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Category Archives: criminal tax law

Maltese Pension Arrangements Makes 2022 IRS “Dirty Dozen” List

WASHINGTON – The Internal Revenue Service today began its "Dirty Dozen" list for 2022, which includes potentially abusive arrangements that taxpayers should avoid.

 

The potentially abusive arrangements in this series focus on four transactions that are wrongfully promoted and will likely attract additional agency compliance efforts in the future. Those four abusive transactions involve charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance, and monetized installment sales.

 

"Taxpayers should stop and think twice before including these questionable arrangements on their tax returns," said IRS Commissioner Chuck Rettig. 


"Taxpayers Are Legally Responsible For What's On
Their Return, Not A Promoter Making Promises
And Charging High Fees. 

Taxpayers Can Help Stop These Arrangements By Relying On Reputable Tax Professionals They Know They Can Trust."

 

The IRS reminds taxpayers to watch out for and avoid advertised schemes, many of which are now promoted online, that promise tax savings that are too good to be true and will likely cause taxpayers to legally compromise themselves.

 

Taxpayers, tax professionals and financial institutions must be especially vigilant and watch out for all sorts of scams from simple emails and calls to highly questionable but enticing online advertisements.

 

The first four on the “Dirty Dozen” list are described in more details as follows: 

  1. Maltese (or Other Foreign) Pension Arrangements Misusing Treaty. In these transactions, U.S. citizens or U.S. residents attempt to avoid U.S. tax by making contributions to certain foreign individual retirement arrangements in Malta (or possibly other foreign countries). In these transactions, the individual typically lacks a local connection, and local law allows contributions in a form other than cash or does not limit the amount of contributions by reference to income earned from employment or self-employment activities. By improperly asserting the foreign arrangement is a “pension fund” for U.S. tax treaty purposes, the U.S. taxpayer misconstrues the relevant treaty to improperly claim an exemption from U.S. income tax on earnings in, and distributions from, the foreign arrangement.
  2.  Puerto Rican and Other Foreign Captive Insurance. In these transactions, U.S owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation with cell arrangements or segregated asset plans in which the U.S. owner has a financial interest. The U.S. based individual or entity claims deductions for the cost of “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the foreign corporation. The characteristics of the purported insurance arrangements typically will include one or more of the following: implausible risks covered, non-arm’s-length pricing, and lack of business purpose for entering into the arrangement.

  3.  Use of Charitable Remainder Annuity Trust (CRAT) to Eliminate Taxable Gain. In this transaction, appreciated property is transferred to a CRAT. Taxpayers improperly claim the transfer of the appreciated assets to the CRAT in and of itself gives those assets a step-up in basis to fair market value as if they had been sold to the trust. The CRAT then sells the property but does not recognize gain due to the claimed step-up in basis. The CRAT then uses the proceeds to purchase a single premium immediate annuity (SPIA). The beneficiary reports, as income, only a small portion of the annuity received from the SPIA. Through a misapplication of the law relating to CRATs, the beneficiary treats the remaining payment as an excluded portion representing a return of investment for which no tax is due. Taxpayers seek to achieve this inaccurate result by misapplying the rules under sections 72 and 664.

  4.  Monetized Installment Sales. These transactions involve the inappropriate use of the installment sale rules under section 453 by a seller who, in the year of a sale of property, effectively receives the sales proceeds through purported loans. In a typical transaction, the seller enters into a contract to sell appreciated property to a buyer for cash and then purports to sell the same property to an intermediary in return for an installment note. The intermediary then purports to sell the property to the buyer and receives the cash purchase price. Through a series of related steps, the seller receives an amount equivalent to the sales price, less various transactional fees, in the form of a purported loan that is nonrecourse and unsecured. 

Taxpayers Who Have Engaged In Any Of These Transactions
 Or Who Are Contemplating Engaging In Them Should Carefully Review The Underlying Legal Requirements 
And Consult Independent, Competent Advisors

Before Claiming Any Purported Tax Benefits.


Taxpayers who have already claimed the purported tax benefits of one of these four transactions on a tax return should consider taking corrective steps, such as filing an amended return and seeking independent advice. 


Where appropriate, the IRS will challenge the purported tax benefits from the transactions on this list, and the IRS may assert accuracy-related penalties ranging from 20% to 40%, or a civil fraud penalty of 75% of any underpayment of tax.

 

While this list is not an exclusive list of transactions the IRS is scrutinizing, it represents some of the more common trends and transactions that may peak during filing season as returns are prepared and filed. Taxpayers and practitioners should always be wary of participating in transactions that seem “too good to be true.” 

The IRS remains committed to having a strong, visible, robust tax enforcement presence to support voluntary compliance. To combat the evolving variety of these potentially abusive transactions, the IRS created the Office of Promoter Investigations (OPI) to coordinate service-wide enforcement activities and focus on participants and the promoters of abusive tax avoidance transactions. 

The IRS has a variety of means to find potentially abusive transactions, including examinations, promoter investigations, whistleblower claims, data analytics and reviewing marketing materials.

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

FBAR Case Investigations Remain a Priority Despite Drop In 2020 Investigations

According Law360Although Internal Revenue Service investigations into people failing to file foreign bank and financial account reports fell sharply during the COVID-19 pandemic, enforcement remains a priority because it's an easy source of revenue, government and private practitioners told Law360.


IRS Statistics For The 2020 Calendar Year Showed
FBAR Investigations Declined Nearly 35%
From 2019, From 5,670 To 3,707.


The number of such examinations closed also declined, from 2,652 to 1,495, while penalties collected dropped from $77.5 million to $46.6 million. The statistics were published in the agency's annual progress report on FBAR cases, required under the USA Patriot Act of 2001. 


The IRS press office said the declines are a direct result of the coronavirus pandemic. The agency's People First Initiative, conducted from April 1 to July 15, 2020, suspended all in-person contacts and some compliance actions, and even after the initiative expired the IRS did not resume its rate of investigations, the agency said.

Two years into the pandemic, the IRS says it expects investigations to rise. As a goal, it will prioritize FBAR awareness to help filers and practitioners comply with FBAR recordkeeping requirements, it said. While the agency did not specify the steps it would take or set specific goals, it told Law360 it would rely on traditional, web-based and social media communications.

COVID Basically Sidelined IRS Enforcement Efforts Across The 
Board," David W. Klasing, A Solo Practitioner, Told Law360. 
"A lot of IRS officers were marginally effective people to start with," he said. "When you pull them out of the office and put them at home, ineffectiveness went to nonperformance."

While the IRS may be conducting fewer investigations, it appears to be hoping for a big payoff from the ones it is pursuing.

The IRS will go after FBAR cases where it thinks there are potential willful violations, and also has started pursuing criminal investigations against people making false, nonwillful statements, he said.

The IRS still investigates taxpayers for failing to file, but the agency has prioritized other areas of tax evasion such as cryptocurrencies, said Andrew Gordon, president of the Gordon Law Group.

The IRS annual report showed examination rates varied widely from 2012 to 2019, from a high of 8,420 in 2014 to a low of 2,807 in 2018. Civil FBAR examinations, penalties levied and penalties collected also rose and fell during the same period. Despite the ups and downs, the number of FBAR filings rose steadily each year from 807,040 in 2012 to 1.4 million in 2020.

The IRS' emphasis on the need to file FBARs, particularly after 2010, is one reason filings increased, Crouch said.

"I give the IRS a lot of credit for improving communication," he said.

Still, a significant number of taxpayers remain unaware of the filing requirement and there is much progress that the agency still needs to make to increase the number of FBAR filings, said Holland & Knight LLP partner Chad Vanderhoef.

"The unfortunate reality is that many taxpayers facing FBAR penalties did not know of the filing requirement," he said. "And the fact that many return preparers similarly lacked awareness exacerbated the problem."


But FBAR Enforcement Remains A Strong Priority

For The IRS, Practitioners Said.


The government continues to collect data through enhanced information sharing efforts and other methods, such as John Doe summonses and cooperation from parties entering into nonprosecution agreements, Vanderhoef told Law360. The information will trigger investigations into offshore accounts, he said.


Do You Have Undeclared Offshore Income?

 
Want to Know if the OVDP Program is Right for You? 
Contact the Tax Lawyers at 
Marini & Associates, P.A.   
for a FREE Tax Consultation contact us at:
or Toll Free at 888-8TaxAid (888) 882-9243




Read more at: Tax Times blog

No Undue Duress To Void a Signed Form 872 Consenting to Extend the SL In Order To Obtain an Appeals Hearing


According to Procedurally Taxing, in Evert v. Commissioner, T.C. Memo 2022-48, the Tax Court addressed a statute of limitations defense raised by petitioner.  Petitioner had signed a Form 872 consenting to the extension of the statute of limitations on assessment; however, she argued that she did so under duress which invalidated the consent.  

The Court found that the consent was valid and, therefore, the notice of deficiency was timely issued.  While duress arises regularly in the joint return context, it also comes into play regularly in the consent context and particularly with unrepresented taxpayers.

The IRS selected Ms. Evert’s 2015 and 2016 returns for exam.  She disagreed with the results of the examination and filed an administrative appeal upon receipt of the 30 day letter. 

The court provided a paragraph of explanation of the Appeals Officer’s (AO) background.  Because the actions of the AO stood at the heart of the case, the background material assists in understanding the case.  He was former military, former SSA hearing officer, former attorney in private practice and former FBI agent before joining Appeals.  His background became important because his credibility was important in deciding whether he exerted undue pressure on Ms. Evert to sign the extension form.


The AO reached out to petitioner to schedule a conference and to gather information she might provide in support of her case.  She was somewhat slow in providing information.  Her case ended up on a report in Appeals showing cases in which the statute of limitations on assessment would expire in nine months and the AO decided that obtaining a statute extension would best serve this case. (
For most Examination cases, there must be at least 365 days remaining on the statute of limitations when a case is received by Appeals (FAQ #12).


So, the AO wanted closure or more time on the statute of limitations and Ms. Evert wanted more time to respond to the request for information.  Each side needed something but the IRS had what some might consider the upper hand since it could issue the notice of deficiency if its comfort level dipped too low.  To gain more time to work with Appeals, Ms. Evert signed the consent form.  Did the pressure to do so exceed the normal pressures that exist in this situation?  That’s what the Court has to decide.

The burden to show that the AO obtained the consent by duress falls on Ms. Evert.  The Court quoted from an old Board of Tax Appeals case, Diescher v. Commissioner, 18 B.T.A 353, 358 (1929) to define duress.

In Diescher the Court found that the taxpayer signed the waiver under uress because the IRS threatened to impose the fraud penalty if he did not sign.  The Tax Court has also held on numerous occasions that simply advising a taxpayer that an assessment will occur without a consent to extend does not rise to the level of duress.

Here, the court found that petitioner failed to meet her burden.  The AO simply informed her that he would close her case without a consent holding open the statute.  In finding this the Court accepted the testimony of the AO as credible and found petitioner’s testimony about statements made by the AO too vague to overcome the AO’s credible testimony about his actions.  The Court distinguished Diescher because it found no evidence that the request to sign the consent was coupled with a threat of the imposition of a penalty of the taxpayer withheld consent.

Cases challenging agreements whether the consent to extend or some other type of agreement put a relatively heavy burden on the taxpayer seeking to show the signing resulted from some wrongdoing on the part of the IRS. 

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

Japanese Tax Audit Leads to IRS $11.6M FBAR Assessment


According to Law360, a Japanese businessman and legal resident of the U.S. owes almost $11.6 million in penalties and fees for failing to report dozens of bank accounts he maintained in Japan for over a decade, the U.S. told a Hawaii federal court.

Osamu Kurotaki willfully failed to file Reports of Foreign Bank and Financial Accounts from 2011 to 2013, the government said Thursday in a counterclaim to a February complaint filed by Kurotaki. He also failed to report income he had earned from his overseas companies, according to the government.

Kurotaki Said In His February Complaint That He Was Not Aware Of His Obligation To File FBARs And Did Not Understand The Implications Until An Audit In Japan.


He claimed his tax preparer did not discuss the requirement with him. The Internal Revenue Service did not obtain the necessary supervisory approval before imposing the penalties, according to Kurotaki, and the agency improperly included balances in his penalties.

However, Kurotaki deliberately failed to report income from real estate and apparel companies he operated in Japan, Hong Kong, Thailand and the U.S., the government said in its counterclaim. He also had a financial interest in 42 foreign bank accounts in 2011, 36 in 2012 and 32 in 2013, the government said.

Kurotaki disregarded numerous indications that he had to report his foreign accounts, the government said. 

He Received Notices From His Tax Preparer That There Were Penalties For Failing To Report, According To The Government.


 He Also Ignored An "FBAR Client Letter" From His Preparer Informing Him Of The Requirement And Inviting Him To Discuss Any Questions About It.


Kurotaki never disclosed his accounts to his tax preparer, the government claimed. Instead, he signed and returned a tax form to his preparer omitting a page that asked for his foreign account information, according to the government.

He eventually filed delinquent FBARs for 2011 and 2012 but failed to include all his accounts, the government said. He timely filed a 2013 form but it, too, failed to list all his accounts, according to the government.

People are typically obliged to disclose foreign accounts if their balances exceed $10,000 by using FBARs, which are filed annually and are due in April. Compliance penalties are steeper for willful violations than nonwillful violations.


Do You Have Undeclared Offshore Income?

 
Want to Know if the OVDP Program is Right for You? 
Contact the Tax Lawyers at 
Marini & Associates, P.A.   
for a FREE Tax Consultation contact us at:
or Toll Free at 888-8TaxAid (888) 882-9243


Read more at: Tax Times blog

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