporations, limited liability companies, and other entities created or registered to do business in the United States must report information about their beneficial owners, the persons who ultimately own or control the company, to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

Now according to Law360, the U.S. Treasury Department's financial crimes unit will start applying new reporting requirements for small businesses in about five months.

But Many Of The Roughly 32 Million Companies Affected By The Disclosure Rules May Not Yet Be Aware Of Them.

Final regulations from the Financial Crimes Enforcement Network aim to expose anonymous shell companies by requiring reports of beneficial ownership information from small businesses, many of which may not work with attorneys or accountants who keep them informed about compliance obligations, according to specialists. Resource constraints may also hamper FinCEN's public outreach regarding the rules, which were finalized in September and will go into effect on Jan. 1, 2024.

Small businesses would likely be concerned about how to interpret terms such as "beneficial owner," according to Niles Elber, a member at Caplin & Drysdale. But most of them probably don't even know about FinCEN's reporting rules, he said.

"They're trying to get the word out and provide some guidance," Elber said, noting for example the FAQ posting in March. "But who in God's green earth is going to the FinCEN website?"

According to the final regulations, a beneficial owner is defined as any individual who meets at least one of two criteria: exercising "substantial control" over the reporting company, or owning or controlling at least 25% of the ownership interest of the company.

The rules exempt so-called large operating companies, which are defined as having more than 20 full-time employees in the U.S. and more than $5 million in gross receipts or sales on their federal tax returns. Businesses in heavily regulated industries, banking and securities, for example, are also exempt under the CTA.

Approximately 32.6 Million Companies Will Be Subject To
The Reporting Requirements In The First Year They're
In Effect And Approximately 5 Million New Companies
Will Fall Under The Rules Each Subsequent Year,
According To Estimates From FinCEN.

Candice Basso, a spokesperson for FinCEN, told Law360 that the Treasury unit has "conducted extensive outreach" to various stakeholders, including the small business community, to inform them about their reporting obligations and to better understand their questions and concerns. FinCEN is also working on an upcoming small entity compliance guide that will contain checklists to help reporting entities collect and report information on beneficial ownership, as well as a webinar that will describe the reporting process, she said.

Meanwhile, FinCEN's limited resources have raised questions about how selective the unit will be when enforcing penalties for noncompliance with the beneficial ownership rules.

FinCEN's potential limitations with informing small businesses about the beneficial ownership rules could leave certain education efforts to banks, but any outreach from financial institutions may depend on their own compliance obligations under the CTA.

Banks are currently subject to a customer due diligence, or CDD, rule that requires financial institutions to identify and verify the beneficial owners of companies that open accounts. The CTA requires FinCEN to revise portions of the CDD rule to bring it into conformity with the new legislation and the Anti-Money Laundering Act as a whole.

"I suspect that what's going to happen is banking is going to be the deputies that are going to have to break this news to most people," he said.

In the meantime, it's unclear what banks may do when they compare information that they collect under the CDD rule against information that their customers submit to the database or if banks try to make the comparison at all.

FinCEN proposed rules in December that spell out when governments and banks may be granted access to the beneficial ownership information submitted by small businesses. According to the regulations, banks can use the database only to facilitate CDD compliance.

Despite the challenges that FinCEN may face in educating millions of small companies about the rules, specialists say the CTA is designed to affect a broad range of businesses so it's more difficult for shell companies to evade detection.

This objective means that FinCEN should be "writing the rule broadly to include in their reporting as many corporate entities as possible while narrowly limiting the exemptions to the smallest possible set permitted by the law," according to the letter.

Quick added, "If you try to narrow it down too much, the people you're dealing with are very sophisticated and are going to find a way to get around it."

Have A Beneficial Ownership QuestionProblem?

Marini & Associates, P.A. 

Read more at: Tax Times blog

According to the IRS, a Colorado man was sentenced today to 15 months in prison for evading the payment of more than $700,000 in employment taxes he owed to the IRS.

According to court documents and statements made in court, Frank Stevens of Bow Mar, Colorado, co-owned restaurants and an oil production business, which had employees from whose paychecks he withheld income and Social Security and Medicare taxes. 

Starting in approximately 2002 and continuing for many years, Stevens did not pay over the withheld payroll taxes to the IRS or file the required quarterly employment tax returns for his businesses. 

After failing to collect from the businesses, the IRS assessed the tax against Stevens personally. To prevent the IRS from collecting through bank levies the taxes he owed, Stevens kept the balances of his personal and business bank accounts low, often leaving them with only $0.01. 

Stevens transferred, or directed employees to transfer, just enough funds to cover expenses and then moved any remaining money to a bank account not subject to IRS levy. In total, Stevens caused a tax loss of approximately $737,128.

In addition to the term of imprisonment, U.S. District Judge Daniel D. Domenico ordered Stevens to serve three (3) years of supervised release and to pay a $10,000 fine and $1,096,138.14 in restitution to the United States.

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According to Procedurally Taxing, in United States v. Paulson, 68 F.4th 528 (9th Cir. 2023) the Ninth Circuit reverses the district court and holds the beneficiaries and trustees personally liable for unpaid estate taxes.  

The Paulson estate had about $200 million in assets.  So, it’s well above the threshold for being a taxable estate, and this case involves unpaid estate taxes. 

Prior to this collection suit, the estate had petitioned the Tax Court, which determined an increased deficiency of $6,669,477 in estate taxes on top of the estate tax liability of $4,459,051 reported on the estate tax return.  Mr. Paulson passed away in July 2000.  The Tax Court entered the stipulated decision in December 2005. The estate elected to pay the additional amount through installments as well.

If the estate taxes are unpaid, trustees, transferees, or beneficiaries become liable for the unpaid estate taxes through IRC §6324(a)(2).  Here, the estate failed to keep up with the installment payments causing the IRS to terminate the §6166 election and issue a notice of final determination under 26 U.S.C. §7479.  This triggered the immediate need for the estate to pay the entire liability.  As you might expect, with an estate of this size, the beneficiaries did not all get along with each other or with the trustee of the living trust. 

By the time the IRS filed suit in 2015 to recover the unpaid estate taxes, the liability had exceeded $10 million.  The beneficiaries, trustees, and former trustees pointed at each other as the person(s) responsible for failing to pay the estate taxes, while each disclaimed their own responsibility.

The district court concluded that James Paulson, Vikki Paulson, and Crystal Christensen were not liable for the unpaid estate taxes as transferees or trustees because they were not in possession of estate property at the time of Allen Paulson’s death.

The timing argument is critical in this case, and it relates to the language of the applicable statute.  The circuit court states:

The statutory provision at issue here, §6324(a)(2), as stated in its title, imposes personal liability on “transferees and others” who receive or have property from an estate.  The statute provides that:

If the estate tax imposed by chapter 11 is not paid when due, then the spouse, transferee, trustee (except the trustee of an employees’ trust which meets the requirements of section 401(a)), surviving tenant, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent’s death, property included in the gross estate under sections 2034 to 2042, inclusive, to the extent of the value, at the time of decedent’s death, of such property, shall be personally liable for such tax.

The question before us is whether the phrase “on the date of the decedent’s death” modifies only the immediately preceding verb “has,” or if it also modifies the more remote verb, “receives.”

The IRS argued that the language imposes personal liability on individuals who have estate property at the time of death but also on those who receive estate property anytime thereafter, covering successor trustees and beneficiaries of the living trust.  The circuit court agrees with the IRS reading of the statute.

Marini& Associates, P.A. 

 

 

for a FREE Tax Consultation at: 

www.TaxAid.com or www.OVDPLaw.com 
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On July 21, 2023 the Treasury Inspector General For Tax Administration (TIGTA) released its report of the IRS Independent Office of Appeals Collection Due Process Program which found that the IRS Independent Office of Appeals (Appeals) properly informed taxpayers that Collection Due Process and Equivalent Hearings were conducted by an impartial hearing officer. 

Appeals hearing officers verified applicable law or administrative procedures were met; allowed taxpayers to raise issues at the hearing related to the unpaid tax; and made a determination on the proposed levy, the filing of the Notice of Federal Tax Lien, or both after considering the collection action balances efficient tax collection with the taxpayer’s concern that the collection action be no more intrusive than necessary. 

However, TIGTA reviewed a statistically valid stratified sample of 106 cases and identified that Appeals did not always classify taxpayer requests properly or provide only one hearing with respect to the taxable period related to the unpaid tax. 

In addition, similar to prior audits, TIGTA identified incorrect Collection Statute Expiration Date (CSED) posting errors in ** (** percent) of the 106 sampled taxpayer cases in which the IRS either incorrectly extended the CSED, allowing the IRS additional time to collect the delinquent taxes; or incorrectly shortened the CSED, resulting in the IRS having less time to collect the delinquent taxes.

 Based on the sample results, TIGTA estimates that ** and 1,790 taxpayer accounts had their CSEDs incorrectly extended and shortened, respectively, during Fiscal Year 2022. 

Because prior year’s review included a still open recommendation to reinforce the procedures for Appeals personnel to ensure that the correct CSEDs are posted to taxpayer accounts, TIGTA is not making any further recommendations related to this issue in this year’s report. 

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

Read more at: Tax Times blog