Category Archives: criminal tax law

According to CoinTracker, to improve crypto tax compliance, starting the 2025 tax year, the IRS has proposed crypto brokers issue a new tax form called Form 1099-DA (similar to stock brokers) showing capital gains and losses.

1099-DA forms will make crypto tax compliance easier if your transactions are contained within an exchange with no transfers in or out.

Moderate and advanced crypto users will need CoinTracker to compute gains & losses and supplement 1099-DAs with data gaps.

The bipartisan Infrastructure Investment and Jobs Act passed in November 2021 required digital assets “brokers” to report users’ gain & loss information to the IRS in the way that stock brokers already do. On August 25, 2023, the IRS issued proposed regulations (Regs) defining the term “broker” and outlining requirements brokers must follow to comply with tax reporting rules related to cryptocurrency transactions.

Who are brokers?

According to the proposed Regs, a broker is “any person that in the ordinary course of a trade or business stands ready to effect sales to be made by others.” There are five potential categories of brokers.

• 

  Digital asset platforms: This category includes centralized exchanges, cryptocurrency ATMs, and certain DeFi platforms where the operator is in a “position to know the identity of the party that makes the sale” and “maintains sufficient control or influence” over the service provided.

• Digital asset-hosted wallet providers: This category includes web3 wallet providers that allow users to swap digital assets directly. Note: If the wallet does not offer a swap feature, it is not a broker.  
• Digital asset payment processors: This category includes products and services that intake cryptocurrency, convert it into USD, and send it to merchants.
• Other brokers: This category includes stablecoin issuers.
• Real estate persons: This category includes middlemen involved in real estate transactions involving cryptocurrency payments.

Merchants who sell goods or services in exchange for digital assets, Proof of Work (PoW) and Proof of Staking (PoS) validation providers, and people who sell hardware and software wallets (without any crypto swap features), are not classified as brokers.

What transactions are subject to broker reporting?

The proposed regulations subject cryptocurrency sold for cash and crypto-to-crypto trades, including the payment of transaction fees in crypto, to broker reporting. Non-fungible token (NFT) transactions are also subject to reporting. Brokers are expected to report gains and losses generated from these activities to users and the IRS on a new tax form called Form 1099-DA.

Note that airdrops, hard forks, and gains & losses related to loan transactions, transferring assets into liquidity pools, and wrapping and unwrapping transactions are not addressed in the proposed regulations due to an absence of guidance in these areas.

It is possible, however, that these transactions will be included in future iterations of 1099-DAs or other tax forms. Note that these transactions are still reportable on your tax return and may be taxable even though they are not immediately reported on 1099-DAs.

Timing of the rules

The crypto community has a 60-day comment period ending on October 24, 2023, to respond to the proposed regulations published by the IRS and the Treasury. After the comment period ends, the IRS will take all comments into consideration, make whatever changes it deems appropriate based on those comments, and issue final regulations, most likely in 2024.

If the proposed Regs become finalized with no changes, for the 2025 tax year, brokers will be required to issue 1099-DA forms with only gross proceeds (sales) amount. For the 2026 tax year and onwards, brokers must issue complete 1099-DAs that report process, cost basis, and gains & losses to taxpayers.

Impact on you & why you need CoinTracker

Tax compliance will be easier for simple crypto users

If you are a single-exchange user, the proposed 1099-DAs will simplify your crypto tax compliance. If implemented effectively (similar to in the stock world), you can rely on the gains & losses reported on these forms to complete your tax return without relying on a crypto tax tool like CoinTracker. Expect to receive complete 1099-DAs for the 2026 tax year.

Moderate & advanced users will need CoinTracker

In the following scenario(s) you will need CoinTracker to reconcile your crypto transactions and compute gains & losses accurately.

You have crypto & NFT transactions in the 2023, 2024, and 2025 tax years
Complete 1099-DAs will not roll out until at least the 2026 tax year. You will need CoinTracker to track your cost basis and gains & losses until you receive complete 1099-DAs from brokers.

You have transactions not reported on the early phases of 1099-DAs.
For example,  airdrops, hard forks, loan transactions, wrapping/unwrapping coins & adding/removing liquidity to/from liquidity pools will not be reported on early 1099-DAs. You will need to compute income and gains & losses related to these transactions using CoinTracker.

You have transferred assets from one broker to another broker.
For example,  Shehan buys 1 BTC on Coinbase, then transfers it to Gemini to sell it there because it offers cheaper trading fees. Under the current implementation of the proposed Regs, Coinbase is not required to share cost basis information with Gemini, so Gemini will not know the cost basis of your BTC unless you track it using CoinTracker. If you don’t keep track of the cost basis, you will likely inflate your capital gains and overpay taxes in this scenario.  

You have transferred assets from a broker to your self-custody wallet.
For example,  Shehan buys $100 of BTC every Friday on Coinbase. At the end of each month, he transfers these coins to his ledger wallet for long-term secure storage. To keep track of the cost basis for each coin and the date purchased (which is required for future capital gain calculations), Shehan will need CoinTracker.

You have transferred assets from your self-custody wallet to a broker.
Continuing with the above example, Shehan transfers 0.1 BTC to Coinbase towards the end of the year and sells it for cash (or exchanges it with another coin). Shehan will need CoinTracker to compute the correct gain & loss by taking the right cost basis into account. Coinbase will not have the cost basis information in this scenario.

You have transferred assets from one self-custody wallet you own to another self-custody wallet you own.
For example, Shehan transfers 0.1 BTC (cost basis $1,000) from self-custody wallet A to Self-custody wallet B. In order to properly maintain the cost basis lots on a per-wallet basis and accurately apply HIFO or LIFO identification methods, Shehan will need to use CoinTracker.

You have staking or mining income directly credited into your self-custody wallet.
For example,  Shehan stakes Cardano and receives rewards directly to his self-custodial wallet. Here, Shehan will need CoinTracker to compute income at the time of receipt and calculate gains & losses when he sells the rewards in the future.

You have transactions in non-broker platforms
For example, Shehan trades cryptocurrency in an overseas exchange (like Binance.com) or a DeFi platform not classified as a broker. In this scenario, Shehan will not receive any 1099-DAs at all. He will need CoinTracker to reconcile his activity and compute gains & losses accurately.

The proposed Regs also require you to maintain cost basis lots on a per-wallet basis. CoinTracker already supports this feature. Moreover, Specific identification of lots such as Highest-in-First-Out (HIFO) or Lowest-in-First-Out (LIFO) is allowed as long as you keep detailed records of your lots held in your self-custodial wallet. You can already keep detailed track of your lots and identify them under HIFO or LIFO methods using CoinTracker. (If you don’t have CoinTracker or another way to accurately identify the lots, your tax lot ID method defaults to First-in-First-out (FIFO), which is not generally tax advantageous).

Overall, the IRS is planning to narrow the tax gap by requiring brokers to report your crypto gains and losses directly to the IRS and compare these reported amounts with the numbers you report on your Form 1040. 

If there is a discrepancy, the IRS system will automatically send you a notice to correct your error. This new system will ultimately allow the IRS to focus its audit efforts on bad actors while giving compliant good actors peace of mind with crypto taxes.

Have An IRS Tax Problem?

Marini & Associates, P.A. 

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On August 8, 2023 we posted IRS Releases Inflation Reduction Act 1-year report card Including Efforts To Pursues High-Income Individuals Tax Evaders where we discussed that the IRS is working to ensure high-income filers pay the taxes they owe. Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to hide their income and evade paying their share. The IRS is now taking swift and aggressive action to close this gap.

Now TIGTA has released its report stating that the IRS Needs to Leverage the Most Effective Training for Revenue Agents Examining High-Income Taxpayers.

In August 2022, The Secretary Of The Treasury Stated
That IRA Funding Was Intended In Part To Increase Examination Of High-Income Taxpayers.

The Secretary also directed that no additional resources, including any new hires, shall be used to increase the share of small businesses or households below the $400,000 threshold that are audited relative to historical levels. 

The Large Business and International (LB&I) Division has expertise in training revenue agents on examining high-income taxpayers. However, the IRS’s efforts to train new hires do not appear to be fully leveraging this expertise. The IRS treats this training as specialized and only offers it when necessary for employees auditing in this specialized area. Commensurate with the new IRA funding, the IRS should revise its training paradigm and expose new hires to the types of issues associated with high-income taxpayer returns. 

The Small Business/Self-Employed Division’s Fiscal
Year 2023 Examination Plan Showed No Significant Increase
In The Number Of High-Income Individual Audits.

Additionally, the LB&I Division’s resource allocation plan is not detailed enough for TIGTA to assess the IRS’s intended efforts to examine high-income individuals with the increased enforcement funding. 

The IRS does not have a unified or updated definition for individual high-income taxpayers. The Tax Reform Act of 1976 required annual publication of data on individual income tax returns reporting income of $200,000 or more. The current examination activity code schema still uses $200,000 as the main threshold. The IRS’s Inflation Reduction Act Strategic Operating Plan sets forth leveraging data analytics to improve the IRS’s understanding of the tax filings of high-wealth individuals and to address potential noncompliance. Consequently, the IRS needs to update its high-income taxpayer definition to better identify and track examination results and manage examination priorities. 

TIGTA made six recommendations, including that the IRS leverage the LB&I Division’s extensive knowledge base by embracing its current high-income individual training content and ensure that examination plans follow the Secretary of Treasury’s Directive to prioritize coverage of individual high-income earners over $400,000.

The IRS agreed or partially agreed with five of the six recommendations and disagreed with one recommendation. 

Have Unreported Income?

Marini & Associates, P.A. 

Read more at: Tax Times blog

The case below indicates exactly how NOT to handle an IRS audit and the implications of such actions. According to Law360, an owner of a media brokerage firm agreed to pay $2.5 million in restitution for back taxes after admitting she failed to report $9.5 million in personal income and $10 million in gross receipts from her company, according to a plea filed in Maryland federal court in the case of U.S. v. Susan K. Patrick, case number 1:23-cr-00254-GLR, in the U.S. District Court for the District of Maryland. 

Susan Patrick, who co-owns Patrick Communications with her husband, pled guilty to one count of filing a false individual tax return for 2013, reporting an income loss of $773,000 when the couple actually had earned $4.3 million that year, according to the plea agreement filed on August 31, 2023.

Patrick also admitted to lying to Internal Revenue Service agents who began investigating her company in 2016 for unfiled employment tax returns, according to the plea, which she signed in March.

During the collections investigation, the IRS discovered she and her husband had not filed corporate returns for 2012 through 2014. Patrick told the IRS that the couple had filed the returns on time and that the returns had been prepared by their accountants, according to the plea.

• Patrick then sent the IRS doctored versions of the returns that had been accurately prepared by the accountants, but never filed by the couple, for the missing years, according to the plea. Patrick falsely reduced the couple's income by more than $9.5 million for the three years and hid $10 million in their company's gross receipts, according to the plea.
• Patrick backdated her signature on the falsified returns to make it look as if she had signed them for on-time submission, according to the plea.
• Additionally, Patrick never filed corporate or personal returns for 2015, despite her accountants having prepared them for her, according to the plea. 

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

According to Law360, a Holocaust survivor who refused to pay $8.8 million in tax penalties for failing to disclose two Swiss bank accounts has agreed to pay $6 million following settlement delays, ending the government's lawsuit against him, according to a New York federal court in U.S. v. Walter Schik, case number 1:20-cv-02211, in the U.S. District Court for the Southern District of New York.

Walter Schik, a retired tie salesman and business owner, agreed to the settlement almost a year after the government announced a deal, according to an order filed on August 23, 2023. The government sued Schik in 2020 for failing to pay $8.8 million in FBAR penalties for 2007. The $16 million in his unreported Swiss accounts, from which he made no withdrawals, had been inherited from relatives killed in Nazi Germany's concentration camps, Schik said.

Schik, who became a U.S. citizen in 1957 after escaping to New York City as a teenager, had argued that he shouldn't have to pay the penalties. He had little formal education, he said in filings, and his accountant never told him about the legal requirement to file a Report of Foreign Bank and Financial Accounts, or FBAR, with the Internal Revenue Service. 

The government announced that it had reached a settlement with him in August 2022. But when negotiations dragged on, U.S. District Judge Mary Kay Vyskocil threatened to dismiss the suit for failure to prosecute, calling the government's failure to finalize the deal "unacceptable" in a July order threatening sanctions.

Judge Vyskocil had rejected the government's request to reduce the case to judgment, saying in March 2022 that it was for a jury to decide whether Schik "was willful rather than merely negligent," therefore triggering the steep penalties, when he didn't file the FBAR.

Schik opened one bank account in Switzerland in the 1960s to deposit money recovered from relatives who had died in the concentration camps, according to filings. His Swiss money manager continued to open and close accounts on his behalf, the filings said, with Schik only signing his name to forms he never himself filled out.

The manager's opening and closing of accounts resulted in the two bank accounts that were ultimately targeted by the IRS.

The Swiss money manager was indicted in 2010 on charges of conspiring with U.S. taxpayers and foreign financial institutions to enable his clients to hide Swiss bank accounts from the IRS. After finding out about the indictment, Schik filed a voluntary disclosure to the IRS, according to filings.

Schik told the court that his opening of the Swiss accounts, and even his initial hiding of their contents,  was understandable and traceable to his suffering from a "Holocaust mentality," according to a September 2021 filing. 

Schik believed he needed secret funds in case he ever needed to flee persecution again, they said.

Born in Austria, Schik was 13 when his family was sent to concentration camps, he told the court. He was sent to a camp near Budapest, Hungary, where he was released with the sons of a wealthy Jewish business owner who had made a deal with the Nazis, while Schik's parents and siblings died at Auschwitz, he said. He escaped the Nazis a second time, tearing the Star of David from his jacket to hide after being captured, and later immigrated to the U.S. at age 16 under the identity of another child, he said.

"This deeply traumatic experience has affected Mr. Schik's entire life and, as relevant in this case, he justifiably believed that it was important to always maintain some funds in Switzerland, a neutral country during World War II," he said in a 2021 memorandum seeking to block the government's motion to reduce the penalties to judgment.

"This is a far cry from the typical offshore banking case, where secret accounts are used to skim cash profits and avoid tax," the memo said.

Been Assessed a 50% Willful FBAR Penalty?

 

 

Contact the Tax Lawyers at 

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