On March 13, 2018, the Internal Revenue Service (IRS) announced that it will begin ramping down the current Offshore Voluntary Disclosure Program (OVDP) and urged taxpayers with undisclosed foreign assets to apply for the program prior to its close on September 28, 2018. We have previously reported on developments in the OVDP.
Laura L. Gavioli, PC, defends individuals and corporations in white-collar prosecutions, civil tax cases, US Internal Revenue Service (IRS) controversies and complex financial litigation. Laura represents numerous taxpayers who are facing civil and criminal issues regarding their reporting of offshore financial accounts and other assets. Laura has also represented clients involved in some of the largest white-collar criminal tax evasion cases ever brought in the United States, and she regularly advises clients regarding the IRS Whistleblower Program. Read Laura Gavioli's full bio.
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. Continue Reading The IRS May Be Coming for Your Bitcoins
Courtney Dunbar Jones is a senior attorney in the Tax-Exempt and Government Entities division in the Office of Chief Counsel of the Internal Revenue Service (IRS). If confirmed, she will assume the position left vacant by the 2016 retirement of Judge John O. Colvin. Judge Colvin still performs judicial duties as a Senior Judge on recall.
On January 24, 2018, numerous press outlets announced that President Trump will nominate Charles “Chuck” Rettig of Hochman, Salkin, Rettig, Toscher & Perez, to serve as the next Commissioner of the IRS.
Rettig has been in private practice at Hochman, Salkin for more than 35 years and has a long record of leadership in our field. Among his many accomplishments, Rettig was instrumental in working with the IRS to establish key settlement initiatives over the last 15 years, including providing key practitioner guidance in designing the Offshore Voluntary Disclosure Program.
If confirmed, Rettig would helm an IRS that has been significantly reshaped by budget cuts and staff attrition in recent years. Rettig would also oversee the implementation of tax reform. Rettig has been a friend and mentor to many of us in the tax controversy bar over the years, and we are encouraged by the selection of someone from the private bar to the post.
We have written several times about penalty defenses, including substantial authority, issues of first impression and tax reporting disclosures. Additionally, we previously covered the 2016 case of Graev v. Commissioner, where a divided US Tax Court (Tax Court) held that supervisory approval was not necessary before determining a penalty in a deficiency proceeding because the statutory language of Internal Revenue Code (Code) Section 6751(b)(1) couched such approval in terms of a proposed penalty assessment. For those not well-versed in procedural tax lingo, an “assessment” is merely the formal recording of a tax liability in the records of the Internal Revenue Service (IRS). In cases subject to the deficiency procedures—i.e., where taxpayers have a right to contest the IRS’s position in the Tax Court—no assessment can be made until after the Tax Court’s decision is final. Continue Reading IRS Required to Obtain Supervisory Approval to Assert Penalties
Today, taxing authorities across the globe, including the Internal Revenue Service (IRS), are increasing their efforts to gather and share sensitive taxpayer information, often aggressively seeking copies of tax advice, opinions and analysis prepared by counsel and other advisors. In some situations, tax advisors specifically draft their advice to be shared with third parties, but frequently the IRS seeks advice that was always intended to be confidential client communications—for example, drafts and emails containing unfinished analysis and unguarded commentary. Sharing this latter type of advice could be problematic for taxpayers because such advice could be used as a road map for examiners during an audit and may mislead the IRS regarding the strength or weakness of a taxpayer’s reporting positions.
Last month, we spoke to tax executives at Tax Executives Institute forums in Houston and Chicago about the IRS’s increased use of treaty requests to obtain US taxpayers’ documents and information from international tax authorities. Continue Reading Maintaining Confidentiality While Navigating Cross-Border Transactions
Coinbase Inc., a virtual currency exchange platform, was recently ordered by the United States District Court for the Northern District of California to provide the Internal Revenue Service (IRS) with 2013-2015 transaction data for thousands of Coinbase accounts. See United States v. Coinbase Inc., et al., No. 17-CV-01431-JSC, 2017 WL 5890052, (N.D. Cal. Nov. 28, 2017). The IRS, citing references to 5.9 million customers and more than $6 billion of bitcoin transactions on Coinbase’s website, identified a potential reporting gap, since only 800-900 taxpayers have identified bitcoin transactions on their tax returns in the past few years. (Coinbase’s website currently references 10 million customers and $50 billion in transactions.) Although the IRS narrowed the scope of the third-party record keeper summons it had originally issued to Coinbase under Code Sections 7602, 7603 and 7609 (aka, a “John Doe Summons”), the parties could not reach agreement on what was to be produced, and the government initiated enforcement proceedings earlier this year. Continue Reading Governments are Pulling Back the Crypto-Currency Curtain
On Tuesday, November 21, a jury acquitted Bank Frey executive Stefan Buck of conspiracy to commit criminal tax evasion in the Southern District of New York. The case is captioned United States v. Edgar Paltzer and Stefan Buck, No 1:13-cr-00282-JSR (S.D.N.Y.).
In April 2013, an indictment was filed against Buck and a co-conspirator, Edgar Paltzer, alleging a criminal conspiracy whereby Buck, the head of private banking at Bank Frey, and Paltzer, a US citizen and lawyer, conspired with US taxpayers to move funds out of Swiss banks under investigation in the US, including Wegelin. The alleged criminal conduct included arranging for cash withdrawals and purchases of jewelry, opening new undeclared accounts, and filing false statements of beneficial ownership, among other actions.
On October 30, 2017, Paul Manafort Jr. was indicted for concealing his interests in several foreign bank accounts, as well as tax evasion and a host of other criminal charges. The indictment reminds us how important it is to follow the strict guidelines of the reporting regime that the Internal Revenue Service (IRS) and the US Department of the Treasury have established to disclose foreign bank accounts.
Pursuant to the Bank Secrecy Act, a US citizen or resident (a US Person) is required to disclose certain foreign bank and financial accounts which he or she has “a financial interest in or signature authority over” annually. This obligation can be triggered by direct or indirect interests; a US Person is treated as having a financial interest in a foreign account through indirect ownership of more than 50 percent of the voting power or equity of a foreign entity, like a corporation or partnership. The US Person is required to annually disclose the interest on FinCEN 114, Report of Foreign Bank and Financial Accounts, which is commonly referred to as the FBAR. The disclosure requirement is triggered when the aggregate value of the foreign account exceeds $10,000. The form is filed with your federal income tax return.
The civil penalties for failing to timely disclose an interest in a foreign account can be severe, and in the case of willful violations, can reach up to 50 percent of the highest aggregate annual balance of the unreported foreign financial account each year. The statute of limitations for FBAR violations is six years, and the willful penalty may be assessed for more than one year, creating extreme financial consequences for FBAR reporting failures.
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.
In two recent cases, the United States Tax Court (Tax Court) has explored the bounds of the anonymity protection afforded to potential whistleblowers under the court’s rules and other authorities. Tax Court Rule 345 relates to privacy protections for filings in whistleblower actions. Under paragraph (a), a whistleblower may move the court for permission to proceed anonymously. In order to proceed anonymously, the whistleblower must provide a sufficient, fact-specific basis for anonymity. Specifically, the Tax Court has held that “[a] whistleblower is permitted to proceed anonymously if the whistleblower presents a sufficient showing of harm that outweighs counterbalancing societal interest in knowing the whistleblower’s identity.” (Whistleblower 10949-13W v. Commissioner, T.C. Memo 2014-94, at 5). However, the balance of harm to societal interest may shift as the case progresses, thereby justifying disclosure after anonymity has been granted. See Tax Court Rule 345(b). Continue Reading Tax Court Requires Specific Factual Showing of Harm for Whistleblower Anonymity