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.

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.

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.

Cryptocurrency

Crypto tax firms will be hired as “outside contractors” that will help them audit cryptocurrency owners. The Internal Revenue Service (IRS) sent to cryptocurrency tax software firms like CryptoTrader.Tax. This can potentially refer to the IRS’ bid to enforce a potentially stricter tax regime for cryptos in the U.S. According to CryptoTrader.Tax, they received an email from the IRS back in May 2020 that says they are “soliciting private contractors to aid in the audits of cryptocurrency-related tax returns." An excerpt from the email reads: “The Internal Revenue Service is engaging outside contractors to assist our Revenue Agents in calculating taxpayers’ gains or losses as a result of their transactions involving virtual currency.” While CryptoTrader.Tax disclosed that they “will not be pursuing” a contract with the IRS, there is no certainty that other contractors IRS reached out to will not accept the offer. Forbes noted that the only possible reason IRS is hiring experts to help them provide consultancy services in auditing cryptocurrency transactions is that they have plans to expand the “volume and scrutiny of cryptocurrency audits.” The IRS has long defined cryptocurrencies as “properties” to put them within its regulatory ambit. Taxable events in cryptocurrency transactions include those that involve an exchange of cryptocurrencies, income generation from mining, and receipt of cryptocurrencies for goods and services. As many may recall, Forbes stated that back in 2017, the IRS filed legal action against Coinbase to get a hold of its list of account holders and their information. A year after that lawsuit, Coinbase had to turn over almost 13,000 names to the IRS. Most of these accounts received “soft letters” from the IRS warning them about complying with the tax regime that governs cryptocurrency transactions before a comprehensive audit is performed. The move of the IRS to look for contractors that can process the data IRS can compile potentially places a question on the anonymity of transactions performed within centralized exchanges like Coinbase. After all, cryptocurrency transactions tied to specific addresses on the blockchain can also be considered traceable too. The ongoing development in the bid of the IRS to tap cryptocurrency experts might just be the signal for crypto holders to expect a stricter tax regime in the days to come. If you own I suggest you get help NOW.

FBAR IRS Audits

 If you have checking, demand deposit, or investment accounts based with an offshore financial institution, there's a good chance that you will need to file what's known as a Foreign Bank Account Report. Popularly referred to as an FBAR, this report is typically filed once a year. There are exceptions based on the amount of funds you have in those offshore accounts.

How do you know when it's necessary to file an FBAR? If you do need to file the report, how do you go about doing so? Here are some essentials that will help you understand the nature of the filing, what it means for your financial well-being, the potential penalties for failing to file, and how you go about filing the right report by the right due date.

Understanding The Basics

Updated in 2013 to what is known as Form 114, the Foreign Bank Account Report is a document that is filed with the US Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau that is part of the US Treasury Department. Don't allow the name of the bureau to intimidate you. Your filing is not in any way an inference that you might be involved in some sort of illegal activity. The goal is simply to ensure that there are no questionable issues occurring with your domestic or international holdings.

Remember that you do not file your FBAR with the IRS. It's not directly connected to your taxes. There are other forms that you would file along with your income tax returns that are related to your foreign holdings. Specifically, you may need to file the FATCA-related Form 8938 with your returns. Form 8938 would be sent to the IRS and not to the Financial Crimes Enforcement Network. Your accountant can help you track when you need to file each of these forms and which agency, or bureau needs to receive them.

Who Has To File An FBAR?

Citizens or resident aliens of the United States who have any type of financial interest in or who have signature authority over one or more offshore accounts may need to file an FBAR. There are specific requirements that determine if there's the need to file this report in any given calendar year.

One important requirement is that the report must be filed if the cumulative balance in all of the filer's offshore accounts exceeds a certain amount at any time during the year under consideration. Since that amount may be subject to change, it's important to seek help from a CPA who can verify what the current minimum amount happens to be.

Is There A Threshold For Filing An FBAR?

As of 2019, there is a threshold or minimum balance that would require you to file an FBAR. At present, the cumulative balances of your offshore accounts would have to meet or exceed the amount of USD 10,000 in order to require the filing. That balance could be realized at any time during the year under consideration and would include balances in investment accounts, demand deposits, any form of savings account, or a checking account.

The key here is that you have to be aware of your account balances throughout the calendar year. Even if those combined balances are less than USD 10,000 USD at the end of the year, you may still need to file the report. For example, the total in those accounts reached a peak amount of USD 12,000 during the third quarter. Even though they dropped back down by the end of the fourth quarter, you will still need to file an FBAR.

Will I Pay Taxes Based On The FBAR?

The purpose of the FBAR is to account for funds that US citizens or resident aliens have placed in offshore accounts. However, they have nothing to do with the amount of taxes that you owe. Your tax burden is based on the amount of income that's generated from domestic sources and other sources that current tax laws do consider subject to taxation. As of the end of 2019, the holdings in your offshore banking and investment accounts are not factored into your tax burden.

Don't forget that the FBAR is not a form that you include with your tax returns. It goes to a separate bureau within the Treasury Department. The goal of having citizens and resident aliens file the report is to minimize the amount of fraud that sometimes takes place when unscrupulous individuals and businesses seek to hide funds from the government. Since you have no intention of doing so, there is no need to worry about your FBAR filing having any impact on your taxes.

What Happens If I Fail To File The FBAR?

Keeping track of the balances in your offshore accounts is important for more than one reason. When it comes to reporting your wealth to a domestic agency, you want to avoid any penalties that could result from failing to file your FBAR. That includes the rather stiff financial penalties that could come about if you overlook filing one year.

There are two possible penalties that may apply. Each depends on the reason for failing to file. For example, you may be charged a penalty because the failure to file is considered non-willful. This simply means that you made an honest mistake and did not realize that your offshore assets exceeded the USD 10,000 threshold. In this scenario, you would be assessed a penalty of USD 10,000 per violation.

The second penalty has to do with a charge of willful failure to file. In this instance, there is evidence that you intentionally chose to not file in an attempt to hide funds. The financial penalty would be either USD 100,000 or half of the balances in your offshore accounts, whichever is higher. There is also the possibility of further penalties, up to and including jail time.

Being assessed a civil penalty does not automatically preclude the possibility of being charged with a criminal offense. A lot depends on the circumstances surrounding the failure to file. The IRS could issue a warning in lieu of taking additional actions. At the same time, criminal actions are likely to result in more fines and up to five years in prison.

What's The Actual Filing Process Like?

At present, you can obtain Form 114 online through what is known as the BSA E-Filing System website. The form itself comes with a series of instructions similar to the way the Treasury Department provides instructions for filling out tax forms. The instructions are set up so that you can go over the form line by line and determine what information needs to be included in each field.

The current structure requires that the report be submitted electronically by June 15. In years past, the final date was June 30. Unlike filing tax forms, there are no extensions and no grace periods. You can complete the report and then follow the instructions provided to submit the finished report. The system is set up to provide an acknowledgement that the document was received.

If you are an individual or filing the report with a spouse, you do not need to set up an e-filing account. Accountants, legal counsel, or an agent who files the reports on behalf of clients will need to establish an account.

Keeping Your Financial Reporting In Order

The bottom line is that you should file an FBAR every year if you meet the threshold. In order to confirm that you do need to file, it's important to stay on top of the current balances in your offshore accounts.