There has been a growing trend of US taxpayers contributing non-cash assets, such as appreciated property, securities and cryptocurrency, into Maltese pension plans since the US-Malta Tax Treaty went into effect in 2011. These transactions were marketed to many US taxpayers as a way to cash in on their earnings without being subject to US federal taxation. The Internal Revenue Service (IRS) is now investigating these transactions as possible tax fraud and evasion.
The Internal Revenue Service (IRS) released its five-year strategic plan (Strategic Plan) for 2022 – 2026, laying out four major goals:
In the portion of his opening message that addressed enforcement, IRS Commissioner Chuck Rettig focused on listed transactions, saying, “We also continued to make important progress in our compliance programs, with a particular focus on abusive tax shelters, including syndicated conservation easements and microcaptive insurance arrangements.”
The Strategic Plan vows an increased focus on noncompliant, high-income and high-wealth taxpayers, partnerships and large corporations, which the report asserts “make up a disproportionate share of the unpaid taxes.” The IRS intends to improve efforts to collect unpaid taxes with effective deterrence and enhanced enforcement capabilities. Employees will also have access to Enterprise Case Management, which will provide agents with the full history of a taxpayer, along with other tools to prevent and address noncompliance. The IRS also wants to reduce the burden on taxpayers by decreasing the time between filing returns and compliance issue resolution. Finally, the IRS plans to improve public confidence by promoting compliance through publicizing criminal prosecutions and civil enforcement efforts.
Additionally, the IRS points to increasing efforts to proactively identify fraud schemes. Its Office of Fraud Enforcement is creating a new Virtual Currency Learning Academy for all IRS personnel—from beginners to experts—with training focused on cryptocurrencies, blockchain tracing, anti-money laundering compliance and Altcoins.
While responsibilities and workloads at the IRS have been increasing, resources to combat criminal fraud and tax evasion have been decreasing. The IRS says it must continue updating necessary tax guidance for new investments, invest in analytical approaches to improve case selection and maintain institutional knowledge of how to combat avoidance activities.
The Strategic Plan indicates that the IRS continues to navigate challenges related to insufficient funding, decreasing workforce and hiring difficulties. In response, the IRS intends to expand electronic services with online accounts and digital filing capabilities. The IRS also plans to expand resources for international taxpayers, as well as implement a Multilingual Strategy with new publications in multiple languages. Other goals include increasing outreach with enhanced social media strategies and prioritizing security while safeguarding taxpayer data.
The Strategic Plan also discusses the IRS’s aging workforce and above-average attrition rates. In response, the IRS intends to hire additional employees, enhance retention and implement a Comprehensive Training Strategy.
Finally, the IRS plans to make improvements to infrastructure, which includes reorganizing operations, upgrading and modernizing systems, accelerating cybersecurity modernization efforts from cyber threats and reducing the paper volume by using digital data more effectively.
Commissioner Rettig stated, “[w]orking toward these strategic goals with consistent multi-year funding will [...]
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On June 28, 2021, McDermott held a webinar presentation titled “Cryptocurrency Global Tax Enforcement: What Investors and Companies in the Industry Need to Know NOW.”
Topics during this webinar included:
A link to the webinar is available here. A link to the webinar’s slides is available here.
The Biden Administration and the Internal Revenue Service (IRS) continue to focus heavily on cryptocurrency tax enforcement issues. On May 20, 2021, the US Department of the Treasury (Treasury) released the American Families Plan Tax Compliance Agenda, a 22-page report detailing tax compliance measures that are to be included as part of US President Joe Biden’s American Families Plan. The report sets forth a number of initiatives designed to “close the tax gap,” identify the underreporting of tax liabilities and detect tax evasion. These measures, which are part of an $80 billion proposal for the IRS, would significantly enhance the agencies’ ability to address the challenges involved with finding taxes that result from virtual currency transactions.
The Treasury’s report notes that “[c]ryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion.” To address this issue, the Biden Administration is proposing “additional resources for the IRS to address the growth of cryptoassets.”
Most notably, the Biden Administration is proposing enhanced reporting requirements for domestic and foreign financial accounts that specifically address cryptocurrency. Financial institutions, including “cryptoasset exchange accounts and payment service accounts that accept cryptocurrencies” would be required to submit third-party annual reports of all “gross inflows and outflows” from business and personal accounts to the IRS using a form similar to the IRS 1099-INT. Additionally, “businesses that receive cryptoassets with a fair market value of more than $10,000 would be reported on” in a manner similar to how cash transactions are reported on Currency Transaction Reports. These new reporting requirements would dramatically increase the IRS’ ability to identify and detect unreported cryptocurrency transactions.
The report also reemphasizes the need to devote additional funding to the IRS. The Biden Administration is seeking $80 billion in additional funding so that the Treasury and IRS can, among other things, hire “new specialized enforcement staff” and “revitalize[e] the IRS’s examination of large corporations, partnerships, and global high-wealth and high-income individuals.”
Additionally, the Biden Administration plans to overhaul the IRS’ IT systems and capabilities. These IT enhancements are designed to “help support a staff capable of deploying new analytical techniques” and “developing machine learning capabilities [that] will enable the IRS to leverage the information it collects to better identify tax returns for compliance review.” Given the inherent difficulties in identifying cryptocurrency users who have failed to comply with the internal revenue laws, increased data collection and analytics capabilities would be invaluable for the IRS.
The IRS has already been ramping up its cryptocurrency tax enforcement efforts by issuing John Doe summons to various cryptocurrency exchanges, working with industry experts and foreign law enforcement. If implemented, the American Families Plan Tax Compliance Agenda would provide the IRS with extensive new tools and resources for these ongoing enforcement activities.
Practice Point: If you have engaged in cryptocurrency transactions, now is the time to analyze whether you have any civil or criminal exposure and prepare for a government inquiry by gathering all of your transaction records. For [...]
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If you have knowingly failed to report income or claimed deductions you know you are not entitled to, or just decided not to file your tax returns and pay the tax owed, you may be liable for civil penalties and even jail time for criminal tax evasion. Taxpayers with civil and criminal tax exposure may want to fix their past mistakes but are afraid of what will happen if they “come clean.” So, the majority of offenders keep offending year after year. But did you know there is an Internal Revenue Service (IRS) program that can help taxpayers get out of that “evasion” cycle, and clean up past tax issues, usually without criminal liability?
The IRS has a longstanding program through which taxpayers can make voluntary disclosures of tax underreporting and tax criminal evasion. Such disclosures may help taxpayers limit their criminal exposure, although disclosure does not automatically guarantee immunity from criminal prosecution.
The latest iteration of the voluntary disclosure program is known as the Voluntary Disclosure Practice (VDP). (Here is a link to the IRS’s VDP program description.) Under the terms of the program, a taxpayer must submit Part I of Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, which contains basic identifying and procedural information necessary to determine if the taxpayer is eligible to participate in the VDP program. The IRS uses this information to verify that the taxpayer is not already under criminal investigation, which is a bar to entering into the VDP program. Once the taxpayer has been “precleared,” the taxpayer must submit Part II of Form 14457, which seeks detailed information regarding the nature of the tax reporting failures and the associated unpaid tax liabilities. If the taxpayer is approved to participate in the VDP program, the taxpayer’s case is transferred to the appropriate IRS civil division for examination. Ultimately, the taxpayer must cooperate with the IRS to determine its correct tax liability and must make good faith arrangements to pay all unpaid liabilities, including interest and penalties. Typically, this will include the filing of corrected tax returns for six years; the payment of the correct tax and interest for those returns; and the payment of enhanced penalties for one tax year.
The current version of Form 14457 was released in April 2020. On July 14, 2020, Carolyn A. Schenck, the National Fraud Counsel for the IRS Fraud Enforcement Program, stated that the IRS is planning to issue additional instructions for Form 14457 to provide further guidance on the mechanics of the VDP. Conforming additions will be made to the Internal Revenue Manual.
Practice Point: The risk of criminal prosecution for tax offenses is increasing due to significant improvements in IRS enforcement strategies. IRS commissioner Charles Rettig was formerly in private practice defending taxpayers and has implemented significant changes in IRS programs and leadership. There is an unprecedented degree of coordination among the enforcement divisions and emphasis on preventing tax fraud, with Eric Hylton, previous deputy [...]
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It took five years, but the Internal Revenue Service (IRS) has finally released some guidance on the taxation of cryptocurrencies! On October 9, 2019, the IRS released Revenue Ruling 2019-24 and several “frequently asked questions” (and answers) which deal with some (but not all) of the federal income tax issues involved with cryptocurrencies.
Over the years, we have reported on the issues involved with cryptocurrencies, including the potential controversies that have ensued because of a lack of guidance.
The new guidance is welcomed by tax professionals and taxpayers. The guidance adopts traditional tax principles to deal with some of the unique aspects of cryptocurrencies. For example, the guidance addresses the tax treatment of so-called “hard forks” and whether the value of the “fork” which is “airdropped” into the taxpayer’s wallet constitutes taxable income.
Practice Point: Cryptocurrencies are a brave new world for most of us. Having thoughtful, current guidance is helpful to tax professionals and taxpayers, and will (hopefully) lead to better and more efficient administration of our tax system.
On October 27, the US District Court for the District of Minnesota issued an opinion in United States v. Adams, No. 0:17-cr-00064-DWF-KMM (D. Minn. Oct. 27, 2018), addressing attorney-client privilege issues relevant to accountants working alongside tax attorneys. The court adopted a narrow, nuanced view of the waiver that applies when the taxpayer discloses an accountant’s work to the Internal Revenue Service (IRS) by filing an amended return.
In Adams, the taxpayer is facing a 17 count superseding indictment in which the government alleges he spearheaded a scheme to defraud investors in two companies and to embezzle corporate funds for his personal benefit. In late 2017, the government added three counts of tax evasion to the indictment, alleging that amended returns the taxpayer filed in late 2011 for the 2008, 2009 and 2010 tax years were willfully false under IRC § 7206(1).
The addition of the tax evasion charges is significant for the government’s arguments for waiver of privilege and work-product protection. It appears that the taxpayer filed the amended returns at issue in late 2011 under advice of counsel, working with the taxpayer’s accountant under a Kovel arrangement. (We have previously discussed the scope of Kovel protections here.) In our experience, filing of amended returns in advance of a criminal investigation or trial is one potential strategy to demonstrate good faith and lack of criminal intent and, if combined with payment, amended returns may have the added benefit of reducing the tax loss at issue in a criminal case. Of course, every case is different, but it appears this may have been the strategy at work in Adams. (more…)
If you have traded Bitcoin or other crypto-currencies, you probably know that their taxation may be as uncertain as your potential for reward or loss. Since 2014, the Internal Revenue Service (IRS) has publicized how it believes these investments should be treated for US federal income tax purposes. If you have failed to report your virtual currency transaction, the result in Coinbase, a recent IRS “John Doe” summons enforcement case, should convince you that it is time to ensure you are compliant with tax laws. The IRS may be coming for your Bitcoins!
IRS Guidance – Bitcoins Are Property
In IRS Notice 2014-21, 2014-16 IRB 938, the IRS explained that so-called “virtual currencies” that can be exchanged for traditional currency are “property” for federal income tax purposes. As such, a taxpayer must report gain or loss on its sale or exchange, measured against the taxpayer’s cost to purchase the virtual currency. In the notice, the IRS also made clear that “virtual currencies” are not currency for Internal Revenue Code (IRC) section 988 purposes. (more…)
In early August 2017 (as we previously reported), the Chief of the Internal Revenue Service’s (IRS) Criminal Investigation Division (CID), John D. Fort, announced that CID would be forming new National Coordinated Investigation Units over the next few months. In a recent conference, Fort has confirmed that these units will be fully operational in January, and they are already sending out referrals to field offices.
The units are intended to modernize CID’s investigative tools to rely more upon data analytics to harvest leads from information received through the Swiss Banking Program, the Foreign Account Tax Compliance Act (FATCA) and the Panama Papers investigation, among other sources. The effort is also clearly intended to maximize the Division’s resources in light of budgetary concerns.
Fort also noted that CID has increasingly focused on tax evasion issues related to cryptocurrencies, and that the use of cryptocurrencies in money laundering operations has become much more mainstream in the last few years. We have also observed a number of developments in this area. For example, the Department of Justice Tax Division is currently engaged in an IRS “John Doe” summons enforcement action against a Bitcoin clearinghouse, seeking the names of Coinbase’s customers who engaged in certain types of potentially reportable transactions. See United States v. Coinbase, Inc., 3:17-cv-01431-JSC (N.D. Cal.).
Practice Point: The new National Coordinated Investigation Units have the potential to reinvigorate and sharpen CID’s investigative efforts in the United States and for taxpayers abroad. Particularly in the area of undeclared offshore accounts, voluntary disclosure is strongly advisable; the world is getting smaller and smaller. Also, CID’s heightened focus upon Bitcoin and other cryptocurrencies may have far-reaching effects beyond criminal investigations. For example, as we have seen historically with the UBS and Jenkens & Gilchrist “John Doe” summons enforcement cases, among others, these summons proceedings can hold open statutes of limitations for assessment in civil audits as well.
We have previously blogged on the criminal tax proceedings related to former US Tax Court Judge Kroupa (see here and here). In October 2016, Judge Kroupa pleaded guilty to multiple tax criminal charges related to her tax returns and interactions with the Internal Revenue Service. Based on sentencing guidelines, the recommended sentence was between 30‒37 months. Judge Kroupa and the government submitted filings on the appropriate sentence, in which Judge Kroupa provided detailed reasons why she believed the court should impose a sentence of 20 months imprisonment. These filings can be found here and here. According to a report in today’s BNA Daily Tax Report, the court sentenced Judge Kroupa to 34 months in prison and ordered her to pay $457,000 in restitution, which is owed jointly with her former husband. She was also sentenced to three years of supervised release. Judge Kroupa’s former husband was sentenced to 24 months in prison and one year of supervised release.
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