Category Archives: criminal tax law

We have been advising that the IRS is criminally prosecuting taxpayers for failing to pay withholding taxes since October 29, 2019 when we posted The IRS is Now Criminally Prosecuting Employers For Failure To Pay Withheld Payroll Taxes! where we discussed that the IRS is stepping up criminally prosecuting business owners for failing to turn over withheld payroll taxes.

The latest criminal prosecution, according to DoJ, is of a Michigan business owner who was sentenced to 12 months and one day in prison for failing to collect and pay over to the IRS employment taxes withheld from his employees’ wages on March 15, 2023.

According to court documents and statements made in court, Yigal Ziv of West Bloomfield owned and operated Multinational Technologies, Inc. (MTI), a software development firm based in Walled Lake. 

Ziv was responsible for filing MTI’s quarterly employment tax returns and collecting and paying to the IRS payroll taxes withheld from employees’ wages. 

From the first quarter of 2014 through the first quarter of 2018, Ziv collected approximately $691,000 in employment taxes from MTI’s employees, but did not file employment tax returns or pay the withheld taxes to the IRS. Even after learning of the IRS’s ongoing criminal investigation in May 2018, Ziv did not file MTI’s employment tax returns from the fourth quarter of 2019 through the fourth quarter of 2020 and did not pay the IRS approximately $199,000 in payroll taxes withheld from MTI’s employees. 

During that same period, Ziv directed MTI to spend hundreds of thousands of dollars for his personal benefit, including home mortgage payments, luxury auto lease payments and department store purchases. In total, Ziv caused a tax loss to the IRS of $1,169,000.

In addition to the term of imprisonment, U.S. District Judge David M. Lawson for the Eastern District of Michigan ordered Ziv to serve one year of supervised release and to pay a $5,000 fine and $897,271.80 in restitution to the United States.

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According to Procedurally Taxing,   in Polish Lottery Winner’s Son Sues Over Penalties For Failing To Report Foreign Gifts They discussed Wrzesinski v US. where the matter involved penalties under Section 6039F for failing to file Form 3520, the Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

Krzysztof Wrzesinski emigrated to the US from Poland in 2005 at the age of 19. About five years later his mom, who still lived in Poland, won the Polish lottery. She took the proceeds and made gifts to Krzysztof of $830,000 over the course of 2010 and 2011.

While the proceeds were excluded from gross income, Krzysztof was hit with penalties in the amount of $87,500.00 and $120,000.00 for 2010 and 2011. Appeals abated much of those, but not about $45,000.

Krzysztof’s Tax Return Preparer Told Him (ADVICE) That He Need Not File Any Forms With His Tax Returns And That The Gift Proceeds Were Exempt From Gross Income.

Last week DOJ has filed a status report indicating that it has conceded, and that Krzysztof will be receiving a refund in a couple of months. 

Hat tip to Dan Price, who, in a post on Linked In, reasonably suggests that he hopes the concession will lead “IRS to acknowledge reasonable cause in more foreign gift penalty cases”.

Read more at: Tax Times blog

The IRS Office of Chief Counsel detailed in a memorandum published March 10, 2023 a scenario in which a controlled foreign corporation's midyear distribution of previously taxed earnings and profits to its U.S. owner would not be recognized as a gain.

The foreign entity's owner, a domestic corporation, is described in the memo as having included in its own gross income for the year Subpart F income and global intangible low-taxed income allocated to the foreign corporation.

Partway through the year, according to the memo, the foreign corporation distributes an amount equal to the Subpart F income and GILTI in the form of a dividend to its U.S. parent.

Under Internal Revenue Code Section 961(B)(1) And Subsection 1.961-2(C), The U.S. Entity Would Not Recognize A Gain On The Distribution, The Internal Revenue Service Said.

The adjusted basis of its stock in the foreign business would increase at first because of the U.S. company's inclusion of foreign income, but would then decrease due to the dividend, according to the memo.

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On May 13, 2021 we posted 9th Cir Reverses Tax Court's Finding That Return Supplied During an IRS Examination is Not a Filed Return where we discussed that the Tax Court had concluded that the signed copy of the Form 1065 faxed to agent was not a return under the Beard test, See Beard v. Commissioner, 82 T.C. 766, 777 (1984), the 9^th Circuit went on to analyze this issue. The 9^th Circuit found that the Form 1065 that Seaview faxed to agent met all the Beard criteria and therefore was a return. 

Now according to Law360, the full Ninth Circuit ruled on March 10, 2023 that the IRS timely disallowed a partnership's $35.5 million loss as the partnership's failure to strictly comply with filing rules meant the agency's readjustment deadline didn't pass, overruling a three-judge panel.

The Ninth Circuit majority ruled that the Tax Court was correct in finding that the IRS' 2010 tax adjustment was timely because of Seaview's failure to comply with Treasury Regulation Section 1.6031(a)-1(e)(1) . 

Under that regulation, Seaview was required to send its returns to a service center in Utah, rather than providing copies of those returns to an IRS agent and attorney, the majority said.

But U.S. Circuit Judge Patrick J. Bumatay disagreed. The IRS has long encouraged taxpayers to file untimely returns with IRS officials who ask for them, and the majority's decision "throws our tax system into disarray" as "taxpayers can no longer trust what the IRS has told them about how to file delinquent tax returns," Judge Bumatay said.

"Based on the ordinary meaning of 'filing,' we should have held that a delinquent partnership return is 'filed' when an IRS official authorized to obtain and process a delinquent return asks a partnership for such a return, the partnership delivers the return to the IRS official in the manner requested, and the IRS official receives the return," Judge Bumatay added.

The Ninth Circuit case focused on what constitutes a tax return that is properly filed with the IRS. The three-judge panel said in its May decision that copies of returns the partnership gave the agency in 2005 and 2007 constituted filings of those returns that kicked off the three-year statute of limitations under Internal Revenue Code Section 6229(a).

Internal guidance at the IRS contradicts the agency's assertions that the partnership's returns had to be filed with the Utah service center for them to be treated as having kick-started the statute of limitations, the three-judge panel found.

But the Ninth Circuit majority disagreed that IRS documents cited by Seaview support its arguments that its returns were properly filed. Moreover, the partnership misses the mark in arguing that the place-of-filing rules apply only to timely filings, as the regulation's "place-for-filing requirement contains no carveout for delinquent returns," the majority said.

As U.S. Circuit Judge Bridget S. Bade said in her dissent in the panel decision, "nothing in the text of the regulation indicates that compliance with the place-for-filing requirement is conditioned upon compliance with the time-for-filing requirement, such that filing at the designated place somehow becomes optional whenever a taxpayer files its return late," the majority added.

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