Freeman Law | TaxConnections

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

27 Oct 2021

Form 8938 And FinCEN Form 114 Compared

The Foreign Account Tax Compliance Act (FATCA) requires certain U.S. taxpayers holding financial assets outside the United States to report those assets to the IRS using Form 8938, Statement of Specified Foreign Financial Assets.

The Form 8938 reporting obligation under FATCA does not, however, replace the independent obligation to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

The two forms are often confused. The table below provides a summary comparison of the key differences between each form:

Written by Jason Freeman | Posted in Form 114- Foreign Bank Account Reporting • Form 8938

20 Oct 2021

Breach Of Contract In Texas

Contracts play an important role in day-to-day business operations and drive economic activity across the globe. And when one party to a contract fails to live up to its obligations, the other party or parties may be damaged. Texas law provides a cause of action for a breach of contract. Aggrieved parties may be entitled to recover not only damages, but attorneys’ fees and costs as well.

Breach of Contract

Texas law requires the following elements to establish a breach of contract: (1) a valid contract exists; (2) the plaintiff performed or tendered performance as contractually required; (3) the defendant breached the contract by failing to perform or tender performance as required; and (4) the plaintiff sustained damages due to the breach.

Written by Jason Freeman | Posted in Breach Of Contract

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

15 Oct 2021

The Tax Implications of DeFi: A General Overview

DeFi, or decentralized finance, has experienced unprecedented growth over the last few years, resulting in a market cap of approximately $85 billion as of October 2021. Built on blockchain technology and cryptocurrency, DeFi has the potential to revolutionize finance by allowing users to borrow, lend, trade, and execute other financial transactions without a centralized authority or financial intermediary. Despite its popularity, the IRS has yet to issue specific guidance on how DeFi transactions should be viewed from a tax perspective. Fortunately, Notice 2014-21, which the IRS originally issued in 2014 and updated this year, can shed some light on how certain transactions conducted on DeFi platforms should be taxed.

In this posting, we will briefly explain what DeFi is and the tax implications of common DeFi transactions, including staking, lending, and yield farming/liquidity mining. It is important to note, however, that the taxation of DeFi transactions is an evolving area and future IRS guidance could supersede or clarify the principles laid out by the Service in Notice 2014-21.

What is DeFi?

Written by Jason Freeman | Posted in Blockchain • Decentralized Finance

28 Sep 2021

Protective Refund Claims: Preserving The Right To A Tax Refund

When is a protective refund claim available? Taxpayers often face uncertain outcomes in litigation or business transactions, giving rise to contingent tax refund claims. For example, if a pending lawsuit ends in a favorable result, it may create new law that gives the taxpayer a more favorable tax position in an earlier year—creating a right to a tax refund. A taxpayer may even be waiting for a hoped-for change in the tax laws that will result in a retroactive right to a refund. But what if the taxpayer’s right to a refund claim will not become clear until after the statute of limitations expires on their ability to file a claim for refund with the IRS?

A protective refund claim may be the solution.

What is a Protective Refund Claim?

Protective refund claims preserve a taxpayer’s right to claim a tax refund when the taxpayer’s right to the refund is contingent on future events that may not occur until after the statute of limitations expires. The “protective claim” concept is not contained in the Code or Treasury regulations but is instead established by case law.

Written by Jason Freeman | Posted in Protective Refund Claim

24 Sep 2021

Challenging Testamentary Capacity In Texas

When an interested party contests the capacity of the testator, what standard do courts use to determine the validity of a will? The recent case of Neal v. Neal provides insight. In that case, following her diagnosis of vascular dementia, a mother cut out two sons from her will, and left a third son left as the sole beneficiary. Neal v. Neal, No. 01-19-00427-CV, 2021 Tex. App. LEXIS 2051, at *1 (Tex. App. Mar. 18, 2021).

Background

In Neal, the decedent, Florene Neal, executed several wills throughout her life, devising her estate in different apportionments to her three sons: John, Randall, and David. Her first and third wills, executed in 2008 and 2011, divided her estate between John and Randall, explicitly excluding David, as he was to gain full ownership of a property that he owned as a joint tenant with right of survivorship. The second will, executed in 2009, left her estate to all three sons in equal shares. In her final will, which was executed in January 2012, Florene devised the entirety of her estate to David, and disinherited both Randall and John.

Florene died in 2015, and Randall opposed admitting the January 2012 will to probate. Randall alleged that Florene lacked testamentary capacity as a result of her vascular dementia diagnosis in August 2011. Ultimately, the court found that Florene was of sound mind when her final will was executed, and Randall appealed the probate court’s decision.

Analysis

On appeal, Randall contended that 1) Florene did not have testamentary capacity when she entered into the final will; and 2) David exerted undue influence to procure the execution of the final will.

Whether Florene had testamentary capacity

For a will to be admitted to probate, a party must first establish that the testator had testamentary capacity. A testator has testamentary capacity when, at the time of the execution of the will, she possesses sufficient mental ability to:

Written by Jason Freeman | Posted in Will And Probate

08 Sep 2021

Estimating Tax Deductions: The Cohan Rule

Travel and Entertainment Tax Deductions In The Absense of Records

The “Cohan rule” is derived from a Second Circuit’s 1930 decision, Cohan v. Commissioner, which allowed for the approximation of travel and entertainment expenses in the absence of records indicating an exact amount.[1] The rule has since flourished, with later noted exceptions, into use with taxpayers who either produce incomplete records or cannot produce any records at all regarding contested disallowed tax deductions.[2]

This holding can be attributed to the one and only, George M. Cohan. Mr. Cohan was perhaps the original Broadway pioneer. He has been credited with writing and publishing over 300 songs (including ‘You’re a Grand Old Flag’), over a dozen musicals, being a fabulous entertainer, networker, and generally credited with making Broadway into the global landmark it is today (see his statute and plaque in Manhattan’s famous Duffy Square).[3] His most memorable accomplishment, however, may be his memorialization in the tax code. After failing to keep atop his substantial Broadway expenditures, Mr. Cohan offered for the court’s approval his tax code debut. Despite grossly inadequate records, Mr. Cohan was allowed a deduction based on close approximations provided to the court.[4] The court then recognized that strict proof of otherwise deductible business expenses is not always available.[5] In the words of the Cohan court, “absolute certainty in such matters is usually impossible” and it is “not fatal that such results will inevitably be speculative; many important decisions must be such.” [6]

Written by Jason Freeman | Posted in Freeman Law • The Cohan Rule • Travel And Entertainment Tax Deductions

06 Aug 2021

Do FBAR Penalties Survive Death? A Texas Court Says “Yes”

A federal district court in Texas recently took up an interesting FBAR issue: whether civil FBAR penalties survive death? That is, if a taxpayer/account holder dies after the IRS assesses an FBAR penalty against them, do the FBAR penalties remain against the decedent’s estate? Or do the penalties die, so to speak, along with them?

The analysis typically turns on a subsidiary question: Are the penalties, for these purposes at least, penal or remedial? If penal, the FBAR penalties would potentially dissolve at death. If, on the other hand, they are remedial, maybe not.

FBAR penalties can be notoriously draconian. If a U.S. person fails to file an FBAR, the IRS can impose a civil monetary penalty. 31 U.S.C. § 5321(a)(5)(A). The amount of the penalty can vary. If, for example, the failure to file results from willful conduct, the statute provides for a penalty equal to the greater of $100,000 or 50% percent of the amount of “the balance in the account at the time of the violation.” 31 U.S.C. § 5321(a)(5)(C), (D).

Written by Jason Freeman | Posted in FBAR Penalties

04 Aug 2021

The Art Of The Tax Disclosure: How To Avoid Tax Penalties By Disclosing A Return Position

There are at least three questions when it comes to IRS tax disclosures: (1) Should a taxpayer disclose; (2) How should a taxpayer disclose; and (3) How much detail should be disclosed? Should a taxpayer simply append a statement or footnote to the return, or should the taxpayer utilize a Form 8275, Form 8275-R, or Form 8886? This article addresses these questions, drawing on experience with hundreds of tax return disclosures. We also explore outstanding questions in the context of IRS disclosures.

To Disclose or Not To Disclose, That is the Question

The Internal Revenue Code (IRC) imposes penalties for tax-reporting positions that result in an underpayment of tax or an understatement of liability and (1) lack the appropriate level of authority and/or (2) are not adequately disclosed. The Accuracy-Related Penalty imposed by Section 6662 (taxpayer) and Section 6694 (preparer) are two examples.

Written by Jason Freeman | Posted in Art Of Tax Disclosure • Form 8275 • Form 8275-R • Form 8886 • IRS Disclosures

28 Jul 2021

A Summary Of The IRS’ Streamlined Filing Compliance Procedures

The IRS’ streamlined filing procedures were first offered by the IRS on September 1, 2012. Since that time, the IRS has made several revisions. A current summary of the IRS’ Streamlined Filing Compliance Procedures is discussed below.

Do I Qualify for the IRS’ Streamlined Filing Compliance Procedures?

To qualify for the IRS’ Streamlined Filing Compliance Procedures (either Domestic or Foreign), taxpayers must meet the following initial requirements:

The taxpayer must be an individual taxpayer or an estate of an individual taxpayer.
The taxpayer must certify in a narrative under penalties of perjury that the conduct was not willful. The relevant conduct requiring certification relates to not only the failure to report income and/or pay tax, but also to submit all required information returns, including FBARs (e., FinCEN Form 114).
The IRS must not have initiated a civil and/or criminal investigation of the taxpayer for any tax year.
The taxpayer must have a valid Taxpayer Identification Number (e., TIN).

For streamlined filings under the IRS’ Domestic procedure, the taxpayer must also meet the following requirements:

Written by Matthew Roberts | Posted in IRS Streamlined Filing Procedure

13 Jul 2021

Are Settlement Payments For Emotional Distress Taxable?

The proper federal tax treatment for any given settlement payment is something of an enigma. Generally, federal courts (and thus, the IRS) respect the terms of a settlement agreement if the terms are clear and the parties expressly allocate the settlement payment or payments to one or more of the underlying claims or causes of action at issue. But, if one or more of these requirements are not present, federal courts are left searching through other evidence in an attempt to determine the payor’s intent, which, absent an express allocation, generally governs the tax characterization of the payment.

The terms of a settlement agreement may become significant in the context of settlement payments received in lieu of damages for personal physical injuries and/or physical sickness. Under Section 104(a)(2) of the Code, these payments are not taxable. However, Section 104(a) specifically provides that settlement payments received in lieu of damages for emotional distress are taxable. So, what is the difference and how can a taxpayer ensure that any settlement payments received are properly treated as non-taxable under Section 104(a)(2)?

Written by Matthew Roberts | Posted in Legal Settlement Payments