Category Archives: criminal tax law

The Court of Federal Claims has held that penalties assessed for failure to file a Report of Foreign Bank and Financial Accounts (FBAR or FinCEN Form 114) are not internal revenue taxes subject to the full-payment requirement.

The Bank Secrecy Act (BSA) requires "United States persons" who have relationships with foreign financial agencies to disclose these relationships to the U.S. Department of Treasury (Treasury Department) on an FBAR. (31 U.S.C. §5314(a); 31 CFR §1010.350) Civil money penalties may be imposed under the BSA on any person who fails to file a required FBAR. The Treasury Department may sue for collection of the penalty. (31 U.S.C. § 5321)

Although the BSA is in title 31 of the U.S. Code, the authority to enforce 31 U.S.C. §5314 and collect FBAR penalties under 31 U.S.C. § 5321 has been delegated to IRS. (31 CFR § 1010.810(g))

The Court of Federal Claims has jurisdiction in any civil action against the United States for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, any penalty claimed to have been collected without authority, or any sum alleged to have been excessive or in any manner wrongfully collected under the internal revenue laws (28 U.S.C. § 1346(a)(1))

Courts lack jurisdiction of suits for refund of income tax unless the taxpayer has paid the entire amount of the assessment against it. (Flora v. United States (S Ct 1960) 5 AFTR 2d 1046; (S Ct 1958) 1 AFTR 2d 1925)

The Court of Appeals for the Third Circuit has stated in a footnote that it was "inclined to believe" that FBAR penalties are internal revenue taxes within the scope of 28 U.S.C. § 1346(a)(1), and are therefore subject to the Flora full payment rule. (Bedrosian v. U.S. (CA 3) 122 AFTR 2d 2018-7052)

In this case the IRS assessed a $752,920 penalty against Raghuveer Mendu for failing to file an FBAR with respect to foreign bank accounts that he had signatory authority over.

Mendu made a $1,000 partial payment against this penalty and filed suit in the Court of Federal Claims, alleging that the FBAR penalty assessed against him was erroneous and resulted in an illegal exaction of his $1,000 partial payment.

The government filed a counterclaim seeking payment of the entire FBAR penalty plus interest.

Mendu then filed a motion to dismiss his own claim, contending that the Court of Federal Claims lacked jurisdiction over it because the full-payment rule applied.

The Court of Federal Claims stated that the structure of the BSA indicated that the FBAR was not an internal revenue tax, as it was part of Title 31 of the United States Code ("Money and Finance"), not the Internal Revenue Code in Title 26. Congress's placement of FBAR penalties outside Title 26 means that they are not subject to various cross-references that equate penalties contained in Title 26 with taxes. The court noted that both Mendu and the government acknowledged they were unable to find any example of a penalty outside the Code that was subject to the Flora full-payment rule.

The Court of Federal Claims said that the Third Circuit's footnote in Bedrosian was unpersuasive. Jurisdiction was not at issue in Bedrosian, the Third Circuit dealt with the full-payment issue in a cursory fashion, and it said it left a definitive holding on the issue for another day.

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On its webpage, the IRS has discussed its Identity Verification Service, used to verify the identity of taxpayers when the IRS thinks there might be a case of identity theft.

If the IRS thinks there might be a case of identity theft and someone besides the taxpayer is trying to get the taxpayer's refund, then it will send one of a series of letters (letters 4883C, 5071C, 5447C, 5747C, 6330C, and 6331C) asking that the receiver of the letter verify their identity.

There are three ways to verify your identity with the IRS—online, by phone, and in-person. If you receive a 4883C or 6330C letter, you must call the IRS to verify your identity.

But if you (1) received a 5071C, 5747C, 6331C, or 5447C letter and (2) your financial and phone information is U.S.-based, then you can verify your identity online using the Identity Verification Service (IVS) website. The webpage does not give details as to how to determine whether you have U.S.-based financial and phone information.

The webpage mentions that if you received a 5071C, 5747C, 6331C, or 5447C letter and cannot verify online, then you can verify by calling the IRS phone number listed in the letter. Thus, if your financial or phone information is not U.S.-based, then you can verify via phone. The webpage also says that taxpayers who do not have the required documentation (discussed below) should also verify via phone.

If the IRS can't verify your identity over the phone, it may ask you to schedule an appointment at your local IRS office to verify your identity in person.

To use IVS, you first have to register. Then you can verify your identity. To register and verify, you need the following five things. You will need to enter some of this information into the IVS website:

1. Your personal account number from a:

   • Credit card,

   • Mortgage,

   • Student loan,

   • Home equity loan or home equity line of credit, or

   • Car loan

2. A mobile phone associated with your name.

3. Your 5071C letter, 5747C letter, 5447C letter, or 6331C letter.

4. The income tax return (Form 1040, 1040-PR, 1040-NR, 1040-SR, etc.) for the year shown on the letter. The IRS notes that a Form W-2 or 1099 is not an income tax return.

5. Your mailing address from your previous year's tax return. 

The webpage does not give details as to what is meant by "previous year's tax return." For example, if the letter shows 2017, and you have already filed your 2020 return, it isn't clear whether the “previous year’s tax return” refers to 2016 or 2019.

If you have filed a tax return with a new address, you must enter the old address from the previous year, even if it's not your current address. If you just filed your first tax return, then select the option labeled "I have not filed a tax return in the past seven years" as your filing status.

Have IRS Tax Problems?

     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

In a memo to IRS employees and on an IRS webpage, the IRS says it is expanding a temporary deviation from its regular procedures that will allow electronic or digital signatures on various forms that currently require handwritten signatures, i.e., that are not e-fileable. The decision was made due to taxpayer representatives' concerns about securing handwritten signatures during the coronavirus pandemic. 

The memo notes that electronic and digital signatures may be created by many different technologies. No specific technology is required for this purpose during this temporary deviation.

IRS's webpage says that taxpayers can send the following forms with digital signatures if they are postmarked from August 28, 2020, through December 31, 2021:

• Form 11-C, Occupational Tax and Registration Return for Wagering;

• Form 637, Application for Registration (For Certain Excise Tax Activities);

• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

• Form 706-A, U.S. Additional Estate Tax Return;

• Form 706-GS(D), Generation-Skipping Transfer Tax Return for Distributions;

• Form 706-GS(D-1), Notification of Distribution from a Generation-Skipping Trust;

• Form 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations;

• Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts;

• Form 706 Schedule R-1, Generation Skipping Transfer Tax;

• Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;

• Form 730, Monthly Tax Return for Wagers;

• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;

• Form 1120-C, U.S. Income Tax Return for Cooperative Associations;

• Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation;

• Form 1120-H, U.S. Income Tax Return for Homeowners Associations;

• Form 1120-IC DISC, Interest Charge Domestic International Sales - Corporation Return;

• Form 1120-L, U.S. Life Insurance Company Income Tax Return;

• Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;

• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;

• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;

• Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies;

• Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);

• Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship;

• Form 1128, Application to Adopt, Change or Retain a Tax Year;

• Form 2678, Employer/Payer Appointment of Agent;

• Form 3115, Application for Change in Accounting Method;

• Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts;

• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner;

• Form 4421, Declaration - Executor's Commissions and Attorney's Fees;

• Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes;

• Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues;

• Form 8038-G, Information Return for Tax-Exempt Governmental Bonds;

• Form 8038-GC; Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales;

• Form 8283, Noncash Charitable Contributions;

• Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms;

• Form 8802, Application for U.S. Residency Certification;

• Form 8832, Entity Classification Election;

• Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent;

• Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement; and

• Elections made pursuant to Internal Revenue Code section 83(b).

The IRS previously allowed electronic or digital signatures for a smaller group of forms through June 30, 2021. 

Have IRS Tax Problems?

     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 IRS, in a News Release, has provided information about, and copies of, new and updated 2021 draft Forms K-2 and K-3 for domestic passthrough entities that have items of international tax relevance that are reported to partners and/or shareholders.

The early drafts of the Schedules K-2 and K-3 proposed for the 2021 Form 1065 were originally released in July 2020. In September 2020, the American Institute of Certified Public Accountants submitted a letter to the IRS saying the proposed international changes to Schedules K-2 and K-3 may result in significant overreporting of information that isn't relevant in determining U.S. federal income tax. 

The redesigned forms and instructions are meant to help partnerships, S corporations and U.S. people who must file Form 8865 for controlled partnerships by explaining how to provide international tax information. 

The Forms Only Apply To Those Required To File Forms 1065, 1120-S Or 8865 If The Entity Has Items Of International Tax Relevance Such As Foreign Activities Or Foreign Partners.

The IRS has now released updated drafts of Forms K-2 and K-3 for partnerships has well as new drafts of these schedules to be used by S corporations (Schedule K-2, Shareholders’ Pro Rata Share Items – International; and K-3, Shareholder’s Share of Income, Deductions, Credits, etc. – International), and foreign partnerships (Schedule K-2 (Form 8865), Partners’ Distributive Share Items – International; and Schedule K-3 (Form 8865), Partner’s Share of Income, Deductions, Credits, etc. - International). 

According to the IRS, these new and updated forms are designed to make it easier for partners and shareholders of passthrough entities with items of international tax relevance to compute their U.S. income tax liability with respect to those items, including claiming deductions and credits. The IRS also said that domestic passthroughs with no items of international tax relevance won't need to use these forms.  . 

According to the IRS, these new and updated forms are designed to make it easier for partners and shareholders of passthrough entities with items of international tax relevance to compute their U.S. income tax liability with respect to those items, including claiming deductions and credits. The IRS also said that domestic passthroughs with no items of international tax relevance won't need to use these forms.  

Both Schedule K-2 (Form 1065) and Schedule K-2 (Form 8865) request the following information: 

• Part A. Is the partnership a withholding foreign partnership?
• Part B. Is the partnership (including the home office or any branch) a qualified derivatives dealer?
• Part 1. Partnership's other current year international information; including, among other items, gains on personal property sales and partner loan transactions. 
• Part 2. Foreign credit limitation; including gross income and deductions.
• Part 3. Other information for preparation of Form 1116, Foreign Tax Credit (Individual, Estate, or Trust) or Form 1118, Foreign Tax Credit - Corporations.
• Part 4. Information on partners’ Section 250 deduction with respect to foreign-derived intangible income (FDII).
• Part 5. Distributions from foreign corporations to partnership.
• Part 6. Information on partners’ Section 951(a)(1) and Section 951A inclusions.
• Part 7. Information to complete Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
• Part 8. The Schedule K-2 (Form 1065) requests information about a partnership’s interest in foreign corporation income (Code Sec. 960). The Schedule K-2 (Form 8865) asks for partners' information for base erosion and anti-abuse tax (Code Sec. 59A) purposes.

The Schedule K-2 (Form 8865) ends with Part 8. However, the Schedule K-2 (Form 1065) continues to request information on: 

• Part 9. Partners’ information for base erosion and anti-abuse tax (Code Sec. 59A); and 
• Part 10. Foreign partners' character and source of income and deductions. 

The Schedule K-2 (Form 1120-S) requests much the same information as the other two Schedules K-2. 

The Schedule K-3 for Form 1065, Form 8865, and Form 1120-S follows the structure of their respective Schedule K-2 and is provided by a passthrough entity to each partner or shareholder. 

There are no instructions for Schedules K-2 and K-3 (Form 1120-S) or Schedules K-2 and K-3 (Form 8865). The IRS plans to release draft instructions for these schedules in the summer of 2021. 

Have an International 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