The U.S. Treasury Department faces a complex task in enforcing its proposed digital asset reporting rules on foreign trading platforms. The regulations, introduced in late August, primarily address domestic transactions, leaving potential difficulties in enforcing reporting requirements on foreign digital asset brokers, especially those operating cryptocurrency trading platforms.
One potential avenue for the Treasury to
On September 8, 2023 the IRS announced a sweeping effort to focus enforcement efforts on high-income individuals, partnerships, and corporations. On September 20, 2023 the IRS announced that it will establish a special passthrough organization to help audit initiatives for high-income individuals and complex partnerships. Government officials have signaled that internal briefings are starting for
A hearing is scheduled for September 11, 2023 for interested persons and organizations to provide testimony on proposed regulations on the timing and approval process for penalties. Section 6751(b) provides that:
No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.
The timing of when the approval is required by Section 6751(b) has been the subject of significant litigation. The Second Circuit in Chai v. Commissioner concluded that Congress enacted section 6751(b) to “prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle.” This has caused a lot of litigation in both the Tax Court and U.S. District Courts such that there are currently two different standards on timing of when such supervisory approval is required. If supervisory approval is to meet the goal of not being used as an unfair “bargaining chip” it must be required before such unwanted behavior can occur. Many groups have submitted comments asking for supervisory approval to be done earlier in the examination process than the proposed regulations require and that approval be done by a direct supervisor and not just anyone with penalty approval rights within the IRS.
Section 2301 of the CARES Act, as amended, permits employers to claim employee retention credits (“ERCs”) if they meet certain requirements. Under one of those requirements, an employer may claim an ERC if the employer’s trade or business operations were fully or partially suspended due to a federal or state COVID-19 governmental order (the “Business Suspension Test”).
Monetized installment sale transactions (“MISTs”) have been on the IRS’s radar for some time. On May 7, 2021, IRS Chief Counsel issued an advice memorandum, contending such transactions were “problematic” and “flawed”.[1] And shortly thereafter, on July 1, 2021, MISTs found themselves on the annual IRS “Dirty Dozen” list, or the publication the IRS uses to alert the public of abusive transactions.[2] The IRS’s “Dirty Dozen” list for 2022 and 2023 also includes MISTs.[3]
UPDATE: On August 15, 2022, Judge Otis D. Write II in the Central District of California entered an order approving service of the summons by the IRS on sFOX for account and transaction records. The Department of Justice entered a press release the following day with Commissioner Chuck Rettig quoted as saying “the John Doe Summons remains a highly valuable enforcement tool that the U.S. government will use again and again to catch tax cheats and this is yet one more example of that.” Deputy Assistant Attorney General David A. Hubbert of the Department of Justice Tax Division was also quoted as well saying “taxpayers who transact with cryptocurrency should understand that income and gains from cryptocurrency transactions are taxable.”
The IRS knows it has a problem, in that it knows there are far more cryptocurrency transactions than are being reported on tax returns. The IRS may also get an $80 billion increase in funding for enforcement that will help solve that problem. What can taxpayers and cryptocurrency service providers expect? More John Doe Summonses. If there was any doubt, the IRS filed two new John Doe Summons requests (here and here) this week on cryptocurrency service provider sFOX. sFOX is the full-service crypto prime dealer for institutional investors, providing brokerage services for digital assets. It’s also now a target for information by the IRS and the Department of Justice Tax Division.
Many people, myself included, can sometimes be accused of poor penmanship. As our paperwork becomes more and more electronic, we write less and less down with pen and paper. However, a recent decision from the tax court may be sending more supervisors at the IRS to penmanship classes. The taxpayers, Gregory and Simone Colbert, were assessed income tax deficiencies and associated accuracy related penalties. The Colberts admitted the deficiencies but disputed the interest and penalties.
On June 21, 2022, the United States Supreme Court agreed to hear a dispute involving split decisions among the circuit courts on non-willful penalties. The Fifth Circuit parted ways with the taxpayer friendly decision of the Ninth Circuit that non-willful penalties are capped at $10,000 per FBAR filing instead of the $10,000 per unreported bank account argued by the government. District courts in New Jersey, Connecticut, California, and Texas had all ruled in the taxpayer’s favor that non-willful penalties were capped at $10,000 per form as well. The case headed to the Supreme Court is United States v. Bittner, where a taxpayer friendly decision from the District Court reduced the $2.7 million penalty to $50,000 based on a $10,000 per form cap on non-willful FBAR penalties. The Fifth Circuit reversed the favorable district court decision and held that the “$10,000 penalty cap therefore applies on a per-account, not a per-form basis.”
In some federal tax disputes, if at first you don’t succeed you may not get to try again. A recent Fifth Circuit decision confirms issue preclusion when the parties and the issue are truly the same. See ETC Sunoco Holdings, LLC v. United States, No. 21-10937 (5th Cir. June 8, 2022). Sunoco sought a refund in the Court of Federal Claims for tax years 2005 through 2008, arguing that they should be permitted a deduction of their costs of goods sold as an excise tax expense even though it did not technically reduce the company’s excise-tax liability. The Court of Federal Claims disagreed. See Sunoco, Inc. v. United States, 908 F.3d 710, 715 (Fed. Cir. 2018). Sunoco then sued again, five years later, for alleged overpayments from tax years 2010 and 2011 but filed suit in the Northern District of Texas instead. Jurisdiction in tax disputes can often be brought in the Federal District Court with local jurisdiction or the Court of Federal Claims that has national jurisdiction. Therefore, jurisdictionally, this was proper. However, District Courts can choose not to hear the case if they conclude that the doctrine of issue preclusion applies.
Properly navigating the IRS labyrinth of rules and regulations is difficult and sometimes taxpayers fail to dot every “i” and cross every “t”. The results can sometimes be devastating for both individuals and small businesses. Especially if the IRS chooses to assess penalties for the unknown failures and then pay those penalties from other funds the taxpayer submits through its offset power. The recent case of Special Touch Home Care Services v. United States, provides an example of how this can sometimes occur.