Category Archives: criminal tax law

According to Law360, the IRS can proceed with summonses requesting bank records on two law firms and the wife of a man owing $2 million in taxes after the Sixth Circuit found Friday that the agency wasn't obligated to inform them about the requests.

A three-judge panel ruled 2-1, in Hanna Karcho Polselli et al. v. U.S., case number 21-1010, in the U.S. Court of Appeals for the Sixth Circuit. that the two law firms, Abraham & Rose PLC and Jerry R. Abraham PC, and Remo Polselli's spouse were not entitled to notification from the IRS that it issued summonses to three banks in the course of an agent's investigation into the location of his assets. 

While the Internal Revenue Service generally can be sued if it fails to notify a person or entity about a summons implicating them, the agency can issue summonses without notice under Internal Revenue Code Section 7609(c)(2)(D)(i) if the IRS is trying to collect already-assessed taxes, according to the opinion.

In Polselli's case, the IRS had made an assessment and issued the summonses to try to collect his taxes, meaning the agency had no obligation to notify his wife and the law firms about the bank summonses, the Sixth Circuit said, affirming a Michigan federal court's decision.

"We Agree With The District Court That The Summonses At Issue Fall Squarely Within The Exception Listed In 

Section 7609(C)(2)(D)(I),"
The Opinion Said.

Him An IRS agent had issued summonses to three banks — Wells Fargo Bank NA, JP Morgan Chase Bank NA and Bank of America NA — him seeking records on accounts held by the two law firms as well as Polselli's wife, Hanna Karcho Polselli, according to the opinion.

The agent was trying to identify the location of Polselli's assets after he accrued around $2 million in unpaid taxes, and believed the closely related firms — of which he was a client — might have information on his financials, according to the opinion. The agent also suspected that Polselli had access to his wife's accounts and might have used them, the opinion said.

But the IRS didn't tell the firms or his spouse about the bank summonses. Instead, the banks themselves notified them, and Hanna Polselli and the firms subsequently filed petitions with Michigan federal court to quash the summonses, according to the opinion.

That lower court found that Hanna Polselli and the firms couldn't sue to do away with the summonses because the IRS was trying to collect the taxes assessed against Polselli, and the plain meaning of the statute allows an exception in such circumstances. The Sixth Circuit majority agreed, saying that it's clear the IRS issued the summonses in order to aid the collection of tax and locate Polselli's assets.

U.S. Circuit Judge Raymond Kethledge disagreed with the majority's decision. He found that its interpretation of the statute renders superfluous a related provision, IRC Section 7609(c)(2)(D)(ii), which allows the IRS to issue summonses without notice to help the agency collect taxes from potential fiduciaries or others who might have received a delinquent taxpayer's assets. Under the majority's interpretation of Section 7609(c)(2)(D)(i), summonses under the transferee and fiduciary provision will fall under both statutes, rendering the second one unnecessary, according to Judge Kethledge. 

"If the government and the majority are right about their interpretation of Section 7609(c)(2)(D)(i), therefore, Congress was wasting its time in writing Section 7609(c)(2)(D)(ii)," Judge Kethledge said.

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According to Law360, The Eleventh Circuit in David F. and Tammy K. Hewitt v. Commissioner of Internal Revenue, case number 20-13700, U.S. Court of Appeals for the Eleventh Circuit, struck down a Treasury rule governing the proceeds from judicial extinguishment of conservation easements that has spoiled many such tax breaks for donors, overturning a U.S. Tax Court decision denying a couple's
$2.8 million deduction.

The U.S. Department of the Treasury failed to sufficiently address public feedback in finalizing the rule governing what happens with proceeds from a potential judicial extinguishment of a conservation easement, the Eleventh Circuit said in an opinion dated Dec. 29, 2021. A three-judge panel reversed a Tax Court decision finding David and Tammy Hewitt couldn't claim the deduction over several years. 

The rule doesn't pass muster under the Administrative Procedure Act, which requires that agencies respond adequately to significant public comments when finalizing regulations, according to the opinion. Those Treasury regulations essentially require that deeds cannot allow for proceeds given to an easement recipient in the event of a judicial extinguishment of the easement to be reduced by any post donation improvements to the property.

The Eleventh Circuit opinion dealt a serious blow to the Internal Revenue Service in its efforts to scrutinize conservation easement deductions, which were created to encourage land preservation but some say have been prone to abuse. The Tax Court has consistently sided with the agency in finding that taxpayers who ran afoul of the judicial extinguishment rule under Section 1.170A-14(g)(6)(ii) of Treasury Regulations cannot claim the corresponding tax deduction, affirming the validity of that rule in May 2020 in a case brought by Oakbrook Land Holdings LLC.

One of those cases included the challenge brought by the Hewitts, who claimed the tax deduction for their easement split between 2012, 2013 and 2014. The IRS issued a deficiency notice in 2017 that nullified the deduction, which the Tax Court affirmed in a June 2020 opinion that said the couple's violation of the judicial extinguishment rule means their easement wasn't protected in perpetuity as required under Internal Revenue Code Section 170.

The Hewitts have since argued that Treasury, in finalizing the rule in 1986, failed to account adequately for comments sent in by groups such as the New York Landmarks Conservancy that urged the agency to do away with the extinguishment provision or otherwise raised concerns with the rules proposed by the agency. When Treasury addressed comments it received on the regulations in the final comments, it didn't acknowledge those made by the NYLC or others that addressed the extinguishment regulation, according to the opinion.

The IRS has argued that the comment from the NYLC was not significant enough to warrant it being addressed in the final rules, according to the opinion.

But the Eleventh Circuit found that the conservancy's comment raised issues concerning the regulation's ability to undermine the intent of the conservation easement statute and warranted an acknowledgment by Treasury.

"NYLC's comment was significant and required a response by Treasury to satisfy the APA's procedural requirements," the opinion said. "And the fact that Treasury stated that it had considered 'all comments,' without more discussion, does not change our analysis."

The Eleventh Circuit cited its decision in the case Lloyd Noland Hosp. and Clinic v. Heckler, in which the appeals court invalidated an insurance rule whereby the U.S. Department of Health and Human Services failed to heed public comments. Under that precedent, Treasury's judicial extinguishment rule doesn't pass muster under the APA, according to the opinion. 

The Eleventh Circuit sent the case back to the Tax Court for further proceedings. 

While the appeals court found the regulation is procedurally invalid under the APA, it didn't decide whether the IRS' interpretation of the regulation is substantively incorrect, as argued by the Hewitts.

"Both the IRS and taxpayers benefit when the IRS meaningfully engages in the rulemaking process," Levin said. "Compliance with the APA's rulemaking process is essential because it provides taxpayers with notice as to what is required by the rules and gives the IRS valuable input as to the rules it is proposing."     

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

The Financial Crimes Enforcement Network (FinCEN) announced that it has amended a Bank Secrecy Act (BSA) regulation to remove obsoleted civil penalty language. 

Generally, a U.S. person having a financial interest in, or signature or other authority over a foreign financial account must report that account to FinCEN every year the account exists. A U.S. person required to report a foreign account files a Foreign Bank Account Report (FBAR) to report the account to FinCEN. (Reg §1010.350)

In addition, specified financial institutions must file a foreign financial agency report to notify FinCEN of certain transactions with designated foreign financial agencies. (Reg §1010.360)

Willful failure to file the above reports is subject to a civil penalty. (31 USC 5321(a)(5) and Reg §1010.820(g))

In 2004, 31 USC 5321(a)(5) was amended to increase the maximum account of the penalty for willful failure to report foreign financial accounts or foreign financial agency transactions. However, Reg §1010.820(g) was not amended to reflect the statutory change.

According to FinCEN, Reg §1010.820(g), which provides civil penalty language for willful failure to file an FBAR or foreign financial agency transaction report, is obsolete and superseded by the 2004 statutory amendments. Therefore, FinCEN is rescinding Reg §1010.820(g) and redesignating paragraphs (h) and (i) as (g) and (h).

This should clear up the discrepancies in court rulings regarding the maximum FBAR penalty haven't been increased, now that the rags are revised to reflect the 2004 changes to the maximum FBAR penalty.

Have Undeclared Income from an Offshore Bank Account?

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The competent authorities of the United States and Malta signed a competent authority arrangement (CAA) confirming their understanding of the meaning of pension fund for purposes of the United States–Malta income tax treaty (Treaty). The competent authorities have entered into this agreement after becoming aware that U.S. taxpayers with no connection to Malta were misconstruing the pension provisions of the Treaty to avoid income tax on the earnings of, and distributions from, personal retirement schemes established in Malta.  

The CAA confirms the U.S. and Malta competent authorities’ understanding that (except in the case of a qualified rollover from a pension fund in the same country) a fund, scheme or arrangement is not operated principally to provide pension or retirement benefits if it allows participants to contribute property other than cash, or does not limit contributions by reference to income earned from employment and self-employment activities. 

Because Maltese Personal Retirement Schemes Contain These Features, They Are Not Properly Treated As A Pension Fund
For Treaty Purposes And Distributions From These Schemes
Are Not Pensions Or Other Similar Remuneration.

The IRS put taxpayers on notice earlier this year that it was reviewing the use of Maltese personal retirement schemes and that some U.S. citizens and residents are relying on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to take the position that they may contribute appreciated property tax free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Ordinarily gain would be recognized upon disposition of the plan's assets and distributions of the proceeds. 

The IRS is actively examining taxpayers who have set up these arrangements and recognizes that other taxpayers may have filed tax returns claiming Treaty benefits as a result of their participation in these arrangements. These taxpayers should consult an independent tax advisor prior to filing their 2021 tax returns and take appropriate corrective actions on prior filings.

The IRS also cautions taxpayers against entering into any substantially similar arrangements that would seek to misconstrue the provisions of a bilateral income tax treaty of the United States to avoid income tax. IRS enforcement, both the civil and criminal divisions, is committed to pursuing abuse and those who market and participate in abusive transactions. 

The CAA is available on irs.gov and will be published in the Internal Revenue Bulletin. 

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

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