The dirty little secret, that isn’t so secret after the release of the Pandora Papers (Pandora Papers – ICIJ), is that the United States is a tax and money-laundering haven for much of the world because, unlike most countries, many U.S. states allow persons to own entities without revealing their ownership to authorities.  Last month, Treasury’s Office of Financial Crimes Enforcement Network (“FinCEN”) issued proposed regulations to put meat on the bones of the 2020 Corporate Transparency Act (“CTA”).  The CTA, which was part of a larger anti-money-laundering act, was designed to address the lack of required reporting of beneficial ownership information.  Many states, such as South Dakota and Nevada, allow what amounts to anonymous ownership of limited liability companies (“LLCs”).  The CTA will eventually require that all new and existing businesses meeting certain broad standards report their beneficial ownership and those having “substantial control” to FinCEN, as well as who applied for entity, subject to civil and criminal penalties.  FinCEN has cast a wide net and built in “flexibility” to ensure they don’t miss anyone trying to fly under the radar.   But what FinCEN sees as flexibility, others will see as ambiguity that will leave advisors scratching their heads and prosecutors lamenting the lack of a bright-line rule that will make their jobs easier.  The only upside for business owners: Congress has effectively doubled FinCEN’s workload without increasing its budget, and no one does more with less.  The CTA merely spread FinCEN’s resources even thinner.   

Six months after the CTA was passed, I was on an ABA panel with the head of the Justice Department’s money-laundering section and a senior advisor to FinCEN’s Director, and the primary question was: what will FinCEN’s CTA regulations look like?  The panelists and audience were concerned with a number of topics:

  • what does “substantial control” mean, to trigger reporting obligations?
  • will the new reporting requirements be burdensome?
  • how would the IRS and others be able to use the information?
  • what safeguards would exist to protect the information from hackers? and
  • how will the new power to punish foreign banks with a US “correspondent account” (which they all have) for not complying with a subpoena be used?   

On December 8, 2021, FinCEN answered the first tranche of those questions with its proposed regulations.  https://www.federalregister.gov/documents/2021/12/08/2021-26548/beneficial-ownership-information-reporting-requirements.  The regulations establish two categories of reporting companies, namely domestic and foreign (non-US entities that have registered to do business here), and list 23 exemptions from the reporting requirements.  In answer to the question about how they will define beneficial owner and substantial control, the regulations set a test of owning or controlling at least 25 percent of an entity, or if the person exercises substantial control over the entity.  The regulations also define which “applicants” have to register, which generally means the individual who files the documents forming the entity (domestic) or registering it to do business in the United States (foreign).  Registration will only require name and “tax residential” address, but more-detailed information is “encouraged,” whatever that means.  However, FinCEN also will require an image of a passport or similar document that includes a photograph.  The rationale for requiring this sort of identification makes clear that FinCEN is looking for crooks, and wants the crooks to leave a copy of their passport with the feds.            

The most interesting part of the proposed regulations (you know you’re a lawyer when you say something like that) is the discussion of how to determine whether someone has substantial control.  FinCEN wanted to identify persons with both title-derived power as well as exercised or exercisable power over important decisions.  It rejected a proposal to limit beneficial owners to one person per entity, which had been proposed to minimize the reporting burden, further signaling that FinCEN wants the database to be as usable as possible for law enforcement purposes.  FinCEN also used its experience and public comments to anticipate and shut down ways in which persons could try to circumvent the 25% rule by avoiding ownership on paper but “controlling” more than 25% of a company. 

As much effort as regulators put in to anticipating how persons will try to avoid or evade regulations, the regulators know that they can’t anticipate the next innovation in crime.  FinCEN included flexibility in the regulations in the form of “catch-all” language that requires reporters to consider all the facts and circumstances.  On the face, these broad regulations will ensure that everyone who is supposed to report, will report.  But, inherent in broad language is ambiguity, and where the government can impose civil and criminal penalties, ambiguity means full employment for lawyers.

Speaking of civil and criminal penalties, one wonders whether all these regulations are simply the roar of a paper tiger.  Despite substantially expanding FinCEN’s obligations through the CTA, Congress hasn’t provided the additional funding needed to monitor enforcement and implement the CTA.  The resulting frustration was evident from my co-panelist, and the FinCEN Director has made his needs clear as well.  Meanwhile, FinCEN will roll out the second and third tranches of regulations while hoping that Congress puts its money where its CTA mouth is.    

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis has been a principal at Hochman Salkin Toscher Perez P.C. since November 2016.  He spent 11 years as an AUSA in the Office of the U.S. Attorney (C.D. Cal), spending three years in the Tax Division where he handed civil and criminal tax cases and eight years in the Major Frauds Section of the Criminal Division where he handled white-collar, tax, and other fraud cases through jury trial and appeal.  As an AUSA, he served as the Bankruptcy Fraud coordinator, Financial Institution Fraud coordinator, and Securities Fraud coordinator.  Among other awards as a prosecutor, he received an award from the CDCA Bankruptcy Judges for combatting Bankruptcy Fraud and the U.S. Attorney General awarded him the Distinguished Service Award (DOJ’s highest litigation award) for his work on the $16 Billion RMBS settlement with Bank of America.  Before becoming an AUSA, Mr. Davis was a civil trial attorney in the Department of Justice’s Tax Division in Washington, D.C. for nearly 8 years, the last three of which he was recognized with Outstanding Attorney awards.  He is a magna cum laude and Order of the Coif graduate of Cornell Law School and cum laude graduate of Colgate University. Mr. Davis represents individuals and closely held entities in federal and state criminal tax (including foreign-account and cryptocurrency) investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and white-collar criminal investigations including campaign finance, FARA, money laundering, and health care fraud.

Please join us January 24-26, 2022 for the USC Gould School of Law 2022 Tax Institute virtual event.
Meet with fellow tax professionals and address the cutting-edge tax issues affecting the industry. This three-day institute includes discussions, networking opportunities, breakout sessions and workshops led by heavy hitters in the field.

We have an excellent line up of programs –


Tips on Trying a Civil Tax Fraud Case
Featuring Dennis Perez


The Three Enforcement Cs (Conservation Easements, Cryptocurrency, Captive Insurance Arrangements)
Featuring Michel Stein


Promoter Investigations; Both Sides of the Table
Featuring Sandra Brown

CLICK HERE for more information.

We are pleased to announce that Steven Toscher, Michel Stein and Sandra Brown will be speaking at the upcoming Strafford Webinar on Tax Reporting of Cryptocurrency: Calculating Basis, Income, and Gain, Thursday, January 20, 2022, 10:00 a.m. – 11:50 a.m. (PST).


This course will provide tax advisers and compliance professionals with a practical look at IRS guidance to calculating and reporting income and gain on cryptocurrency (e.g., Bitcoin, Coinbase) transactions. The panel will discuss the IRS’ position on cryptocurrency as property rather than cash, analyze IRS compliance monitoring, and define proper reporting and tax treatment for “mining” and exchanging cryptocurrency.

We are also pleased to announce that we will be able to offer a limited number of complimentary and reduced cost tickets for this program on a first come first serve basis. If you are interested in attending, please contact Sharon Tanaka at sht@taxlitigator.com. 

Click Here for more information.

I previously blogged on the Ninth Circuit’s decision in United States v. Boyle, 991 F.3d 1077 (2021), where the Court held the $10,000 non-willful FBAR penalty applies on a per-form rather than per-account basis.  Several district courts had reached the same conclusion, including the district court in United States v. Bittner, 469 F.Supp.3d 709 (ED TX 2020).  It almost seemed like the tide had turned in taxpayers’ favor, at least with respect to the non-willful FBAR penalty.  Almost, but not quite.

Bittner and the Government filed cross appeals with the Fifth Circuit.  Bittner challenged the district court’s determination that he failed to prove reasonable cause.  The Government appealed the determination that the non-willful FBAR penalty is assessed per-form rather than per-account.  On November 30, 2021, the Fifth Circuit issued its opinion.  It affirmed the determination that Bittner failed to establish reasonable cause and reversed the determination that the non-willful penalty is assessed per form.

First the facts: Bittner was born in Romania, moved to the U.S. in 1982, became a naturalized U.S. citizen, and returned to Romania in 1990.  In Romania, he became a very successful businessman, owning a “diverse array of companies” and opening numerous foreign accounts.  Between 2007 and 2011, he had, at any one time, between 51 and 61 foreign financial accounts.  He first learned that he was required to file FBARs after he returned to the United States in 2011.  He hired a CPA who prepared and filed FBARs for 2007 through 2011, but the CPA made several mistakes:  only listing the larger accounts and checking “no” to the question whether Bittner had more than 25 offshore accounts.  When Bittner realized the error, he hired another CPA who prepared and filed new FBARs that listed each offshore account.   Because the FBARs were not filed on time, the IRS assessed $2.72 million in non-willful FBAR penalties against him.  When Bittner did not pay, the Government sued to reduce the assessments to judgment.  On cross-motions for summary judgment the district court held that Bittner failed to establish reasonable cause but that the assessment was excessive, since Bittner was only liable for one $10,000 penalty for each year in issue, rather than a $10,000 penalty for each offshore account per year.

Addressing Bittner’s reasonable cause argument, the Fifth Circuit held that reasonable cause for purposes of 31 U.S.C. §5321(a)(5)(B)(ii)(I) “requires that the individual exercised ordinary business care and prudence, considering all pertinent facts and circumstances on a case-by-case basis.”  The taxpayer has the burden of proving reasonable cause.

According to the Fifth Circuit, the facts established the Bittner failed to show reasonable cause.  Bittner admitted he did nothing while living in Romania to determine whether he had a reporting requirement.  He was a sophisticated businessperson, which “makes his failure to inquire about his reporting obligations even more unreasonable.”  Despite his living in Romania, with minimal contacts with the United States, during the years in issue, it was unreasonable for him “not to ascertain his reporting obligations.”

Having slammed Bittner on the reasonable cause issue, the Fifth Circuit chided the district court for having relied on a statement in California Bankers v. Schultz, 416 U.S. 21 (1974), which was issued more than thirty years before enactment of the non-willful FBAR penalty.  The Court then began its textual analysis of the relevant statutes.  It noted that §5321(a)(5) penalizes “a violation of any provision of section 5314.”  This required an analysis of §5314.  That section directs the Secretary to require a person who “maintains a relation with a foreign financial agency” to file a report, which is to contain information “in the way and to the extent the Secretary prescribes.”  According to the Court, the regulations, 31 C.F.R. §§1010.350(a) and 1010.306(d), distinguish between reports and the forms used to make the reports (required reports “shall be filed on forms prescribed by the Secretary” and “forms to be used in making the [required] reports”).

            The Fifth Circuit reasoned that there is “(1) a statutory requirement to report each qualifying transaction or relations with a foreign financial agency and (2) a regulatory requirement to file these reports on an FBAR before a certain date each year.”  The Court concluded that

By authorizing a penalty for “any violation of[] any provision of section 5314,” as opposed to the regulations prescribed under section 5314, section 5321(a)(5)(A) most naturally reads as referring to the statutory requirement to report each account—not the regulatory requirement to file FBARs in a particular manner.

Having chided the district court for relying on a quote from Schultz, the Fifth Circuit followed this statement with a quote from Shultz which it claims “supports this reading.”

            Next, the Fifth Circuit discussed that the district court erred in concluding that §5314 creates an obligation to file a single report: this would lead to the Secretary having “the discretion not only to define the reporting mechanism, but also to define the number of violations subject to penalty” since the Secretary could require filing a separate FBAR form for each account.

            While the Ninth Circuit had looked to the differences between the non-willful and willful penalty provisions of §5321 to conclude that the non-willful penalty is assessed per form not per account, the Fifth Circuit argued that the willful penalty provisions support its interpretation.  The willful provisions prescribe a maximum penalty for a willful violation equal to $100,000 or “the balance in the account at the time of the violation” when the violation involves “a failure to report the existence of an account.”  Since a canon of statutory construction is that identical terms within an act have the same meaning, the Fifth Circuit reasoned that if a violation for purposes of the willful penalty involves a failure to report an account, “violation” must mean the same thing for purposes of the non-willful penalty.

            The Fifth Circuit found additional support for its decision in the fact that the reasonable cause exception applies only if there is reasonable cause and “the amount of the transaction or the balance in the account at the time of the transaction was properly reported.”  Since the exception referred to a violation relating to the reporting of an account, this meant non-willful violations are determined on an account-by-account basis.

            Finally, the Fifth Circuit rejected Bittner’s arguments concerning penal statutes and the rule of lenity, since the civil FBAR penalty is not a penal statute.  It also rejected Bittner’s argument that a per-account reading would lead to absurd results and his invocation of the legislative history, since “mining legislative history … is highly disfavored in the Fifth Circuit.” 

            The Fifth Circuit ended this part of its opinion by stating:

The text, structure, history, and purpose of the relevant statutory and regulatory provisions show that the “violation” of section 5314 contemplated by section 5321(a)(5)(A) is the failure to report a qualifying account, not the failure to file an FBAR. The $10,000 penalty cap therefore applies on a per account, not a per-form, basis.

Given the direct conflict between the Fifth Circuit and the Ninth Circuit on this issue, it is probable that the Supreme Court will be asked to weigh in on the question (unless Bittner files a successful motion for en banc rehearing).

Robert S. Horwitz is a Principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending clients in criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

The IRS is getting more information from its cryptocurrency exchange John Doe summonses, which it will use to fuel another round of soft letters to account holders, according to an agency official.

Michel R. Stein of Hochman Salkin Toscher Perez PC noted that the Coinbase summons used older tax years but the same dollar threshold for determining which accounts the exchanges had to disclose to the IRS. The substantial increase in virtual currency values could explain a large portion of the increased number of responses, he said.

Click Here for full article.

We are pleased to announce that Sandra Brown along with Sharyn Fisk, IRS Office of Professional Responsibility, Caroline D. Ciraolo, and Bradley M. Seltzer will be speaking at the upcoming PLI Institute Tax Strategies for Corporate Acquisitions, Dispositions, Spin-Offs, Joint Ventures, Financings, Reorganizations & Restructurings 2021 LA webinar, on “Balancing Tax Planning, Advocacy and Professional Ethics: The Rules That Every Tax Advisor Should Know” on Friday December 3, 2021, 1:10 p.m. – 2:30 p.m. (PST).


Ethics rules related to advising clients on corporate transactions, including tax motivated transactions, and the pitfalls encountered by the advisor at every stage – from the planning of the transaction, to providing tax opinions and recommending return positions, to dealing with the IRS in audit; the ethical rules and standards derived from the Internal Revenue Code, Circular 230, the AICPA Statements on Standards for Tax Services, and the ABA Model Rules of Professional Conduct.

Click Here for more information.

We are pleased to announce that Steven Toscher along with Larry Campagna, Honorable Elizabeth Copland and Charles Muller III will be speaking at the upcoming University of Texas 69th Annual Taxation Conference webinar, on “What Does Enforcement Look Like Today?” on Thursday December 2, 2021, 1:30 p.m. – 3:00 p.m.(CST).


While Congress debates whether to fund more IRS enforcement, the Service continues to prioritize certain audit and criminal enforcement issues. Discuss areas of current IRS focus, such as John Doe summonses, conservation easements, captive insurance, employment taxes, passport restrictions, repatriation of assets, innocent spouse claims in the Tax Court, information return penalties, and regulation of return preparers. 

Click Here for more information.

We are pleased to announce that Sandra Brown will be speaking at the upcoming Freeman Law International Tax Symposium webinar, on “International Criminal Tax” on Friday, November 19, 2021, 9:25 a.m. – 10:15 a.m. (CST).

The United States and other countries have increased focus on investigating and prosecuting international tax crimes.  With the rise of supranational bodies, such as the OECD, as well as multi-lateral and bi-lateral information-exchange agreements, international criminal tax enforcement is on the rise.  We’ll discuss developments with respect to criminal tax enforcement in the international tax context.

Click Here for more information.

Coinbase will report its third-quarter earnings on Tuesday, likely giving more insight into its new offerings, such as its recently announced non-fungible token marketplace. The company, which is the largest crypto exchange in the U.S. by trading volume, could also announce new ventures as it expands further into financial services.

It likely won’t be a big deal for large exchanges like Coinbase, but it could drive some customers to buy and sell crypto on places Craigslist and the dark web, said Evan Davis, a tax attorney at Hochman Salkin Toscher Perez P.C., who represents crypto companies as clients.

Click Here for Article.

We are pleased to announce that Dennis Perez will be speaking at the upcoming Professional Advisory Network of the Motion Picture and Television Fund webinar, on “The California Exodus: How to Exit the State with Your Fortune Intact (or Not)” on Thursday November 11, 2021, 12:20 p.m. – 1:28 p.m. (PST).


Spurred by increasing taxes, crippling regulations and high-profile tech companies’ recent departures, many high net worth individuals are eyeing the exit door. Are states like Texas, Washington, Nevada, Florida and Tennessee truly greener pastures? And, what about lower net worth individuals? Join our panel of experts as we discuss the pros and cons surrounding the exodus buzz.


CLICK HERE for more information.

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