Category Archives: criminal tax law

According to Law360, A naturalized citizen must face tax penalties for his failure to report foreign bank accounts to the Internal Revenue Service because the government proved he willfully attempted to hide his income overseas, the Eleventh Circuit said Friday.

A three-judge panel affirmed that a Florida federal court correctly held Said Rum liable for the maximum penalty for his failure to file Reports of Foreign Bank and Financial Accounts, according to the per curiam opinion. 

Rum Failed To Prove That The Penalty, Which The IRS Set At 50% Of The Funds In His Unreported Account, Was Arbitrary And Capricious, According To The Opinion.

"In sum, the evidence was overwhelming that Rum sought to hide his overseas accounts from the United States government," the opinion said. "Repeatedly he took steps to conceal the accounts and not report his income to the government."

Rum was born in Jerusalem and has been a naturalized U.S. citizen since 1988, and has owned and operated a number of businesses, including a convenience store and delicatessen, according to the opinion. In 1998, Rum opened a Swiss UBS bank account and deposited $1.1 million to conceal the money from judgment creditors, the opinion said.

Rum failed to report to the IRS the funds in the UBS account, which was eventually closed in 2008 as $1.4 million was transferred to Arab Bank, according to court documents. Rum transferred the $1.4 million to a U.S. account in 2009, and he reported roughly $40,000 of the $300,000 in investment income generated when the funds were held in the foreign banks on his 2009 tax return, the opinion said.

Rum's 2009 tax return triggered an IRS examination that led to the agency's assessment of unpaid taxes and proposal of a maximum willful FBAR penalty for the 2007 tax year related to his failure to report the foreign bank accounts, according to the opinion.

Rum challenged the IRS' assessed taxes and penalty in the U.S. Tax Court, which determined that he would be liable not for civil fraud penalties but for accuracy-related penalties for his understatement of income during the time he concealed his foreign bank account.

The IRS sued Rum in Florida federal court seeking to enforce the FBAR penalty against him, and won summary judgment in its favor, which Rum appealed, according to court documents.

On appeal, Rum argued that the lower court incorrectly applied a standard of willfulness to find him liable for the FBAR penalty and should have determined that the penalty was improper and arbitrary, according to the opinion.

In its opinion, the Eleventh Circuit found that Rum failed to prove how the district court incorrectly interpreted willfulness to include "recklessness," a conclusion that several other appeals courts have determined.

Rum's arguments related to whether there remained issues of material fact during the district court proceedings were also proved insufficient by mounts of evidence presented by the IRS, the appeals court said.

Rum's using numbers instead of his name on his foreign bank accounts and requests that his funds not be invested in U.S. securities while they were held by UBS were clear signs that he willfully attempted to hide his income, the Eleventh Circuit said.

The case is U.S. v. Said Rum, case number 19-14464, in the U.S. Court of Appeals for the Eleventh Circuit.

Read more at: Tax Times blog

As time has progressed since the passage of the check the box rules, the IRS has created more and more exceptions to the disregarded treatment. The following is a summary of the principal exceptions, but is not intended to be exhaustive. If any readers think we have missed anything major, please feel free to comment to this posting.

1. Status is modified if the single owner of the entity is a bank. Treas. Regs. Section 301.7701-2(c)(2) (iii). 

2. Status is modified for certain tax liabilities. Treas. Regs. Section 301.7701-2(c)(2)(iii). These include: (1) federal tax liabilities of the entity with respect to any taxable period for which the entity was not disregarded; (2) federal tax liabilities of any other entity for which the entity is liable; and (3) refunds or credits of federal tax. 

3. Disregarded status ignored or modified for taxes imposed under Subtitle - Employment Taxes and Collection of Income Tax (Chapters 21, 22, 23, 23A 24, and 25 of the Code) and taxes imposed under Subtitle A including Chapter 2 - Tax on SelffEmployment Income. Treas. Regs. Section 301.7701-2(c) (2) (iv) (A). 

4. Status is modified for certain excise taxes, as described in Treas.Regs. Section 301.7701-2(c)(2J(v). Although liability for excise taxes isn't dependent on an entity's classification, an entity's classification is relevant for certain tax administration purposes, such as determining the proper location for filing a notice of federal tax lien and the place for hand-carrying a return under Code Section 6091

5. Conduit financing proposed regulations will treat a disregarded entity as separate from its single member. Code Section 7701 (I).

6. Special rules will apply in hybrid situations. Hybrid situations are circumstances where an entity is not disregarded in one jurisdiction but is disregarded in another.

7. Final regulations (TD 9796) that treat domestic disregarded entities wholly owned, directly or indirectly, by foreign persons  as domestic corporations solely for purposes of making them subject to the reporting requirements under Internal Revenue Code, Section 6038A that apply to 25% foreign-owned domestic corporations.

 

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In CCA 202114020, the IRS ruled on the issue of whether a taxpayer who received Bitcoin Cash as a result of the August 1, 2017, Bitcoin hard fork has gross income under section 61 of the Internal Revenue Code (Code)?

The IRS reached the conclusion that, yes, a taxpayer who received Bitcoin Cash as a result of the August 1, 2017, Bitcoin hard fork has gross income because the taxpayer had an accession to wealth under section 61 of the Code. See Revenue Ruling 2019-24. The date of receipt and fair market value to be included in income will be dependent on when the taxpayer obtained.

IRC Sec. 61(a)(3) provides that gross income means all income from whatever source derived, including gains from the sale or exchange of a property. The term "property" includes services and the right to use property, but it does not include money. (Code Sec. 1273(b)(5))

Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the U.S. dollar or a foreign currency. (FAQ 1, Frequently Asked Questions on Virtual Currency Transactions (3/3/2021))

Cryptocurrency is a type of virtual currency that utilizes cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. Distributed ledger technology uses independent digital systems to record, share, and synchronize transactions, the details of which are recorded in multiple places at the same time with no central data store or administration functionality. (FAQ 3, Frequently Asked Questions on Virtual Currency Transactions (3/3/2021))

A "hard fork" occurs when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the existing distributed ledger. A hard fork may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. Following a hard fork, transactions involving the new cryptocurrency are recorded on the new distributed ledger, and transactions involving the legacy cryptocurrency continue to be recorded on the legacy distributed ledger. (FAQ 22, Frequently Asked Questions on Virtual Currency Transactions (3/3/2021))

An airdrop is a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers. (FAQ 22, Frequently Asked Questions on Virtual Currency Transactions (3/3/2021))

 Have a Virtual Currency Tax Problem?

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According to Law360, the gap between taxes owed each year and those actually paid could be more than $1 trillion, much larger than the most recent estimate of $441 billion, IRS Commissioner Chuck Rettig told the Senate Finance Committee on Tuesday.

IRS Commissioner Chuck Rettig told the Senate Finance Committee on April 13, 2021 that his agency is making the most of its resources, but "we do get outgunned." 

The Ballooning Of The Tax Gap, Rettig Said, Can Be Partly Attributed To The Growth In Popularity Of Cryptocurrency, Which Was Still A Relative Novelty The Last Time The Internal Revenue Service Released An Official Estimate Of The Tax Gap, Which Covered Tax Years 2011 Through 2013.

There are now more than 8,600 virtual currencies with a global market capitalization of about $2 trillion, he said. Rettig added that the estimates for 2011 through 2013 didn't have information about foreign-sourced and illegally sourced income.

"I Think It Would Not Be Outlandish To Believe That
The Actual Tax Gap Could Approach And Possibly Exceed
$1 Trillion Per Year," Rettig Said.

The $441 billion tax gap estimate, according to the IRS, is an average gross yearly estimated tax gap based on data from tax years 2011 through 2013. After late payments and enforcement work are factored in, the estimated net tax gap is $381 billion, according to the agency's website.

Rettig also noted that a recently released report found that the top 1% of all earners fail to report about 20% of their income and that some outside estimates have said the tax gap could exceed $7.5 trillion over the next decade.

The IRS will issue a new estimate next year, Rettig said. Meaningfully reducing the tax gap will take a multifaceted effort, he said.

Rettig said the agency has lost about 17,000 employees in the enforcement area over the last decade. It has about 6,500 frontline revenue agents who now handle the most complex individual and corporate tax matters and substantially all of them are dedicated to the most egregious cases, wealthy individuals or the largest corporations, he said. The IRS is using its resources to the best of its ability, he said, but it needs more.

"We do get outgunned. I mean there's no other way to say it," he said. "We are today able to identify evidence of tax fraud and signatures of tax fraud, if you will, and tax evasion that even two years ago we could not identify. But it's an example of we're heading in the right direction. We need to get there ahead of time."

President Joe Biden's Fiscal 2022 Budget Request Calls For A 10.4% Funding Increase For The IRS.

The request would include an increase of $417 million in funding to improve tax compliance and revenue collection under a multiyear project.

 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