Matthew Roberts | TaxConnections

14 Dec 2021

Is My Foreign Retirement Account Subject To IRS Information Return Reporting (FBAR, 3520, etc.)?

United States citizens and residents[i] are subject to federal income tax on their worldwide income. For example, even if a United States citizen permanently relocates to a foreign country, he or she will generally continue to have income tax reporting obligations in the United States. And, in many cases, because of this newfound nexus between the United States citizen and the foreign country, that person will also have newfound United States reporting obligations (such as FBARs).

Perhaps more commonly, United States reporting obligations arise in these situations when the United States person establishes a retirement account in a foreign jurisdiction. As discussed more fully below, many of the issues surrounding the proper reporting of foreign retirement accounts remain murky and unresolved. Because harmless mistakes can result in significant penalties for failing to file information returns, taxpayers with foreign retirement accounts should take actions to ensure that the accounts are properly disclosed for United States reporting purposes.

IRS Guidance and the 2018 GAO Report.

Written by Matthew Roberts | Posted in Foreign Retirement Account • Form 3520/3520-A

23 Nov 2021

Pre-Marital Agreements And The IRS

It is certainly not uncommon for one taxpayer with significant federal tax debts to want to marry another taxpayer without any tax debts at all. In these instances, both taxpayers may naturally desire to enter into a pre-marital agreement to ensure that their respective assets and debts (including federal tax debts) are kept separate. This is particularly so in so-called “community property states” where the presumption is that each taxpayer is deemed to have rights to one-half of the other taxpayer’s community property income and assets.

Taxpayers in these circumstances should understand that the IRS will not always respect a pre-marital agreement. Rather, the IRS will, in many cases, carefully scrutinize the agreement itself and the surrounding circumstances to determine whether it can pierce through the agreement and reach the liable spouse’s community property share of assets. Accordingly, taxpayers should, where warranted, consult with a tax professional to determine whether the pre-marital agreement complies with federal tax law and IRS guidance.

Written by Matthew Roberts | Posted in IRS • Pre-marital Agreement

16 Nov 2021

Federal Court Orders Taxpayer To Repatriate Assets To Satisfy FBAR Penalty Judgment

Free Attendee Ticket – Freeman Law International Tax Symposium

Our firm has written extensively on FBAR penalties. For example, see here, here, here, and here. As a quick summary, Title 31 of the United States Code authorizes the United States to impose civil penalties against taxpayers who fail to properly disclose their interests in foreign accounts and certain foreign assets on a timely filed FBAR. The amount of the penalty depends on whether the conduct at issue was “willful” or “non-willful,” with willful penalties being the harshest—i.e., up to 50% of the highest account balances of the foreign accounts that were not properly disclosed for each year of the non-disclosure.

Without doubt, FBAR penalties, particularly those due to willful conduct, are extremely harsh and punitive in nature. Thus, I am not surprised when clients ask me from time to time what could happen after the United States obtains a lawful judgment for the FBAR penalties against them? The simple answer: if payment or payment arrangements are not made, the United States will use all of its expansive resources to collect the penalty through involuntary means, such as seizures of property, garnishment, and other methods.

Indeed, the recent decision in Schwarzbaum shows just how far the United States will go to collect on an FBAR penalty judgment against a taxpayer.

Written by Matthew Roberts | Posted in FBAR Penalty Judgement

03 Nov 2021

Settlement Agreements And IRS Forms 1099

Characterization matters. This is particularly so for federal income tax matters and the proper characterization of a settlement payment. For example, the characterization of a settlement payment as a payment for damages due to defamation or a payment in lieu of lost profits results in ordinary income to the recipient. Conversely, characterization of that same payment as a payment for physical injuries or a return of capital results in no tax to the recipient. With ordinary income tax rates as high as 37-percent, the difference in characterization in these instances can result in either a lot of income tax or no income tax at all.

The IRS is well aware that parties to a settlement agreement will often attempt to play games with the characterization of a payment. But, how does the IRS keep track of these payments and also determine whether the recipient has properly characterized a settlement payment as taxable or non-taxable? The answer lies primarily in the Internal Revenue Code’s intricate tax reporting regime.

Written by Matthew Roberts | Posted in IRS Form 1099 • IRS Settlement Agreements

28 Oct 2021

What Is The Difference Between Willful And Non-Willful Conduct For FBAR Penalties: The Hughes Decision Provides Some

FBAR penalties can be steep. Indeed, under current law, if a taxpayer “willfully” fails to file a timely and accurate FBAR, the taxpayer may be liable for civil penalties of $129,210 per year or 50% of the balance in the accounts at the time of the violation, whichever is higher.[i] And even non-willful violations—given the 6-year statute of limitations—can add up with civil penalties of $12,921 per year currently.[ii]

Because the amount of FBAR penalties often hinges on whether the conduct was “willful” or “non-willful,” tax practitioners must take careful notice of the distinction between the two when advising their clients of the results of failures to timely file. Thus, a recent federal court decision out of the Northern District of California is worth a read and provides some helpful insights to tax professionals and taxpayers alike as to how to potentially distinguish between the two types of conduct.[iii]

The Facts of Hughes.

Written by Matthew Roberts | Posted in FBAR Penalties • Willful And Non-Willful Conduct

20 Oct 2021

Defenses To Section 6038 IRS Penalties

Administratively, the IRS continues to devote significant resources to catching taxpayers who have failed to properly file international information returns (e.g., Forms 5471, Forms 8865, Forms 3520, etc.). Don’t believe me? Just look at the uptick in federal court cases associated with these information returns and the IRS’ attempts to assess civil penalties against taxpayers who have not timely filed.

For example, the Western District of Texas only months ago issued its decision in Colliot v. U.S., No. 1:19-cv-212-LY (W.D. Tex. Mar. 24, 2021). In that case, the IRS sought to impose over $400,000 of civil penalties against a taxpayer for his failure to file Forms 5471 and Forms 8865 for 6 years under section 6038 of the Code. Only months later, the United States Tax Court issued its memorandum opinion in Kelly v. Comm’r, T.C. Memo. 2021-76, which also involved a taxpayer’s non-failure of Forms 5471 under section 6038. However, in that case, the IRS was not attempting to impose civil penalties against the taxpayer—rather, the IRS was attempting to utilize section 6038(c)(8) and its extension of the general three-year statute of limitations period for assessment indefinitely until a taxpayer files the Form 5471.

Not only do these two decisions provide support that section 6038 issues are here to stay, they also offer some lessons and insights to taxpayers who are attempting to defend against civil penalties under section 6038. Accordingly, these two decisions are discussed in more detail below.

Written by Matthew Roberts | Posted in Section 6038 IRS Penalties • TaxConnections

19 Oct 2021

What Happens If I Default On An IRS Installment Agreement?

Installment Agreements Generally.

Taxpayers do not always have the financial wherewithal to pay all of their federal tax obligations on time. In these instances, the Internal Revenue Code (the “Code”)[i] grants taxpayers with a statutory right to request additional time to make full or partial payment through an installment agreement.[ii] If the IRS accepts the terms of the installment agreement, the taxpayer benefits in that the IRS is precluded from levying against the taxpayer’s assets, provided the taxpayer continues to comply with the terms of the agreement.[iii] Moreover, the IRS benefits in that it is not required to devote its resources to investigate the taxpayer’s financial situation and also seek levy of the taxpayer’s assets to satisfy the outstanding tax debts.

IRS Form 433-D.[iv]

Generally, a taxpayer enters into an installment agreement with the IRS through execution of an IRS Form 433-D, Installment Agreement. A standard-form Form 433-D provides the following terms and agreements amongst the parties:

The amount of the monthly payment to the IRS;
Whether the monthly payment will remain static or increase/decrease after a specified period of time;
Recognition by the taxpayer that the agreement is based on the taxpayer’s current financial condition and that the agreement may be modified or terminated if the IRS has information that suggests that the taxpayer’s ability to pay has “significantly changed”;
Recognition by the taxpayer that the taxpayer must remain compliant with other federal tax reporting and payment obligations while the agreement remains in effect;
Recognition that the IRS may terminate the installment agreement in certain instances, including: (1) if the IRS has information that suggests that the taxpayer’s ability to pay has “significantly changed;” (2) the taxpayer has failed to stay compliant with all federal tax reporting and payment obligations; (3) the taxpayer misses a monthly payment; and (4) the taxpayer fails to provide requested financial information to the IRS.

Written by Matthew Roberts | Posted in IRS Installment Agreements

21 Sep 2021

What Is IRS Notice Of Deficiency?

Ordinarily, taxpayers file their income tax returns each year with the IRS and hear nothing more. Rather, the Internal Revenue Service (“IRS”) simply processes the tax return, assesses the reported amount of tax due, and accepts and credits the taxpayer’s payment against the reported tax amount. In this manner, life moves on until the same process is repeated again the next year.

But, there are times in which the IRS disagrees with the amount of tax reported on a taxpayer’s return. In these instances, the IRS must utilize so-called “deficiency procedures” to communicate to the taxpayer the IRS’ belief that adjustments should be made to the return. These deficiency procedures provide taxpayers with significant procedural rights to contest the IRS’ determinations. This article discusses the deficiency procedures including the Notice of Deficiency (“NOD”) the IRS must issue prior to making an assessment of federal tax. This article also discusses the taxpayer’s right to challenge the IRS’ determinations in the NOD through filing a petition with the United States Tax Court (“Tax Court”).

Written by Matthew Roberts | Posted in IRS • Notice Of Deficiency

17 Sep 2021

Congress Readies New Round Of Tax Increases

Background.

The House Committee of Ways and Means (the “House”) has been busy the last few days. Indeed, the House continues to mark up and work through potential revenue raisers (i.e., tax increases) to help pay for recent legislative proposals. Although these proposals are not yet law, tax professionals should keep a careful eye on the proposals to ensure that they do not potentially interfere with their client’s tax planning. At a very minimum, tax professionals should be knowledgeable enough to discuss the proposals with their clients and how such proposals (if eventually enacted into law) would impact their clients’ overall goals and objectives.

Income Tax Rates.

Increasing income tax rates is generally the easiest way to raise additional revenue for the government. And, the proposals are no different in proposing additional income tax increases. These potential increases are discussed below.

Individual Income Tax Rates.

Individual income tax rates are currently housed in section 1 of the Internal Revenue Code of 1986, as amended (the “Code”). The Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97 (the “TCJA”) reduced income tax rates for individuals. Under the TCJA, the top income tax rates for tax years 2018 through 2025 were reduced from 39.6 percent to 37 percent. However, the reduced rates were not permanent and were set to sunset in 2026, i.e., the top rates were set to revert back to 39.6%.

The House proposal seeks to increase these reduced rates from 37 percent to 39.6 percent for the 2022 and later tax years. In addition, the proposal seeks to bring more high-income earners into the higher marginal tax rate of 39.6 percent through a reduction of income subject to the higher rate. For example, under existing law, taxable income of over $538,475 for a single individual is taxed at 37 percent. Under the proposal, taxable income over $501,250 would be taxed at 39.6 percent for a single individual.

Corporate Income Tax Rates.

Written by Matthew Roberts | Posted in Congress • Tax Increases

13 Aug 2021

Recovery Of Attorney Fees Under “Chapter 38” In Texas

Under the “American rule,” litigants on each side generally pay their separate legal fees associated with a lawsuit. This is generally so even if one party prevails on the merits of his or her claim or claims. Texas follows this rule.

But, there are exceptions. One of the more routinely utilized exceptions (particularly for breach of contract claims where there is no governing language in the agreement) in the State of Texas is Chapter 38 of the Texas Civil Practice & Remedies Code (“Chapter 38”).

Under Chapter 38, a plaintiff may recover attorney fees if the plaintiff successfully shows: (1) the plaintiff properly plead for a recovery of attorney fees; (2) the plaintiff’s claims fall within a specified category of claims; (3) the plaintiff was represented by an attorney; (4) the defendant was an individual or a corporation (although this is about to change);[i] (5) the plaintiff timely presented the claim to the defendant; (6) the defendant failed to tender timely payment within 30 days after the claim was presented; (7) the plaintiff prevailed on his or her claim; and (8) the plaintiff incurred attorney fees that were reasonable. Tex. Civ. Prac. & Rem. Code §§38.001, .002

Written by Matthew Roberts | Posted in TaxConnections

11 Aug 2021

How To Designate An IRS Employment Tax Payment

When a taxpayer makes a voluntary payment to the IRS, the taxpayer has the option to designate the application of the payment to certain periods and/or taxes. For example, if a corporation owes federal employment taxes and the corporation desires to make a partial payment towards the past due employment taxes, the corporation or an authorized individual may designate the payment towards the “trust fund portion” of employment taxes due. In this manner, the payment reduces not only the employment taxes owed, but also the potential liability for persons who may have been liable or may be subsequently found to be liable for so-called trust fund recovery penalties (“TFRPs”) under Section 6672 of the Code.

On July 23, 2021, IRS Chief Counsel released a Chief Counsel Advice Memorandum on this issue, and it serves as an important reminder to tax professionals and taxpayers regarding the option to designate payments and also the requirements taxpayers must follow to do so.

Trust Fund Recovery Penalties Generally

Written by Matthew Roberts | Posted in Designate IRS Employment Tax Payment • Trust Fund Recovery Penalty