Matthew Roberts | TaxConnections

13 Apr 2022

IRS Issues FBAR Reference Guide

The IRS and FBARs

On March 30, 2022, the IRS issued Publication 5569, Report of Foreign Bank & Financial Accounts (FBAR) Reference Guide. The 12-page publication provides helpful information to both taxpayers and tax professionals regarding FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The IRS’s issuance of Publication 5569 also shows that the IRS will continue its education campaign on FBAR compliance and filing obligations. This article summarizes the information that is located in IRS Publication 5569.

Who Must File an FBAR?

By statute and regulation, all U.S. persons must file an annual FBAR if they have a financial interest in or signature or other authority over any financial account(s) located outside the United States, provided the aggregate balance(s) of the account(s) exceed $10,000 at any time during the calendar year.

Who is a U.S. Person?

Written by Matthew Roberts | Posted in FBAR Reference Guide • IRS Publication 5569

15 Mar 2022

IRS Goes After Holocaust Survivor For Willful FBAR Penalty

FBAR Penalties

On March 8, 2022, the Southern District of New York issued its Opinion in the case of United States v. Schik, No. 20-cv-0221 (MKV), 2022 U.S. Dist. Lexis 41148 (S.D.N.Y. Mar. 8, 2022). In that case, the United States brought a lawsuit against a Holocaust survivor for willful failure to file an FBAR for one year: 2007. Incredibly, the United States sought to assess the maximum willful FBAR penalty against Mr. Schik—i.e., 50% of the foreign account balance—which would have resulted in close to a $9 million FBAR penalty. As seems more and more common, the United States moved for summary judgment on the willfulness determination. This article discusses the Schik case.

FBARs Generally

Written by Matthew Roberts | Posted in FBAR Penalties

08 Mar 2022

IRS Notice 2007-83 Declared Unlawful Under The Administrative Procedure Act

The Administrative Procedure Act

The Internal Revenue Code (the “Code”) contains over one hundred different civil penalties for various acts or failures to act. For example, Section 6707A requires taxpayers, in certain instances, to report certain transactions that they have entered into, particularly those that the IRS has determined have the potential for tax avoidance or evasion.

These “reportable transactions” can generally be broken down in more subsets, one of which includes “listed transactions.” For these purposes, a “listed transaction” is one that is the same or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction identified by notice, regulation, or other form of published guidance as a listed transaction. Generally, listed transactions are reported on IRS Form 8886, Reportable Transaction Disclosure Statement.

Written by Matthew Roberts | Posted in IRS Notice 2007-83 • The Administrative Procedure Act

04 Mar 2022

The Research and Development Credit – Section 41

Taxpayers are always interested in whether certain expenditures qualify as tax deductions. But many taxpayers often forget that expenditures may alternatively qualify for various tax credits. And all things being equal, taxpayers should generally prefer tax credits over tax deductions as the former are more valuable monetarily than the latter.

Regrettably, many taxpayers are unaware that they qualify for certain tax credits. For this reason, thousands of taxpayers each year fail to file the necessary forms with their tax returns, rendering the credits unclaimed. After a number of years, these credits are gone forever due to the statute of limitations for refund claims.

This article explains one of the more commonly missed tax credits: the research and development credit under Section 41.[i] This article also discusses the IRS’s renewed interest in this credit and its new refund claim procedures applicable to taxpayers who seek to claim the credit after January 10, 2022.

The Research & Development Credit.

Written by Matthew Roberts | Posted in The Research and Development Credit – Section 41

17 Feb 2022

The IRS’s Voluntary Disclosure Practice (VDP): IRS Revises Form 14457

On February 15, 2022, the IRS announced that IRS Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, and the accompanying instructions to the form had been revised. Because the revisions provide clarification on certain issues that caused confusion during the submission process, the revisions are welcome news to many tax professionals, including this writer. The revisions are discussed more fully below.

Introduction to the Voluntary Disclosure Practice

A full primer on the IRS’s Voluntary Disclosure Program (“VDP”) can be found here. In short, the VDP permits non-compliant taxpayers an opportunity to come forward, file missing or amended returns correcting prior year reporting, and pay the government taxes that are owed. In exchange, the taxpayer making the disclosure receives what is akin to amnesty, provided the taxpayer meets all of the eligibility requirements of the VDP. This can result in significant reduction of criminal risks and exposure for the non-compliance in addition to significant reductions in civil penalties associated with the non-compliance (in some cases).

Written by Matthew Roberts | Posted in Form 14457 • IRS Updates • The IRS’s Voluntary Disclosure Practice (VDP)

16 Feb 2022

What Happened To My Joint IRS Income Tax Refund? The IRS’s Authority To Offset

Matthew Roberts - Joint IRS Income Tax Refund

Generally, when a taxpayer makes an overpayment of tax, the IRS refunds the overpayment to the taxpayer. But this is not always the case. For example, the IRS has the statutory authority to credit (or offset) an overpayment against certain other tax debts, including pre-existing federal tax debts.

This offset issue is common with many types of taxpayers: individuals, corporations, etc. However, the issue becomes much more common and also confusing with married taxpayers. This article discusses some of these offset issues in the context of married individuals.

The IRS’s Right of Offset

Written by Matthew Roberts | Posted in Joint IRS Income Tax Return

11 Feb 2022

The Evolving Standard Of “Willfulness” In FBAR Cases: Where Are We Now?

The concept of “willfulness” is an important one in the FBAR civil penalty context. Indeed, a taxpayer’s willful failure to file a timely and accurate FBAR may result in significant penalties: the higher of 50-percent of the unreported account balance at the time of the violation or $100,000 (adjusted for inflation). Take this simple example:

Mark is a dual citizen of the United States and Australia. Mark routinely travels to Australia to visit his family. In one year, Mark chooses to live and work in Australia, making $300,000 as an independent contractor. Mark deposits the funds from his work in an Australian bank account.

When tax time comes, Mark files an income tax return reporting the $300,000 of income. However, he fails to file an FBAR reporting the maximum account balance in the foreign account, which was $200,000. If the IRS determines that Mark’s failure to file an FBAR was willful, the IRS may assess a $100,000 willful FBAR penalty against him.

Written by Matthew Roberts | Posted in FBAR Filing • “Willfulness” In FBAR Cases

28 Jan 2022

Willful FBAR Penalties And A District Court’s Authority To Remand IRS Willful Penalty Computations

Willful FBAR Penalties

The Schwarzbaum case has received a lot of attention in the last few years from tax professionals. For example, in 2020, the district court concluded—contrary to some other federal court decisions—that the simple act of signing a federal tax return and not filing an FBAR does not in and of itself constate a finding that there was a willful FBAR violation. See U.S. v. Schwarzbaum, No. 18-CV-81147, 2020 WL 1316232, at *8 (S.D. Fla. Mar. 20, 2020). In 2021, after finding that Schwarzbaum’s conduct in failing to file FBARs was willful, the district court granted the government’s motion for an order requiring Schwarzbaum to repatriate millions of dollars of foreign assets to provide security to the government for full payment on the affirmed willful FBAR penalties. See U.S. v. Schwarzbaum, 128 AFTR 2d 2021-6436 (S.D. Fla. Oct. 26, 2021). Months later, though, the district court changed course and granted Schwarzbaum a stay of repatriation until after the Eleventh Circuit reviewed the district court’s decision on willfulness. See here.

Written by Matthew Roberts | Posted in FBAR Penalties

19 Jan 2022

Criminal Tax Statutes Of Limitations And Suspensions: 18 U.S.C. § 3292 And The Fifth Circuit’s Decision In Pursley

In civil and in criminal cases, the Government must generally act within a certain prescribed time to take action against taxpayers. In legal parlance, this period of time is known as the “statute of limitations.” The statute of limitations generally forces the Government to show its hand and file suit more quickly to avoid prejudice to taxpayers, which may occur through stale evidence or faded memories.

The statute of limitations for many criminal tax cases is located in I.R.C. § 6531. For example, that provision states that the Government must generally bring a criminal action against a taxpayer within 6 years after the commission of the offense. But there are exceptions to this general rule. Indeed, the recent Fifth Circuit Court of Appeals decision in U.S. v. Pursley discusses one notable exception potentially applicable to taxpayers with foreign activities and foreign accounts: 18 U.S.C. § 3292.

Relevant Facts.[i]

Written by Matthew Roberts | Posted in 18 U.S.C. § 3292 • Tax Statutes Of Limitations

11 Jan 2022

The Art Of An IRS APA Defense

The Art of an IRS APA Defense: Conservation Easements and Hewitt

Good tax attorneys will do whatever it ethically takes to win on behalf of their clients. Often, this means the attorney must not only have a good understanding of the substantive provisions at play, but also relevant procedural rules. And, there are many.

Take for example the recent Eleventh Circuit decision in Hewitt. In that case, the taxpayers had donated a conservation easement on property. However, they ran afoul of a Treasury Regulation, which places limitations on the amount of proceeds the Hewitts could receive in the event the conservation easement was later nullified through judicial extinguishment. Rather than simply arguing that the operative regulation did not apply to the transaction at issue, the tax attorney also contended that the regulation was void as violative of the Administrative Procedure Act (the “APA”). The taxpayer won! The Hewitt decision is discussed more fully below.

Facts.

The Property and the Deed of Conservation Easement.

David Hewitt (“David”) acquired approximately 1,300 acres in Alabama from his family and other third parties (the “Property”). He used the Property for cattle ranching.

However, on December 28, 2012, David executed a Deed of Conservation Easement (the “Deed”) in favor of a conservancy. The Deed was properly recorded in the county records in Alabama.

Among other provisions, the Deed contained its purpose, prohibited uses of the Property, and permitted uses of the Property. First, it specified that David had executed the Deed to retain the Property in its natural condition. Second, the Deed limited the usage of the Property—to advance its natural state—and permitted the conservancy to enter the Property to preserve and protect the easement. Third, it contained a “permitted uses” provision, which reserved to the Hewitts the right to build certain types of improvements on the Property.

In many cases, there is an issue of which party shares in the improvement value of land when an easement is extinguished. For example, here is it David or is it the conservancy? To address this issue, the parties agreed that the Deed should contain a judicial extinguishment clause. Thus, subsection 15.1 of the Deed stated:

Extinguishment. If circumstances arise in the future such as render the purpose of this Easement impossible to accomplish, this Easement can only be terminated or extinguished, whether in whole or in part, by judicial proceedings in a court of competent jurisdiction, and the amount of the proceeds to which Conservancy shall be entitled, after the satisfaction or prior claims, from any sale, exchange, or involuntary conversion of all or any portion of the Property subsequent to such termination or extinguishment (herein collectively “Extinguishment”) shall be determined to be at least equal to the perpetual conservation restriction’s proportionate value unless otherwise provided by Alabama law at the time, in accordance with subsection 15.2 . . .

Written by Matthew Roberts | Posted in TaxConnections

06 Jan 2022

Failure To Collect And Pay Over Tax, Or Attempt To Evade Or Defeat Tax – 26 U.S.C. § 6672

Also Referred to as Internal Revenue Code Section 6672; I.R.C. § 6672; Section 6672; Trust Fund Recovery Penalty

Background. In certain instances, the Internal Revenue Code (the “Code”) requires persons to withhold certain taxes (e.g., excise or employment) on the government’s behalf and then remit those same taxes to the government. In this manner, the person acts similar to a fiduciary on behalf of the government until such amounts are paid in full. A person’s failure to pay the government can result in so-called “trust fund recovery penalties.”

Full Statutory Text

a. General Rule.

Written by Matthew Roberts | Posted in Trust Fund Recovery Penalty

20 Dec 2021

Challenging FBAR Penalties In Federal Court: FBAR Litigation

In most cases, IRS exam initiates FBAR assessments. And, after an IRS examiner determines that an FBAR penalty is appropriate, taxpayers are generally afforded pre- or post-assessment appeals rights with the IRS Independent Office of Appeals (“Appeals”). If Appeals agrees with IRS exam that the FBAR penalty is appropriate, Appeals will either recommend assessment (if a pre-assessment case) or sustain the assessment determination (if a post-assessment case).

But, what happens after the assessment? The short answer: litigation. And as discussed more fully below, this litigation is likely to occur whether the taxpayer wants it or not due to the unique collection procedures applicable to FBAR assessments under Title 31 of the Code.

FBAR Assessments

United States persons who have a financial interest in or signature authority over one or more foreign financial accounts located in a foreign country with aggregate balances exceeding $10,000 at any time during the calendar year must file a timely and complete FBAR. If the United States person fails to file a timely and accurate FBAR, he or she can be liable for “willful”[i] or “non-willful” FBAR penalties.