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Cryptocurrency Global Tax Enforcement: What Investors and Companies in the Industry Need to Know NOW

by Kevin Spencer, Simon Airey and McDermott Will & Emery | Jun 30, 2021 | IRS Guidance, Tax Reform

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:

How to address the tax consequences of past virtual currency transactions, including potential voluntary disclosure considerations.
How to protect your business from a US Department of Justice (DOJ) or UK investigation, including compliance updates to address this risk.
Law enforcement perspectives and updates from the IRS, DOJ and a former high-level director at HM Revenue & Customs.
How to respond to an IRS letter, including potential civil resolutions.
How to respond to a DOJ or a UK Serious Fraud Office (SFO) inquiry, summons, subpoena, search warrant or a whistleblower complaint.

A link to the webinar is available here. A link to the webinar’s slides is available here.

Weekly IRS Roundup June 21 – June 25, 2021

by McDermott Will & Emery | Jun 28, 2021 | IRS Guidance, Tax Reform, Tax Refunds

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 21, 2021 – June 25, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

June 22, 2021: The IRS issued a news release announcing the launch of two online tools regarding the Child Tax Credit, as expanded by the American Rescue Plan Act of 2021: The Child Tax Credit Eligibility Assistant, which assists families in determining whether they are eligible for advance payments of the credit, and the Child Tax Credit Update Portal, which assists families in monitoring their credit payments.

June 23, 2021: The IRS issued a news release announcing the release of the Electronic Tax Administration Advisory Committee’s (ETAAC) annual report to Congress, which focuses on the prevention of identity theft and refund fraud.

June 23, 2021: The IRS issued a news release announcing that, in partnership with local civic organizations, special events will be held in 12 cities in late June and early July to assist eligible families in registering for advance payments of the Child Tax Credit.

June 24, 2021: The IRS issued Notice 2021-40, extending, through June 30, 2022, earlier relief that temporarily removed the requirement that certain elections and consents under pension and employee benefit plans be made in the physical presence of a plan representative or notary public.

June 24, 2021: The IRS issued a news release with more information regarding the Child Tax Credit Eligibility Assistant and urging families to use the tool to determine whether they qualify for advance payments of the Child Tax Credit.

June 24, 2021: The IRS issued a news release announcing the release of the Data Book, which details its activities during Fiscal Year 2020, particularly its activities in response to the COVID-19 pandemic.

June 25, 2021: The IRS issued Revenue Procedure 2021-22, setting forth requirements for 2021 regarding the use of substitutes for official IRS forms with respect to certain employment tax returns and associated schedules.

June 25, 2021: The IRS issued Revenue Procedure 2021-27, setting forth requirements for 2021 regarding the use of substitutes for official IRS forms with respect to certain information returns.

June 25, 2021: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Le Chen in our Washington, DC, office for this week’s roundup.

Weekly IRS Roundup June 14 – June 18, 2021

by McDermott Will & Emery | Jun 21, 2021 | IRS Guidance, Tax Reform, Tax Refunds

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 14, 2021 – June 18, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

June 14, 2021: The IRS issued a news release unveiling updates to its online Non-Filer Sign-Up Tool, expanding the scope of the tool to assist families who do not normally file tax returns to register for and receive monthly advance payments of the Child Tax Credit (as expanded by the American Rescue Plan of 2021).

June 15, 2021: The IRS issued Revenue Ruling 2021-12, providing various prescribed interest rates for federal income tax purposes for July 2021.

June 16, 2021: The IRS issued corrections to final regulations published on January 5, 2021, regarding simplified accounting rules for small businesses under sections 263A, 448, 460 and 471 of the Code.

June 16, 2021: The IRS issued Notice 2021-37, providing the monthly update to certain interest rates used for pension plan funding and distribution purposes.

June 17, 2021: The IRS issued Revenue Procedure 2021-28, providing procedures for taxpayers to change to the alternative depreciation system of accounting under section 168(g) of the Code with respect to certain residential real property placed in service prior to 2018 as required by the Taxpayer Certainty and Disaster Tax Relief Act of 2020.

June 17, 2021: The IRS issued Revenue Procedure 2021-29, providing simplified procedures for certain partnerships to file amended partnership returns to comply with the procedures for tax accounting with respect to residential real property discussed in Revenue Procedure 2021-28.

June 18, 2021: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Le Chen in our Washington, DC, office for this week’s roundup.

Weekly IRS Roundup June 7 – June 11, 2021

by McDermott Will & Emery | Jun 14, 2021 | Appellate Courts, Court Procedure Matters, IRS Guidance, Tax Reform, Tax Refunds, Trial Courts

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 7, 2021 – June 11, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

June 7, 2021: The IRS issued a news release announcing it has begun sending letters to inform more than 36 million American families of their potential eligibility to receive monthly Child Tax Credit payments beginning in July, pursuant to the expansion of the Child Tax Credit under the American Rescue Plan Act of 2021 (ARPA).

June 8, 2021: The IRS issued a news release, soliciting applications for 80 vacancies within its Procurement office, including vacancies for contract specialists who assist the IRS in the procurement and administration of third-party contracts.

June 8, 2021: The IRS issued a news release reminding taxpayers who make estimated tax payments that the second installment of estimated taxes for 2021 is due June 15, 2021.

June 9, 2021: The IRS issued a news release announcing the disbursement of more than 2.3 million Economic Impact Payments worth more than $4.2 billion, bringing the total amount of disbursements under ARPA to more than 169 million payments worth approximately $395 billion.

June 10, 2021: The IRS issued Notice 2021-36, announcing that the applicability date for certain regulations under sections 59A and 6038A of the Code, which set forth various reporting requirements with respect to qualified derivative payments (QDPs) for purposes of the base erosion and anti-abuse tax (BEAT), is delayed to the 2023 taxable year.

June 11, 2021: The IRS issued final regulations regarding the new mandatory 60-day postponement of certain tax deadlines due to a federally-declared disaster, enacted as section 7805A(d) of the Code by the Further Consolidated Appropriations Act, 2020.

June 11, 2021: The IRS issued Revenue Ruling 2021-11, providing the semi-annual Standard Industry Fare Level (SIFL) rates and terminal charges used in computing the value of noncommercial flights on employer-provided aircrafts for purposes of the taxation of fringe benefits under section 61 of the Code. The Revenue Ruling provides both unadjusted SIFL rates and SIFL rates adjusted for relief provided to the airline industry by COVID-related legislation.

June 11, 2021: The IRS issued an Action on Decision, announcing it would not acquiesce to TriNet Group, Inc. v. United States, 979 F.3d 1311 (11th Cir. 2020), which held that a professional employer organization (PEO) had “control of the payment of wages” to its clients’ employees and therefore the PEO—not its clients—was the “employer” (under section 3401(d) of the Code) eligible to claim Federal Insurance Contributions Act (FICA) tip tax credits with respect to such wages.

June 11, 2021: The IRS issued a news release and two sets of FAQs, providing assistance to families and small businesses claiming [...]

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Weekly IRS Roundup May 31 – June 4, 2021

by McDermott Will & Emery | Jun 7, 2021 | IRS Guidance, Tax Reform, Tax Refunds

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of May 31, 2021 – June 4, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

June 1, 2021: The IRS issued a news release, soliciting applications for the IRS Advisory Council, a forum consisting of representatives of the public to advise the IRS regarding various tax administration issues.

June 2, 2021: The IRS issued a news release, reminding taxpayers living and working abroad of the June 15, 2021, deadline for filing their 2020 US federal income tax returns.

June 4, 2021: The IRS issued Notice 2021-34, providing the applicable reference price and associated credit amount used in determining the marginal well production credit under section 45I of the Code.

June 4, 2021: The IRS issued Announcement 2021-11, announcing that the United States and Switzerland have entered into an arrangement listing the US and Swiss pension and retirement plans, which now include various US and Swiss individual retirement savings plans that may qualify for the exemption from withholding on dividends under the US-Switzerland tax treaty.

June 4, 2021: The IRS issued a news release, announcing the issuance of more than 2.8 million refunds to taxpayers who paid taxes on unemployment compensation in 2020, compensation that was retroactively excluded from 2020 taxable income by the American Rescue Plan Act of 2021.

June 4, 2021: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Le Chen in our Washington, DC, office for this week’s roundup.

Ninth Circuit Holds Tax Form is Substance

by Kevin Spencer and McDermott Will & Schulte | Jun 4, 2021 | Appellate Courts, Court Procedure Matters, Trial Courts

The substance over form doctrine (and related step transaction and economic substance doctrines) are often invoked by courts to disallow tax consequences that seem too good to be true. Courts have struggled for years with how to properly apply these doctrines. Those advocating against application usually rely on the famous passage by Judge Learned Hand in Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934): “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Those advocating for this position seek shelter in cases like Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945), in which the Supreme Court of the United States stated, “the incidence of taxation depends upon the substance of a transaction. …. To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.” But ultimately, as the Supreme Court explained in Gregory v. Helvering, 293 U.S. 465, 469 (1935), “the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended.”

However, what the statute intended is not always easy to determine. In Mazzei v. Commissioner, No. 18-82451 (9th Cir. June 2, 2021), the US Court of Appeals for the Ninth Circuit answered this question in the context of tax motivated transactions involving the since-repealed foreign service corporation (FSC) regime that was complied with all the formalities required by the Internal Revenue Code but which the Internal Revenue Service (IRS) asserted should nonetheless be recharacterized under the substance over form doctrine. The Court noted it is a “black-letter principle” and courts follow “substance over form” in construing and applying the tax laws. However, this doctrine is not a “smell test” but rather a tool of statutory construction that must be applied based on the statutory framework at issue. Thus, in appropriate situations where Congress indicates that form should control, the substance over form doctrine is abrogated.

That is exactly what happened in Mazzei. Agreeing with the First, Second and Sixth Circuits, which had previously addressed similar issues, the Ninth Circuit found that the statutory framework and history indicated that Congress did not intend for the substance over form doctrine to apply to the FSC regime. While “[i]t may have been unwise for Congress to allow taxpayers to pay reduced taxes” under the statutory scheme, “it is not our role to save the [IRS] from the inescapable logical consequence of what Congress has plainly authorized.”

Practice Point: The distinction between tax avoidance (permissible) and tax avoidance (impermissible) is not always an obvious line. Taxpayers should be able to rely on the words used by Congress when enacting tax laws, but courts [...]

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Weekly IRS Roundup May 24 – May 28, 2021

by McDermott Will & Emery | Jun 1, 2021 | IRS Guidance, Tax Reform

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of May 24, 2021 – May 28, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

May 24, 2021: The IRS issued a news release, announcing that the 2021 IRS Nationwide Tax Forum—an annual series of continuing education seminars for tax professionals—will be held virtually from July 20, 2021, through August 19, 2021.

May 26, 2021: The IRS issued a news release, announcing the disbursement of more than 1.8 million Economic Impact Payments worth more than $3.5 billion, bringing the total amount of disbursements under the American Rescue Plan Act of 2021 to nearly 167 million payments worth approximately $391 billion.

May 27, 2021: The IRS issued Revenue Ruling 2021-10 and an accompanying news release, setting forth the overpayment and underpayment interest rates under section 6621 of the Code for Q3 of 2021.

May 28, 2021: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Le Chen in our Washington, DC, office for this week’s roundup.

Supreme Court Opens Door to APA Challenge of Overreaching IRS Information Reporting Regime

by Kevin Spencer, Jenny L. Johnson Ware and McDermott Will & Schulte | May 28, 2021 | Appellate Courts, Court Procedure Matters, IRS Audits, IRS Guidance, Trial Courts

In CIC Services, LLC v. Internal Revenue Service, a unanimous US Supreme Court allowed CIC, a tax advisor, to proceed with a pre-enforcement challenge to the Internal Revenue Service’s (IRS) “reportable transaction” regime. CIC alleged that the IRS violated the Administrative Procedure Act (APA) when it issued Notice 2016-66 (Notice), deeming certain micro-captive insurance transactions as “reportable transactions” and sought an order enjoining enforcement of the Notice. The IRS sought to avoid judicial review by hiding behind the Anti-Injunction Act’s (AIA) bar on suits brought “for the purpose of restraining the assessment or collection of any tax.” Disagreeing with the trial and appellate courts, the Supreme Court allowed CIC’s suit to proceed, finding that CIC was challenging a regulatory mandate separate from any tax. As the Court explained, “The tax appears on the scene – as criminal penalties do too – only to sanction that mandate’s violation.” By choosing to address their concerns about micro-captive transactions by imposing a non-tax reporting obligation, Congress and the IRS “took suits to enjoin their regulatory response outside the Anti-Injunction Act’s domain.”

On remand, the Court’s decision leaves open questions that the lower courts must now address while also providing meaningful clues about how the Court may approach future disputes over IRS enforcement strategies. Such questions include: (1) does the reportable transaction regime as the IRS currently administers it violate the APA (See: Mann Construction, Inc. v. United States, No. 1:20-cv-11307 (E.D. Mich. May 13, 2021) (holding that IRS Notice requiring disclosure of listed transactions was not subject to APA’s notice-and-comment requirement); (2) would the AIA bar a suit to enjoin enforcement of a reporting obligation brought by a taxpayer, as opposed to an advisor; (3) how onerous must the challenged requirement be; (4) how disconnected from the tax penalty must the challenged requirement be and (5) is the existence of criminal penalties sufficient and/or necessary to exempt a challenge from the AIA?

Practice Point: APA challenges in tax cases have steadily increased since the Supreme Court’s rejection of tax exceptionalism 10 years ago in Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44 (2011). As tax law continues to get more complicated and the IRS issues additional guidance, we can expect this trend to continue. Understanding how to use the APA to challenge the overreaching of the IRS is an important tool for taxpayers and tax advisors alike. In the absence of a clear congressional mandate, any new enforcement policy issued by the IRS may be fair game for an APA challenge. The Supreme Court has opened the door to judicial review of unsanctioned IRS programs that place unfair burdens on taxpayers. And, this issue extends beyond the reportable transaction regime, including to the information reporting proposals recently announced by the Biden Administration.

Biden Administration Proposals Will Greatly Enhance IRS’ Ability to Identify Cryptocurrency Transactions

by Julian André, Kevin Spencer and Katharine Suominen | May 26, 2021 | IRS Guidance, Tax Reform

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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Weekly IRS Roundup May 17 – May 21, 2021

by McDermott Will & Emery | May 24, 2021 | IRS Guidance, Tax Reform, Tax Refunds

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of May 17, 2021 – May 21, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

May 17, 2021: The IRS issued Revenue Ruling 2021-9, providing various prescribed interest rates for federal income tax purposes for June 2021.

May 17, 2021: The IRS issued Revenue Procedure 2021-24, providing procedures for individuals who are not required to file federal income tax returns to receive advance Child Tax Credit payments and third-round Economic Impact Payments under the American Rescue Plan Act of 2021 (ARPA), as well as 2020 recovery rebate credits under earlier coronavirus-related legislation.

May 17, 2021: The IRS issued a news release, reminding taxpayers that May 17 is the filing deadline for most individual income tax returns and summarizing various e-filing and extension options.

May 17, 2021: The IRS issued a news release, announcing that the first monthly payments under the Child Tax Credit, as expanded by ARPA, will be made to eligible families on July 15, 2021.

May 18, 2021: The IRS issued Notice 2021-31 and an accompanying news release, providing guidance on the temporary premium assistance for Consolidated Omnibus Budget Reconciliation Act (COBRA) health insurance benefits, and the associated COBRA premium assistance credit, enacted by ARPA.

May 19, 2021: The IRS issued Notice 2021-33, providing the monthly update to certain interest rates used for pension plan funding and distribution purposes.

May 19, 2021: The IRS issued a news release, summarizing various tax benefits available to individuals experiencing homelessness, the rural poor and other underserved groups and urging employers and community groups to spread information about such benefits and assist such individuals in filing 2020 tax returns.

May 20, 2021: The IRS issued a news release, urging taxpayers who missed the recent May 17 tax-filing deadline to file their tax returns as soon as possible to obtain refunds or limit penalties and interest.

May 21, 2021: The IRS issued Notice 2021-32, providing the 2021 inflation adjustment factors and reference prices for the renewable electricity production credit, refined coal production credit and Indian coal production credit under section 45 of the Code.

May 21, 2021: The IRS issued an Action on Decision, announcing that it would not acquiesce to Machacek v. Comm’r, 906 F.3d 429 (6th Cir. 2018), which held that the economic benefits of a compensatory split-dollar life insurance arrangement may be treated as a distribution under section 301 of the Code.

May 21, 2021: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Le Chen in our Washington, DC, office for this week’s roundup.

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