Showing posts with label IRS. Show all posts
Showing posts with label IRS. Show all posts
Conservation Easement
As the Internal Revenue Service continues combatting abusive syndicated conservation easements, the agency today released additional information to help address questions related to the ongoing settlement initiative.
Today the Internal Revenue Service Chief Counsel released Chief Counsel notice which contains information regarding Chief Counsel's settlement initiative for certain pending Tax Court cases involving abusive syndicated conservation easement transactions.
The IRS encourages investors to seek independent professional assistance with understanding the settlement terms and CC Notice, and to help them assess their hazards of litigation. Investors would be well advised to obtain counsel from competent, independent advisers not related to or recommended by the SCE transaction promoter.
As previously noted, the IRS has been very successful in litigating SCE transactions. While some promoters have attempted to distinguish the decided cases, claiming that their transactions are "different" and do not suffer the same flaws, the IRS has many grounds for disallowing the tax benefits claimed from these abusive transactions. The IRS will soon publish updates to the Conservation Easement Audit Technique Guide, which will set out new arguments that taxpayers can expect the IRS to make in cases involving SCE transactions.
The CC Notice reflects the IRS's continuing efforts to combat abusive SCE transactions. Notably, the newly established Office of Fraud Enforcement and the National Fraud Counsel are coordinating with examining agents and Chief Counsel attorneys to canvas cases for additional fraud considerations, which might include assertion of the 75% civil fraud penalty, or where applicable, referrals to Criminal Investigation.
The CC Notice also responds to a recurring question raised by several groups of partners that have approached IRS Chief Counsel seeking to resolve their cases. The Chief Counsel settlement initiative requires that the partnership that engaged in the SCE transaction and all its partners agree to settle on the offered terms. Those terms include a complete disallowance of the claimed charitable contribution deductions and penalties, although some partners may deduct their cost of investing in the partnership. The CC Notice explains that, in rare cases, Chief Counsel may permit less than all the partners to settle on these terms.
In most cases, however, the IRS will require settling groups of less than all partners to pay an additional 5% penalty, reflecting the lost efficiencies of the IRS having to proceed with the partnership case. The IRS and Chief Counsel encourage partners who want to settle to work with the other partners to reach a full resolution of the case. The CC Notice also indicates that the IRS will settle with individual partners (or groups of individual partners) only when they own a significant percentage of the partnership and they cooperate with Chief Counsel, which may include providing evidence that Chief Counsel might use to support its contentions in the litigation. The CC Notice provides that partners or groups of partners interested in resolving their cases on these terms have 30 days from the date of this Notice to elect to settle.
The CC Notice also explains that Chief Counsel may consider making the same offer to newly filed cases in Tax Court. Chief Counsel will consider a variety of factors in deciding whether to extend the offer, including whether the partnership fully cooperated with the IRS during the audit.
Finally, the CC Notice answers numerous procedural questions related to the settlement terms.
Cryptocurrency
Tax season is one of the most dreaded times of the year for many, and when the added confusion of filing crypto returns is thrown into to the mix, things can get even stickier. News.Bitcoin.com
“That is massive” says Lance Wallach. “This question in the 2019 return … it forces every taxpayer in the United States to make a decision whether or not they’re going to be honest or not on this question, because its a yes or no and when you sign the tax return … it’s in small print, it says ‘under penalty of perjury I have reviewed this return and it’s true, complete and correct,’ so failing to check the box is incomplete.” He emphasizes: It’s a yes or no … it’s kind of like coming out of the closets … Anybody who was a trader in ’19, well, they were probably a trader in ’17 as well.
Wallach went on to explain that by reporting crypto gains in light of the new question, many crypto holders will inadvertently reveal that they first acquired their digital assets years back, which calls their previous years’ returns into suspicion and makes an IRS investigation more likely.
Wallachs service has so far seen two cryptocurrency audits with its clients, and the tax professional is interested in learning more about what triggers an IRS investigation. One client claimed to have never received the 2019 warning letters, but was audited all the same. According to Donnelly, the focus of the IRS is not so much on the methods by which capital gains are reported, but that all inputs and outputs are accounted for, and that the AML (anti-money laundering) narrative remains in central focus.
“I think people sense that the government views crypto traders as possibly engaging in some sort of crime,” Wallach notes. “We shouldn’t feel that way, but we do.” He cites a recent Chainalysis report showing the darknet’s share of crypto usage is less than 1% of the total. The tax expert went on: I would say most of these questions, as you read them, fall into the category of anti-money laundering … My suspicion is that if the IRS wanted to crack down on every American that traded cryptos they could do it, but the backlash from voters back to congress would snap the IRS in the face and they would be sent packing … So I think as long as they stay on the money laundering theme, then they look above board.
Wallach also shared a non-confidential snippet of a client’s IRS audit letter for a 2017 return relating to just under $40,000 in crypto gains. This client claims to have never received the warning letters from the agency.
Portion of a crypto tax audit document with notes from Donnelly. Source: cryptotaxaudit.com
Wallach emphasized throughout our conversation that it is not so much the various means by which a crypto holder reports gains — using different tax tools can and often does result in slightly different numbers — but that the IRS wants to verify total asset amounts add up, with all inputs and outputs accounted for. Especially where cash is concerned. The image of the form above lays out in detail what types of specific information the agency wants to know.
Donnelly further detailed that high frequency traders are sometimes concerned when seeing large proceeds calculated for their trades on 1099-K forms from crypto exchanges, but that costs are not yet factored into these amounts. This can make some traders understandably hesitant to file, but audits are less likely if the proceeds amount is reported fully.
“Half the court cases in tax court are because the IRS didn’t do the procedure right, the due process, if you will, ” Donnelly details, “but there’s this form called the FBAR form … that form is not a tax form, it’s not a part of the tax laws. The IRS administers it, but it’s not a part of the tax laws. It’s part of the Bank Secrecy Act, Title 18.” He goes on: Prosecutors love the FBAR form because they can say ‘you didn’t file it, you should have, whammo, here’s the penalty and we can assess it right now.’ There’s no due process defense on that.
The FBAR form has to do with assets held in foreign bank accounts, and must be filed by U.S. taxpayers if “the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.” The FBAR brings Fincen (Financial Crimes Enforcement Network) into the tax action, and has to do directly with combating money laundering, so Donnelly suspects this may be part of the reason the AML narrative has become the focus of crypto tax reporting. It is also a frightening prospect for crypto traders utilizing overseas exchanges and accounts.
The audit form asks taxpayers to report all crypto exchanges, opening up the possibility for FBAR to apply to them. Source: cryptotaxaudit.com
“The penalty for the anti-money laundering form — this is FBAR — is $10,000, plus $10,000 for every foreign account that you’ve never reported,” Donnelly elaborates. “If you never filed the FBAR, you just told the IRS all the exchanges you were on … you just incriminated yourself. They say ah, ‘well you’re on Huobi, Kucoin, Binance, you got five of ’em. That’s $50,000 plus the $10,000 I originally smacked you with for not filing a form. You didn’t do this in ’17, you didn’t do it in ’18, you didn’t do it in ’16 either, so I can just add these penalties up.’ Before you know it you’re up to $200, $300,000 and they can get worse if they want to be hostile about it.” He concludes:
The IRS controls the narrative. ‘We’re not going after crypto traders, we’re going after people that are violating the anti-money laundering laws’ … It’s implicitly ‘dirty,’ right? — to be caught for money laundering.
Staying Safe
Lance Wallach says his mission is to help people file what he calls a “bulletproof tax return,” as the penalties for simple mistakes and omissions can be so egregious, and so few tax advisors know how to help their clients when it comes to crypto.
News.Bitcoin.com also regularly publishes articles on available tax tools and software which may make the job of reporting easier for bitcoiners. Of course, when dealing with unpredictable and potentially dangerous groups like the IRS, individuals should exercise due diligence and research thoroughly before pursuing any course of action. Not surprisingly, the permissionless, peer-to-peer money designed to fight financial censorship that is bitcoin, has fast become a prime target for the very groups of middlemen, banks, politicians and other third parties it makes largely unnecessary.
IRS and Captive
With the October 15 filing deadline quickly approaching, the Internal Revenue Service today encouraged taxpayers to consult an independent tax advisor if they participated in a micro-captive insurance transaction.
The IRS encourages any taxpayer who has continued to engage in an abusive micro-captive insurance transaction to not anticipate being able to settle its transaction with the IRS or Chief Counsel on terms more favorable than previously announced settlement offers and that any potential future settlement initiative that the IRS may consider will require additional concessions by the taxpayer.
With this in mind, the IRS encourages taxpayers to consult an independent tax advisor if they participated in a micro-captive insurance transaction. These taxpayers should seriously consider exiting the transaction and not claiming deductions associated with abusive micro-captive insurance transactions, just like many other taxpayers did who were contacted by the IRS in March and July 2020.
For those taxpayers that do not exit the transaction and continue taking such deductions, the IRS will disallow tax benefits from transactions that are determined to be abusive and may also require domestic captives to include premium payments in income and assert a withholding liability related to foreign captives. The IRS Office of Chief Counsel will continue to litigate these abusive transactions in Tax Court.
Any future settlement terms will only get worse, not better. The IRS has never been better positioned in its quest to eradicate abusive transactions following the stand-up of a dedicated promoter office, a new Fraud Enforcement Office, enhanced service-wide coordination with Criminal Investigation and the Office of Professional Responsibility, and our advanced data analytics and mining capabilities. Taxpayers are strongly encouraged to use this opportunity to put this behind them and get into compliance.
Abusive micro-captives have been a concern to the IRS for several years. The transactions first appeared on the IRS "Dirty Dozen" list of tax scams in 2014 and remain a priority enforcement issue for the IRS. In 2016, the Department of Treasury, which identified certain micro-captive transactions as having the potential for tax avoidance and evasion. In March and July 2020, IRS issued letters to taxpayers who participated in a Notice 2016-66 transaction alerting them that IRS enforcement activity in this area will be expanding significantly and providing them with the opportunity to tell the IRS if they've discontinued their participation in this transaction before the IRS initiates examinations. Early responses indicate that a significant number of taxpayers who participated in these transactions have exited the transaction.
This summer, the IRS issued a new round of section 6112 letters to material advisors who filed with the IRS pursuant to Notice 2016-66. In addition, the IRS has deployed 12 newly formed micro-captive examination teams to substantially increase the examinations of ongoing abusive micro-captive insurance transactions.
Also, as part of IRS's continued focus in this area, the IRS has become aware of variations of the abusive micro-captive insurance transactions. Examples of these variations include certain Puerto Rico and offshore captive insurance arrangements that do not involve section 831(b) elections.
These variations appear to be designed and marketed with the express intent of avoiding reporting under Notice 2016-66 and yet perpetuating in some cases the same or similar abusive elements as abusive micro-captive insurance transactions. The IRS is aware of these abusive transactions and is actively working to counter their proliferation. The IRS cautions taxpayers that, to the extent they engage in variations of abusive micro-captive transactions that are substantially similar to Notice 2016-66, they must be disclosed. Otherwise, the IRS will impose penalties for the failure to disclose.
The Section 79 Plan Catch
The Pitch
The basic pitch behind section 79 plans is the opportunity to buy cash value life insurance using pre-tax dollars. The returns on cash value life insurance tend to be low, but if you could buy them with pre-tax dollars and borrow money from them tax-free but not interest free, the after-tax returns start to look a lot more attractive. The insurance agents sells it like this:
How would you like a retirement plan where you get:
1) An upfront tax deduction
2) Tax-protected growth,
3) Tax-free income in retirement, and
4) Don’t have to pay for an employee match into the plan?
How It Works
Section 79 is the section of IRS Code that encourages employers to offer life insurance along with health insurance to their employees. The rules are that you can deduct the premium cost for $50,000 of group life insurance for each employee. And what most companies do with that is offer $50,000 of free term insurance to their employees. It makes the employees think the employer cares about them, even though they probably need 10, 20, or perhaps 50 times as much insurance. The benefit is much cheaper than offering health insurance to the employees. In fact, premiums might only be $100 per person per year. That’s what a 30 year old healthy male can buy $50K in 5 year level term insurance for. So the employer gets to offer the employee a tiny amount of life insurance and write it off as a business expense. Sometimes, the employer will even let the employee buy a little bit more of the insurance, but any amount above and beyond the premiums due on the first $50K is fully taxable to the employee.
However, there is no rule that says the insurance offered has to be term life insurance. That’s where the insurance agents figure there’s an opportunity to sell some cash value life insurance. Of course, this is also where all the complexity comes in. A general truism in personal finance is that the more complex the product, the better it is for the guy selling it and the worse it is for the guy buying it. So when things start getting complicated, that’s the time to really beware. Of course there is a catch. In fact, there are quite a few catches…
The Deduction and Paying Taxes on Phantom Income
If the employer just buys all the employees a $50K term policy, the entire cost of that is probably deductible. If he decides to instead offer a permanent life insurance policy, the entire cost is no longer deductible. But, if properly designed, it’s possible that 20-40% of the cost of the premium can be deductible to the employee (the entire premium is deductible to the corporation.) That’s catch #1. Remember the insurance agent offered the opportunity to buy whole life insurance with pre-tax dollars. It’s pre-tax to the corporation, but not to you as the employee. You only get to buy 20-40% of the premium with pre-tax dollars. The rest has to be bought with post-tax dollars.
To make matters worse, you have to pay the taxes on that benefit from other income because this income to you is “phantom income” because you never saw it. So the employer gives you this policy (let’s say $100K premium per year), then you have to pay taxes on $60-80K of it (probably $20K or so) without ever actually getting the $100K with which to pay the taxes. It’s a bit like the phantom income issue with TIPS in a taxable account. That’s catch #2.
Scaring the Employees
Just like with a 401(k) or other typical employer-offered retirement plan, you can’t discriminate against your employees. If you want to buy yourself a whole life policy, you have to offer it to your employees. And that does get really expensive. However, the employees can choose not to participate. Why would they choose not to? Well, you have to scare them into not taking it, because if someone else is going to pay all the premiums, I’ll sure as heck take the policy.
Cryptocurrency
Tax season is one of the most dreaded times of the year for many, and when the added confusion of filing crypto returns is thrown into to the mix, things can get even stickier. News.Bitcoin.com recently talked with Lance Wallach or VEBA, a service that specializes in crypto returns. The U.S. Treasury-licensed Enrolled Agent shared some of his opinions and insights regarding crypto audits and what triggers them, as well as an example from a client.
The IRS announcement that thousands of tax warning letters would be issued to United States crypto holders last summer elicited calls for greater clarification and guidelines, but it hasn’t stopped the Internal Revenue Service audit train from steaming forward. The presence of a new crypto question on 2019’s Schedule 1 form has individuals concerned about reporting their crypto assets correctly more than ever, and according to experts, this is for good reason.
“That is massive” says Lance Wallach. “This question in the 2019 return … it forces every taxpayer in the United States to make a decision whether or not they’re going to be honest or not on this question, because its a yes or no and when you sign the tax return … it’s in small print, it says ‘under penalty of perjury I have reviewed this return and it’s true, complete and correct,’ so failing to check the box is incomplete.” He emphasizes: It’s a yes or no … it’s kind of like coming out of the closets … Anybody who was a trader in ’19, well, they were probably a trader in ’17 as well.
Wallach went on to explain that by reporting crypto gains in light of the new question, many crypto holders will inadvertently reveal that they first acquired their digital assets years back, which calls their previous years’ returns into suspicion and makes an IRS investigation more likely.
Wallachs service has so far seen two cryptocurrency audits with its clients, and the tax professional is interested in learning more about what triggers an IRS investigation. One client claimed to have never received the 2019 warning letters, but was audited all the same. According to Donnelly, the focus of the IRS is not so much on the methods by which capital gains are reported, but that all inputs and outputs are accounted for, and that the AML (anti-money laundering) narrative remains in central focus.
“I think people sense that the government views crypto traders as possibly engaging in some sort of crime,” Wallach notes. “We shouldn’t feel that way, but we do.” He cites a recent Chainalysis report showing the darknet’s share of crypto usage is less than 1% of the total. The tax expert went on: I would say most of these questions, as you read them, fall into the category of anti-money laundering … My suspicion is that if the IRS wanted to crack down on every American that traded cryptos they could do it, but the backlash from voters back to congress would snap the IRS in the face and they would be sent packing … So I think as long as they stay on the money laundering theme, then they look above board.
Wallach also shared a non-confidential snippet of a client’s IRS audit letter for a 2017 return relating to just under $40,000 in crypto gains. This client claims to have never received the warning letters from the agency.
Portion of a crypto tax audit document with notes from Donnelly. Source: cryptotaxaudit.com
Wallach emphasized throughout our conversation that it is not so much the various means by which a crypto holder reports gains — using different tax tools can and often does result in slightly different numbers — but that the IRS wants to verify total asset amounts add up, with all inputs and outputs accounted for. Especially where cash is concerned. The image of the form above lays out in detail what types of specific information the agency wants to know.
Donnelly further detailed that high frequency traders are sometimes concerned when seeing large proceeds calculated for their trades on 1099-K forms from crypto exchanges, but that costs are not yet factored into these amounts. This can make some traders understandably hesitant to file, but audits are less likely if the proceeds amount is reported fully.
“Half the court cases in tax court are because the IRS didn’t do the procedure right, the due process, if you will, ” Donnelly details, “but there’s this form called the FBAR form … that form is not a tax form, it’s not a part of the tax laws. The IRS administers it, but it’s not a part of the tax laws. It’s part of the Bank Secrecy Act, Title 18.” He goes on: Prosecutors love the FBAR form because they can say ‘you didn’t file it, you should have, whammo, here’s the penalty and we can assess it right now.’ There’s no due process defense on that.
The FBAR form has to do with assets held in foreign bank accounts, and must be filed by U.S. taxpayers if “the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.” The FBAR brings Fincen (Financial Crimes Enforcement Network) into the tax action, and has to do directly with combating money laundering, so Donnelly suspects this may be part of the reason the AML narrative has become the focus of crypto tax reporting. It is also a frightening prospect for crypto traders utilizing overseas exchanges and accounts.
The audit form asks taxpayers to report all crypto exchanges, opening up the possibility for FBAR to apply to them. Source: cryptotaxaudit.com
“The penalty for the anti-money laundering form — this is FBAR — is $10,000, plus $10,000 for every foreign account that you’ve never reported,” Donnelly elaborates. “If you never filed the FBAR, you just told the IRS all the exchanges you were on … you just incriminated yourself. They say ah, ‘well you’re on Huobi, Kucoin, Binance, you got five of ’em. That’s $50,000 plus the $10,000 I originally smacked you with for not filing a form. You didn’t do this in ’17, you didn’t do it in ’18, you didn’t do it in ’16 either, so I can just add these penalties up.’ Before you know it you’re up to $200, $300,000 and they can get worse if they want to be hostile about it.” He concludes:
The IRS controls the narrative. ‘We’re not going after crypto traders, we’re going after people that are violating the anti-money laundering laws’ … It’s implicitly ‘dirty,’ right? — to be caught for money laundering.
Staying Safe
Lance Wallach says his mission is to help people file what he calls a “bulletproof tax return,” as the penalties for simple mistakes and omissions can be so egregious, and so few tax advisors know how to help their clients when it comes to crypto.
News.Bitcoin.com also regularly publishes articles on available tax tools and software which may make the job of reporting easier for bitcoiners. Of course, when dealing with unpredictable and potentially dangerous groups like the IRS, individuals should exercise due diligence and research thoroughly before pursuing any course of action. Not surprisingly, the permissionless, peer-to-peer money designed to fight financial censorship that is bitcoin, has fast become a prime target for the very groups of middlemen, banks, politicians and other third parties it makes largely unnecessary.
About Lance – Captive Insurance Audit Support
While the IRS has been cracking down on syndicated conservation easements for over ten years, earlier this year Chuck Rettig, the Commissioner of the
While the IRS has been cracking down on syndicated conservation easements for over ten years, earlier this year Chuck Rettig, the Commissioner of the IRS, announced several campaign areas upon which the IRS would heighten focus in the coming year. Following through on this promise, on Nov. 12, 2019, the IRS announced a significant increase in enforcement actions for syndicated conservation easements in Issue Number IR-2019-182.
What is a Syndicated Conservation Easement?
Generally, a charitable deduction is not allowed for a gift of property that is less than the donor’s entire interest in the property. However, Internal Revenue Code sections 170(h)(1) through (h)(5) and Treasury Regulations section 1.170A-14 provide for an exception for a qualified conservation contribution. A qualified conservation contribution is a contribution of a qualified real property interest that includes a restriction, granted in perpetuity, on the use of the real property. The contribution must be exclusively used for conservation purposes. A charitable contribution deduction is allowed for the fair market value of the conservation easement donated to certain charitable organizations.
The concept supporting a charitable deduction for the donation of a conservation easement is fairly simple.However, in practice, taxpayers often run into limitations on the amount of the charitable deduction they can actually take.Rather than allow this limitation to prevent full use of a potential tax deduction, promoters and advisors set up syndications to purchase land for the purpose of then applying conservation easements.These structures often involve pass-through and tiered entities that hold or acquire real property to allow several investors to share in the charitable deduction, utilizing the deduction more fully so no taxpayer is likely to reach the 50 percent limitation on the contribution.Generally, the deductions claimed by investors in these transactions significantly exceed their amounts invested.In many cases, after acquisition by the syndication, property valuations and appraisals greatly inflate the value of the easement based on unreasonable conclusions about the development potential of the real estate.Then, the pass-through entity donates an easement encumbering the property to a tax-exempt entity, claiming a holding period of more than one year.
The IRS is Now Throwing Significant Resources Behind the Hunt for These Transactions
In 2016, the IRS labeled these transactions as “Listed Transactions” in Notice 2017-10.The Notice applies to certain transactions where promotional materials suggest to potential investors that they may be entitled to a share of a charitable contribution deduction that equals or exceeds two and a half times the amount invested.Per the Notice, individuals entering into these and substantially similar transactions must disclose them to the IRS via a disclosure statement on a Form 8886 as prescribed by Treasury Regulations section 1.6011-4(d).In addition, the Notice created disclosure and list maintenance obligations for material advisors to those transactions.
In 2018, these types of investments were added to the list of the Large Business and International Division’s compliance campaigns. The IRS moved these transactions from entity- and individual-based audits to issue-based treatment, handling these audits with highly trained revenue agents. The Conservation Easement Audit Techniques Guide includes almost 100 pages of instructions for examinations of charitable contributions of conservation easements.
These transactions are also included in the IRS’s 2019 “Dirty Dozen” list of scams to avoid. The IRS stated that syndicated conservation easements “start with a legitimate tax-planning tool that is improperly distorted … by a promoter to produce benefits that are too good to be true.”
In the IRS’s most recent publication, IR-2019-182, the IRS warned that “[c]oordinated examinations are being conducted across the IRS in the Small Business and Self-Employed Division, Large Business and International Division and Tax Exempt and Government Entities Division. Separately, investigations have been initiated by the IRS’s Criminal Investigation division. These audits and investigations cover billions of dollars of potentially inflated deductions as well as hundreds of partnerships and thousands of investors.”
The IRS also stated it is using “innovation labs” to develop new, more extensive enforcement tools that employ advanced technologies to discover additional abusive syndicated conservation easement transactions.
The Time to Consult a Tax Professional is Now
The IRS announced that it “will not stop” in its pursuit of “everyone involved in the creation, marketing, promotion and wrongful acquisition of artificial, highly inflated deductions based on these aggressive transactions.”The Service further stated that “every available enforcement option will be considered” including both civil penalties and criminal investigations.
With enhanced enforcement efforts at the IRS level, and over 80 cases currently pending in the Tax Court, taxpayers engaged in any syndicated conservation easement transaction should immediately consult with a competent tax attorney to determine the best course of action.The IRS is not only searching for those who took deductions, but also promoters, appraisers, tax return preparers, and all others involved in the transactions.
Taxpayers should heed Commissioner Rettig’s warning and take steps to get back into compliance before they hear from the IRS. Taxpayers with questions regarding how to get into compliance and whether they may be vulnerable to civil or criminal investigation or penalties should contact
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