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Prepare for Examination Season

by Kevin Spencer and McDermott Will & Schulte | Dec 20, 2017 | IRS Audits, IRS Guidance, Tax Reform, Uncategorized

The tax bar is abuzz with the talk of tax reform. Clients are in modeling purgatory, trying to calculate its effects and plan for the future. Public accounting firms are suggesting how to accelerate deductions in 2017 to take advantage of the massive tax rate decline in 2018. Now more than ever, there are substantial economic incentives to accelerate deductions in 2017 and defer income until 2018. Yes, it’s beginning to look a lot like Christmas and the end to what bodes to be a historic year for federal tax!

Not to be a Grinch, but consider the following as you prepare for year end. If you attempt to accelerate any deductions, make sure to have a complete, “audit-ready” file if the Internal Revenue Service (IRS) decides to test your position. Consider how you will protect against the assertion of any penalties; typically, your ticket to get of out penalty “prison” is to maintain proper substantiation and to establish a reasonable cause defense. An opinion of counsel is one method to meet your burden of establishing that defense. It is always better to be proactive and anticipate an IRS audit than to be reactive and try to compile the proper documentation after-the-fact.

Maintaining Confidentiality While Navigating Cross-Border Transactions

by McDermott Will & Emery and McDermott Will & Emery | Dec 14, 2017 | IRS Audits, IRS Guidance, Privilege and Non-Disclosure, Uncategorized

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. (more…)

Tax Court: Mailbox Rule Can Apply with Stamps.com Postage Label

by Jeffrey M. Glassman and McDermott Will & Schulte | Dec 5, 2017 | Court Procedure Matters, IRS Guidance, Trial Courts, Uncategorized

Within the Internal Revenue Code (Code) is a rule commonly known as the “mailbox rule” or the “timely mailed, timely filed rule.” Under Code Section 7502(b), the date that an item—including a Tax Court petition—is postmarked and mailed can also be the date the item is considered filed. When an item is received after the filing deadline, the mailbox rule can make all the difference. There are, however, procedural requirements which must be satisfied. In Pearson v. Commissioner, the Tax Court, in a court-reviewed opinion, held that a Tax Court petition mailed with a Stamps.com postage label was timely filed under the mailbox rule.

Taxpayers generally have 90 days to file a petition with the Tax Court after receiving a notice of deficiency. In Pearson, the Tax Court received the taxpayers’ petition one week after the 90-day period expired, but the envelope in which the petition was mailed bore a Stamps.com postage label dated within the 90-day period. The administrative assistant who created the Stamps.com postage label supplied the court with a declaration under penalty of perjury stating that she went to a US Post Office the same day as the postage label date and mailed the petition. (more…)

Facebook Goes to District Court to Enforce Access to IRS Appeals

by K. Christy Vouri-Misso and Robin L. Greenhouse | Nov 13, 2017 | Court Procedure Matters, IRS Guidance, Trial Courts, Uncategorized

On November 8, 2017, Facebook, Inc. and Subsidiaries (Facebook) filed a complaint in the District Court for the Northern District of California asserting that the Internal Revenue Service (IRS) had improperly denied Facebook access to Internal Revenue Service (IRS) Appeals. Facebook’s complaint seeks a declaratory judgment that the IRS unlawfully issued Revenue Procedure 2016-22, 2016-15 I.R.B. 1, and unlawfully denied Facebook its statutory right to access an independent administrative forum. Facebook also requests injunctive relief from the IRS’s unlawful position, or action in the nature of mandamus to compel the IRS to provide Facebook access to an independent administrative forum. (more…)

Paradise Papers Revelations Highlight Importance of IRS Voluntary Disclosure

by Editorial Team | Nov 6, 2017 | IRS Guidance, Uncategorized

In light of the massive leak of the Appleby files this weekend (i.e., the “Paradise Papers” leak), it is increasingly important for US taxpayers to know the rules regarding reporting of their offshore financial accounts and assets. We have previously written on this subject here.

The latest document release from the International Consortium of Investigative Journalists includes over 13.4 million files spanning a time period of more than 60-years, including a large cache from the Bermudan law firm, Appleby, and a fiduciary service provider, Estera. According to news reports, covered jurisdictions include Antigua and Barbuda, Aruba, the Bahamas, Barbados, Bermuda, the Cayman Islands, the Cook Islands, Dominica, Grenada, Lebanon, Malta, the Marshall Islands, St. Kitts and Nevis, St. Lucia, St. Vincent, Samoa, Trinidad and Tobago, and Vanuatu.

Practice Point: Voluntary disclosure to the Internal Revenue Service may still be an option for affected individuals and entities; therefore, all options should be considered when evaluating the consequences of this leak.

Tax Court Says IRS’s “Drift-Net” Argument to Expand Privilege Waiver Must Be Anchored in Principles

by Jeffrey M. Glassman, Kevin Spencer, Robin L. Greenhouse and Roger J. Jones | Nov 3, 2017 | Court Procedure Matters, IRS Audits, IRS Guidance, Privilege and Non-Disclosure, Trial Courts, Uncategorized

In Estate of Levine v. Commissioner, the US Tax Court (Tax Court) rejected an Internal Revenue Service (IRS) attempt to expand upon the privilege waiver principles set forth in AD Inv. 2000 Fund LLC v. Commissioner. As background, the Tax Court held in AD Investments that asserting a good-faith and reasonable-cause defense to penalties places a taxpayer’s state of mind at issue and can waive attorney-client privilege. We have previously covered how some courts have narrowly applied AD Investments.

In Estate of Levine, the IRS served a subpoena seeking all documents that an estate’s return preparer and his law firm had in their files for a more-than-ten-year period, beginning several years before the estate return was filed and ending more than four years after a notice of deficiency (i.e., which led to the Tax Court case) was issued. The law firm prepared the estate plan and the estate tax return in issue. The law firm represented the estate during the audit, and after the notice of deficiency was issued, the law firm was engaged to represent the estate in “pending litigation with the IRS.” (more…)

Manafort Indictment Is a Good Reminder of FBAR Disclosure Requirements

by Kevin Spencer, McDermott Will & Emery, Roger J. Jones and McDermott Will & Emery | Nov 2, 2017 | IRS Guidance, Uncategorized

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.

(more…)

IRS Criminal Investigation Division Expects Official “Stand Up” of National Coordinated Investigation Units in January

by Kevin Spencer and McDermott Will & Emery | Oct 30, 2017 | IRS Guidance, Uncategorized

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.

IRS and Taxpayers Continue to Battle over the IRC Section 199 Deduction for Computer Software

by Kevin Spencer and Robin L. Greenhouse | Oct 27, 2017 | IRS Guidance, Uncategorized

On October 20, 2017, the Internal Revenue Service (IRS) published Office of Chief Counsel Internal Revenue Service Memorandum 20174201F (FSA), legal advice written by a field attorney in the Office of Chief Counsel that was reviewed by an associate office, which deals with a merchant bank’s claim that its revenue from merchant discount fees qualifies as Domestic Product Gross Receipts (DPGR) under Internal Revenue Code (Code) Section 199. According to the FSA, on its amended return the taxpayer claimed a Code Section 199 deduction with respect to its merchant discount fees based on the third-party comparable exception for online software found in Treasury Regulation § 1.199-3(i)(6)(ii)(B). The taxpayer argued that the merchant discount fees were derived from the use of computer software, the software “Platform.” The taxpayer took solace in the fact that third parties derived gross receipts from the disposition of substantially identical software. Accordingly, the taxpayer argued that the merchant discount fees should be treated as DPGR pursuant to the third party comparable exception.

The IRS, however, had a very different perspective. Its analysis began with the threshold question of whether there was a “disposition” of the Platform. The IRS concluded that the taxpayer did not dispose of the Platform because the taxpayer did not lease, rent, license, sell, exchange or otherwise dispose of the Platform as required by Treasury Regulation § 1.199-3(i)(6)(i). Moreover, the IRS concluded that the merchant discount fees represented remuneration for “online services” (e.g., online banking services) per Treasury Regulation §1.199-3(i)(6)(i). Because the taxpayer did not establish that there was a disposition of the Platform, the third party comparability exception in Treasury Regulation § 1.199-3(i)(6)(ii)(B) is inapplicable—the merchant discount fees were derived “from the provision of merchant acquiring services.”

Practice Point: We have reported extensively on the IRS’s attacks on taxpayer’s ability to claim the IRC section 199 deduction for computer software and qualified film production. The issue is also on the IRS’s annual Guidance Plan as an area in which the IRS expects to issue regulations within the next year. The FSA is further proof that taxpayers and the IRS do not see eye-to-eye on these issues. Indeed, there are presently several docketed cases seeking judicial determinations regarding the applicability of the third-party comparable exception. Because we have several clients who have this same issue, we are watching it closely, and will report back with any developments.

IRS Releases 2017-2018 Priority Guidance Plan

by Kevin Spencer and McDermott Will & Schulte | Oct 26, 2017 | IRS Guidance, Uncategorized

The US Department of Treasury (Treasury) and Internal Revenue Service (IRS) issue Priority Guidance Plans each year to identify the tax issues they believe should be addressed through regulations, revenue rulings, revenue procedures, notice and other published administrative guidance. On October 20, 2017, the IRS and Treasury released the 2017-2018 Priority Guidance Plan.

Part 1 focuses on the eight regulations from 2016 that were identified pursuant to Executive Order 13789 (see here for prior coverage on Treasury’s report in response to this Order) and the intended actions related to those regulations.
Part 2 describes certain projects that Treasury and the IRS have identified as burden reducing and that they believe can be completed in the eight and a half months remaining in the plan year.
Part 3 describes the various projects related to the implementation of the new statutory partnership audit regime. See here for prior coverage.
Part 4 describe specific projects by subject area that will the focus of the balance of Treasury’s and the IRS’s efforts for the plan year.

Practice Point: The Priority Guidance Plan is a useful tool for taxpayers in that it highlights areas in which Treasury and the IRS are focused, both in the short-term and the long-term. Although items in the Priority Guidance Plan are subject to modification, they provide a blueprint for issues that the government views as important. For example, the plan reports guidance projects relating to Internal Revenue Code Section 199, focused on the treatment of computer software and films. These issues have created substantial controversy for the IRS and taxpayers, as we have previously reported. See https://www.taxcontroversy360.com/2017/04/the-irss-assault-on-section-199-computer-software-doesnt-compute/ and https://www.taxcontroversy360.com/2017/03/irs-campaign-focuses-on-definition-of-qualified-film-under-section-199/. Additional guidance would be welcomed.

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