Posted by: Robert Horwitz | April 11, 2021

The Good, the Bad and the Ugly FBAR Style by Robert Horwitz

What does the title of one of Sergio Leone’s great Clint Eastwood westerns have to do with Foreign Bank Account Reports (known in the trade as “FBARS”) and FBAR penalties.  Two significant court of appeal opinions and a district court opinion involving the FBAR penalty were issued recently (United States v. Boyd, __ F.3d __, 2021 WL 1113531 (9th Cir. March 24, 2021), Kimble v. United States, __ F.3d __, 2021 WL 1081395 (Fed. Cir. March 22, 2021) and United States v. Gentges, No. 18-CV-7910(KMK) (SDNY March 31, 2021)).  From the perspective of people who are assessed non-willful FBAR penalties Boyd is generally good, but raises some potentially bad points, while Kimble and Gentges are bad and ugly.  This blog will discuss the two appeals court cases; my next blog will discuss the district court case.  So let’s look at the Boyd and Kimble cases.

In Boyd the defendant had 14 accounts overseas.  She did not originally file FBARs or report income from the accounts on her income tax returns.  In 2012, she was admitted into the Offshore Voluntary Disclosure Program (OVDP) and filed amended returns and late FBARs, including an FBAR for 2010 on which she accurately reported her foreign accounts.  In 2014, she opted out of OVDP.  After the IRS determined that her failure to file a timely FBAR reporting her foreign accounts for 2010 was non-willful, the IRS assessed 14 non-willful penalties against her for 2010 totaling $47,279.  The Government sued to reduce the FBAR assessments to judgment and the district court ruled in favor of the Government.  Ms. Boyd appealed.

On appeal Ms. Boyd argued that where an accurate but late FBAR is filed, the Government can only assess one penalty in the maximum amount of $10,000.  The Government argued that when there is a late FBAR, it can assess a non-willful penalty for each offshore account.  The Ninth Circuit viewed the “salient question” as whether Ms. Boyd committed one non-willful violation for her failure to file a timely FBAR for 2010 or multiple violations for her single failure to file a timely FBAR.  To answer the question, the Ninth Circuit looked to the language of the statute, 31 U.S.C. §5321(a)(5)(A), which allows the Government to “impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.”  The court focused on the word “provision,” which is not defined in the statute.  A general rule of statutory construction is that, barring an indication to the contrary, words in a statute are deemed to have their ordinary, common meaning.  Turning to the dictionary, the court noted that “provision” is defined as “a condition, requirement, or item in a legal instrument.”  The Court found two provisions in §5314: a) timely filing an FBAR and b) ensuring the report requires specified information.[i]

Noting that the Supreme Court has held that civil and criminal penalties under the Bank Secrecy Act, which contains the FBAR provisions, require a violation of regulations, the court then looked at the regulations.  The first regulation requires citizens to report financial interests in offshore accounts on the FBAR form; the second sets a date for filing the FBAR if the aggregate value in the accounts exceeded $10,000 during the prior calendar year.  Because Ms. Boyd’s late-filed FBARs were accurate, the Ninth Circuit concluded that “she could not have violated …the regulation that delineates the content of the report prescribed by §5314 — the FBAR”.  This logically led to the inexorable conclusion that Ms. Boyd only committed one violation: filing a late FBAR for 2010.

The Ninth Circuit listed its reasons for rejecting the Government’s argument of multiple violations (one for each account):

  1. Since her late FBAR was accurate, she did not violate the regulation concerning the contents of the report;
  2. The statutory phrase “any violation” did not mean that more than one violation could occur with respect to a single report because it was “any violation …of any provision”; since Ms. Boyd did not violate the provision governing the contents of the FBAR report, she only could have committed one violation, failing to file on time.

In discussing the second reason for rejecting the Government’s argument, the court hinted that in a different factual situation (such as not filing an FBAR, or filing one but leaving off several accounts) the statutory language might support a claim that there were several non-willful violations.  This is one reason why I characterize the Boyd opinion as good-bad (but not ugly).

The court next rejected the Government’s arguments that its interpretation was correct based on “the statutory scheme as a whole and legislative intent,” finding that (a) unlike the willful-violation provisions of §5321(a)(5)(D),[ii] the non-willful penalty provisions didn’t refer to “a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account” and (b) based on the per-account language in the reasonable cause exception to the non-willful penalty, the failure to include per account language in the non-willful penalty provision militates against this argument.[iii]  The court reiterated that “nothing in the statute or regulations suggests that the penalty may be calculated on a per-account basis for a single failure to file a timely FBAR that is otherwise accurate.”  This is the second indication that the Boyd court is leaving open the possibility that a person who fails to file an FBAR with multiple accounts could face multiple penalties.

Ms. Boyd argued that the rule of lenity mandates her interpretation of the statute.  Noting that the rule of lenity ordinary applies to criminal statutes, the Ninth Circuit also noted that it “strictly construes tax penalty provisions independent of the rule of lenity.”  Strictly construing the §5321(a)(5)(B) penalty, the court held that even if the Government’s interpretation was reasonable, “the precise issue here is not whether the statute authorizes a non-willful penalty; it is whether the statute plainly authorizes a non-willful penalty for each account under the facts here, and it does not.”  This is the third time the court hints that, under different facts, a person could potentially be assessed multiple non-willful penalties with respect to one FBAR report. 

Another “bad” part of the language is the characterization of the FBAR penalty as a “tax penalty,” even though it is found in Title 31 and not in Title 26 (the Internal Revenue Code).  In Bedrosian v. United States, 912 F.3d 144 (3rd Cir. 2019), the court based its decision that the district court lacked jurisdiction over Mr. Bedrosian’s suit for a refund since he paid only a portion of the penalty on its determination that the FBAR penalty was a “internal revenue” penalty and thus full-payment of the amount assessed with any penalties and interest was required to maintain a suit for refund of an FBAR penalty.  This may be an indication that the Ninth Circuit will not allow a person to sue for a refund of an FBAR penalty without full payment of the amount assessed with interest and penalties.

The majority opinion leaves a number of unanswered questions about the FBAR penalty: a) if a person non-willfully fails to file an FBAR, have they committed two non-willful violations, not filing on time and not reporting, allowing the IRS to assess two $10,000 penalties? b)  if a person non-willfully fails to file an FBAR and has multiple accounts, will they have committed one violation, two violations, or one violation per account (or maybe a violation for not filing and a sperate non-reporting violation for each account); c) if a person is assessed a large FBAR penalty, will they need to full pay the amount of the assessment with any accrued penalties and interest, because it is a “tax penalty”? d) would the Ninth Circuit uphold multiple willful penalties of up to $100,000 each if a person files an accurate, albeit late FBAR?  I’m sure there are many other potential issues lurking here, but the most consequential issue may be that the decision will spur the IRS to assess willful penalties against persons residing in the Ninth Circuit where otherwise it might assess non-willful penalties.

It also appears the Ninth Circuit majority opinion, remanding the case to the district court, leaves another issue hanging in the air.  It says the maximum penalty that can be assessed against Ms. Boyd is $10,000.  It does not state that is the amount of the judgment the district court should enter.  Since the largest penalty assessed was $5,000 but there was only one violation according to the Ninth Circuit can the district court enter judgment for $10,000 based on two penalties or can it only enter judgment for $5,000 based on one penalty assessment?  The Ninth Circuit doesn’t say. 

Judge Ikuta made a spirited dissent, arguing that based on the statute and regulations, United States persons with multiple offshore accounts are required to file a report for each account (which the judge calls the “substantive element”), that the use of one form to report multiple accounts (which she calls the “procedural element”) doesn’t affect that duty and, therefore, the IRS can assess multiple penalties where a late FBAR is filed accurately listing multiple accounts.  Judge Ikuta ended her dissent with the quip “the majority misinterprets the relevant statutes and regulations in a manner that unfairly favors the tax evader.”  There is nothing to suggest that Ms. Boyd was a tax evader.  She was not assessed either a willful FBAR penalty or a civil fraud penalty.   Jack Townsend, in his Federal Tax Crimes blog, felt that the dissenting judge was out of bounds in making a “cute” sound bite.  I think it may reflect how some members of the federal judiciary view people with undisclosed offshore accounts and may in part account for why the courts have readily upheld FBAR willful penalties even on summary judgment.

Which takes us to Kimble.  Ms. Kimble inherited foreign bank accounts from her father, a Holocaust survivor who kept the accounts secret because he feared possible persecution in the U.S. and the need to flee the country.  Ms. Kimble’s husband advised her father, and, after he died, he advised her on managing the offshore accounts.  He prepared their income tax returns and did not report income from those accounts on their returns.  He continued to manage the accounts after they divorced.  Following the divorce, Ms. Kimble hired a CPA to prepare her returns.  The CPA never asked her about foreign accounts and she did not tell him about them.  He prepared returns that checked the box on Schedule B “No” to the question whether she had offshore accounts.  Ms. Kimble signed the returns under penalties of perjury.  It was through reading about the IRS investigation of UBS, that she learned of the need to disclose foreign bank accounts.  She was accepted into the OVDP. 

Because she balked at paying the proposed penalty under the OVDP ($377,309), she withdrew from OVDP.  The IRS assessed a $697,299 willful FBAR penalty against her.  She paid and sued in the Court of Federal Claims, which granted summary judgment in favor of the IRS, finding that in signing her return under penalty of perjury without reviewing it she acted with reckless disregard and, thus, had willfully violated the FBAR requirements.  The Court of Federal Claims also rejected her argument that the IRS abused its discretion in assessing a penalty equal to 50% of the amount in her account.  The Federal Circuit affirmed.

The court rejected Ms. Kimble’s argument that a willful violation requires “actual knowledge” of the duty to file an FBAR.  In Norman v. United States, 942 F.3d 1111 (Fed. Cir. 2019), it had held that willful for purposes of the civil FBAR penalty includes recklessness.  As a result, “Ms. Kimble had a secret foreign account, she had constructive knowledge of the requirement to disclose that account [because of Schedule B of the income tax return], and she falsely represented that she had no such accounts.  It was thus not clear error for the Court of Federal Claims to hold that she committed a willful violation.”

While I could understand the Federal Circuit affirming a decision after a trial, as occurred in Norman, I find its decision in this case troubling because the court is laying down a rule that there is an irrebuttable presumption a taxpayer has constructive knowledge of the contents of her tax return and in filing a return that is erroneous the taxpayer has “willfully” violated the law.  But as we will see in the discussion of Gentges, this is the rule most courts now follow.

In line with its decision in Norman, the court rejected Ms. Kimble’s argument that the regulation promulgated in 1987, which set the maximum willful penalty at $100,000, was rendered invalid by a subsequent amendment to the statute and, thus, the IRS did not err in assessing a penalty equal to 50% of the amount in the account.  Because Ms. Kimble failed to plead that the penalty violated the Eight Amendment prohibition on excessive fines, the court held that she waived this argument.

Query: Assuming someone in Ms. Boyd’s situation signed an original return that checked “no” to the question whether she had foreign accounts, will the IRS, based on Kimble, in the future automatically assess willful FBAR penalties if a FBAR form was filed late even if it was accurate if the “no” box on the tax return was checked?  Remember, like Ms. Kimble, Ms. Boyd was accepted into the OVDP program, filed late FBARs as required of OVDP participants, and then withdrew. 

A major problem I have with the cases that automatically find failure to read carefully a tax return is willful under the “reckless disregard” standard is that it makes a mockery of what “reckless disregard” means.  In holding that reckless disregard can be constitute willful conduct in the civil contest, the Supreme Court in Safeco Ins. Co. v. Barr, 551 U.S. 47 (2007) stated that reckless disregard is an objective standard that is:

action entailing “an unjustifiably high risk of harm that is either known or so obvious that it should be known.”

*****

It is this high risk of harm, objectively assessed, that is the essence of recklessness at common law. See Prosser and Keeton §34, at 213 (recklessness requires “a known or obvious risk that was so great as to make it highly probable that harm would follow”).

I do not see failing to read over every line of an income tax return as being an act that entails “an unjustifiably high risk of harm that is either known or so obvious that it should be known.”  While cases upholding willfulness under the reckless disregard standard often cite Safeco, I have not seen any decision that articulates how failing to read every line of a tax return meets this standard.  But maybe I just don’t see the obvious.

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 criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.


[i] The court didn’t say why each enumerated item of information required to be reported under §5314 wasn’t a separate provision, but then the Government didn’t argue that there could be multiple violations for each offshore account.

[ii] The distinction made by the court between the willful and the non-willful penalty is an indication that it may support the assessment of multiple $100,000 willful penalties where a person files a late FBAR accurately listing multiple accounts. 

[iii] The reasonable cause exception, 31 U.S.C. §5321(a)(5)(B)(ii) states:

Reasonable cause exception.–No penalty shall be imposed under subparagraph (A) with respect to any violation if–

(I) such violation was due to reasonable cause, and

(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

“When a man’s got money in his pocket he begins to appreciate peace.” The Man With No Name

Why start with a quote from one of Sergio Leone’s great Clint Eastwood westerns, A Fistful of Dollars.   It is more peaceful to have money in your pocket, or at least close by in a domestic financial account, than offshore given how the IRS’s penchant for assessing and the courts’ penchant for upholding FBAR willful penalties.  Which brings us to the district court case mentioned in my prior blog, Gentges.  Mr. Gentes for a number of years held two accounts at UBS in Switzerland: account ending in 4959 and account ending in 4337.  He failed to file FBARs for 2007.  Almost a decade later, the IRS assessed a $679,635 willful FBAR penalty with respect to account 4959 and a $224,488 penalty with respect to account 4337.[i]  In 2018 the Government sued Mr. Gentges to reduce the assessments to judgment.  It filed a motion for summary judgment, which the court granted in part and denied in part.

The facts are straight forward: when opening both UBS accounts Mr. Gentges signed documents stating that (a) he was electing to have the accounts numbered, (b) he wanted all mail from UBS held, (c) he did not want any investments in U.S. securities so that information would not be disclosed to the IRS, and (d) he was aware he was liable for tax in the U.S. as a U.S. person.  He claimed he signed the documents where he was directed and did not read them over carefully.  He picked up his mail from the bank during his frequent visits to Switzerland.  He and his wife set up a trust to which they transferred their home in the U.S. and all their U.S. bank accounts.  He did not tell the attorney who set up the trusts about the Swiss accounts or seek anyone’s advice about them. 

Mr. Gentges used the same CPA to prepare his returns for many years.  He never disclosed his Swiss accounts to the CPA and never asked him about reporting foreign accounts.  He would send his information to the CPA every year to prepare his tax returns (without any information on the Swiss accounts).  The “no” box was checked on each return in response to the Schedule B question whether the taxpayer had any foreign bank accounts.  Mr. Gentges signed his returns under penalties of perjury.  Mr. Gentges claimed he did not disclose his Swiss accounts because, as his inheritance from his parents, they were his “European heritage,” which he did not think were relevant to his tax obligations.

In September 2008, he moved the accounts from UBS to Migros Bank in Switzerland and instructed that the mail be sent to his son’s home in Switzerland.  When Migros Bank informed him it no longer would do business with U.S. citizens, he moved his account to another Swiss bank and, when that bank stopped doing business with U.S. citizens, he moved his accounts to yet another Swiss bank. 

In addressing the Government’s summary judgment motion the court noted that Mr. Gentges did not dispute that in failing to file an FBAR for 2007 he violated the reporting requirements of §5314 and the regulations.  The issues before the court were

  1. Was the violation willful and
  2. Was the penalty properly calculated

Citing the Third Circuit’s decision in Bedrosian, the Fourth Circuit’s decision in Horowitz, and the Federal Circuit’s decision in Norman for the proposition that in the context of the civil FBAR penalty willful includes both knowing violations and reckless ones (a proposition that Mr. Gentges conceded), the court held that for purposes of the civil FBAR penalty willful includes both knowing and reckless violations of the statute. 

Mr. Gentges said he signed his return (which had the box on Schedule B checked “no”) without any significant review other than checking the summary comparing the 2007 year with the prior year.   The court stated that Mr. Gentges’ signing his return without carefully reviewing it “dooms Defendant’s argument on summary judgment.”  After discussing the appellate and district court cases where willfulness was found on similar facts to those in Mr. Gentges’ case, the court held:

Following the weight of authority for appellate and district court cases around the country, the Court concludes that Defendant recklessly disregarded the FBAR filing obligation by failing to carefully review his 2007 income tax return and erroneously representing that he had no financial interest in foreign accounts.

The court refused to follow the “handful of district court cases that have gone the other way” because they were either “factually distinguishable or analytically flawed.”  The case that was “factually distinguishable” was United States v. Clemons (MD Fla. 2019), where the taxpayer prepared his own return using Turbo Tax, checked the box on Schedule B “yes” and claimed he did not file an FBAR because Turbo Tax did not prompt him to prepare one.  According to the court, this could have been due to negligence whereas Mr. Gentges signed a return that falsely checked the “no” box.

The court found two cases “analytically flawed”: United States v. Flume (SD Tex. 2018) and United States v. de Forrest, 463 Fed. Supp. 3d 1150 (Nev. 2020).  It rejected the Flume court’s determination that the “constructive knowledge” theory undermines the distinction between willful and non-willful and termed its refusal to adopt the “constructive knowledge” theory as a “dodge” since courts had frequently held that a person who signs a tax return is deemed to have constructive knowledge of its contents. The de Forrest case denied the Government’s summary judgement motion but did not distinguish or address the cases “holding that a taxpayer’s submission of an erroneous tax return he or she signed is per se evidence of reckless disregard toward the FBAR obligation.”

Despite the court’s holding that a person acts willfully for purposes of the FBAR civil penalty by signing a return that erroneously answers “no” to the question whether the taxpayer has an offshore account, the court went on to discuss other evidence that Mr. Gentges acted willfully: his failure to disclose his foreign accounts to his long-time CPA or consult with him about whether he had to report the accounts to the IRS; his use of numbered accounts and mail holds; and the amounts in the accounts were not so small or insignificant as to be overlooked. 

If failing to carefully review every line on a tax return is reckless and consequently willful, the discussion of other evidence is irrelevant.  But then, I have never bought in to the idea that signing a return with the “no” box checked creates an irrebuttable presumption that the taxpayer acted with reckless disregard, thus making the failure to file an FBAR willful.  To me, this is more a dodge than the holding of the Flume court.  I believe the correct approach is that of the district court in Jones v. United States (CD Cal. 2020), where the district court denied summary judgment, finding that signing an erroneous return creates a rebuttable presumption that the taxpayer knew the contents of the return but that “Ultimately, willfulness is a finding of fact and the fact that Mrs. Jones signed her return under penalty of perjury is prima facie evidence that she had constructive knowledge of the FBAR requirements.  Such evidence creates a genuine dispute of material fact as to whether she engaged in a willful violation.”  While the Gentges opinion relies on the Jones case regarding the penalty calculation, for some reason it ignores the Jones’ holding on willfulness.

Which gets us to the second issue: computation of the penalty.  Mr. Gentges did not challenge the calculation of the $679,365 penalty for account 4959 since it was based on the amount in the account on June 30, 2008.[ii]  He did challenge calculation of the $224,448 penalty for account 4337 since it was based on the account balance as of December 2007 since the IRS did not have information on the account balance as of June 30, 2008. 

The court noted that the amount of the penalty is reviewed under the Administrative Procedure Act’s “arbitrary and capricious” standard.  Relying on United States v. Schwartzbaum (SD Fla 2020) and Jones, the court held that where the IRS makes an FBAR willful penalty assessment using an incorrect account balance it acts arbitrarily and capriciously.  It therefore remanded the case to the IRS with respect to the penalty calculation for the 4737 account.  End result:  summary judgement in favor of the Government on the penalty for account 4959 and on the issue of willfulness on account 4337, but summary judgment denied on the amount of the willful penalty for account 4337.  This raises some interesting questions: (a) if the amount in the account on June 30, 2008, was more than on December 31, 2007, can the IRS assess a larger penalty? (b) if the account was closed by June 30, 2008, what penalty can the IRS assess? (c) if the IRS abates and reassesses, would Mr. Gentges have a statute of limitations defense or will the institution of the collection action be deemed to have tolled the statute of limitations?

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 criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.


[i] While the court’s opinion does not discuss the reason for the delay in assessing the penalties, I assume that Mr. Gentges was accepted into the OVDP program, agreed to waive the statute of limitations to assess the FBAR penalty, and then withdrew or was removed from the program.

[ii] Under 31 U.S.C. §5321(a)(5)(D)(ii), the 50% willful penalty is based on the amount in the account at the time of the violations, which is the due date of the FBAR.  During the year in issue, FBARs were due on June 30 of the year immediately succeeding the year for which the report was made.

In the Lord of the Rings saga, the antagonist is a disembodied entity called Sauron who was represented by a flame-filled “Great Eye.”  Sauron’s Great Eye had powerful vision when fixed upon his rivals, but even this powerful eye was unable to see unaided into the thoughts of humans.  Fans of the LOTR movies know that Sauron used a mighty orb called a Palantir to see where his Great Eye could not, forcing rivals to reveal their secrets.

What does that have to do with the IRS and cryptocurrency?  The IRS has to identify illegal non-filers and evaluate the veracity of hundreds of millions of tax returns by looking for inconsistencies on the face of the returns, comparing returns or the lack thereof to other filings such as W-2s and 1099s, and even evaluating the filed returns and non-filing against publicly available information.  Despite its desire to do so, the IRS can’t focus on everything at once, but when it does focus its attention on certain taxpayers or transactions, it can be bad news for those whom the IRS has selected for further investigation.

The IRS has been slowly turning its gaze toward cryptocurrency for the past five years, notably beginning with the 2016 Coinbase summons that was designed to identify thousands of non-filers and filers who had omitted substantial transactions in cryptocurrency.  Between 2016 and 2020, the IRS rolled out additional tools designed to sharpen its vision on cryptocurrency.  It contracted with ChainAnalysis[1] to harvest data from the Blockchain concerning unreported cryptocurrency transactions.  Bitcoin transactions occur in the public environment of the Blockchain.  They are only made confidential through the interaction with private keys, but the public aspects allow the IRS to piece together public and tax information to determine who conducted those transactions despite not knowing the private keys.  The IRS prioritized training its Revenue Agents on how to incorporate cryptocurrency into its audits, Revenue Officers on how to identify and levy cryptocurrency, and Special Agents on how to conduct criminal investigations of unreported cryptocurrency.  It updated tax forms, including the 1040, Voluntary Disclosure, and collection forms, to require reporting of crypto ownership and/or transactions.  Taking a page from Sauron’s book, the IRS also harnessed the aptly named Palantir[2] data analysis tool to identify cryptocurrency patterns and connections in data available to the IRS, allowing the IRS to identify worthwhile investigations as well as to advance investigations.  With each step, the IRS has increased data that could be harvested, sharpened its employees’ skills, and left fewer dark corners for crypto non-filers and non-reporters to hide.

Just as April 15, 2021 approaches, at a March 5, 2021 Federal Bar Association conference, the IRS’s director of the new Fraud Enforcement Office, former IRS CI Special Agent in Charge Damon Rowe, announced the agency’s latest focus on cryptocurrency, Operation Hidden Treasure.  Director Rowe, along with the IRS’s National Fraud Counsel Carolyn Schenck, described how the criminal side of the IRS is working in tandem with civil investigators to train agents and conduct parallel investigations of omitted crypto income.  In addition to investigating crypto omissions, Ms. Schenck noted these sophisticated tools permit the IRS to identify and seize crypto in civil and criminal cases.  The seizure of crypto appears to be quite rare today given the technological and practical challenges of obtaining the taxpayer’s required private key, but the IRS is fully aware that it can enlist courts to force the disclosure of private keys in most collection situations.  The fact that the IRS is paying for additional tools means the IRS is expecting a good return on investment in the form of crypto seizures.  With bitcoin prices skyrocketing, these assets are becoming more and more attractive for civil collection and criminal seizure.

What does the IRS want crypto-owning taxpayers and tax professionals to take away from Operation Hidden Treasure, which is backed by ChainAnalysis, stepped-up training, and Palantir?  The IRS’s Great Eye won’t turn away from crypto.  As Ms. Schenck said, “We see you.”

For additional information, see IRS’s ‘Operation Hidden Treasure’ Focusing on Crypto Fraud (bloombergtax.com)                   

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.


[1] The Blockchain Analysis Company – Chainalysis at https://www.chainalysis.com/

[2] Home | Palantir at https://www.palantir.com/

On March 30, the Department of Justice, Tax Division, filed a petition for leave to serve a “John Doe” summons on Payward Ventures, also known as “Kraken,” requesting account information for all United States taxpayers who held accounts there with the equivalent value of $20,000 or more in cryptocurrency for any one year from 2016 through 2020.

What does this mean for Kraken and other Crypto Account Holders?

Steve is quoted saying that, “the Court’s decision is important for a number of reasons. First it tells us something we already know – that the IRS is using all of its tools to investigate tax compliance of those who invest and trade in cryptocurrency. More importantly, it reiterates what the District court held in the Coinbase case – that the “ narrowly tailored” language recently added to the statue has real teeth.”

Click Here for full article.

We are pleased to announce that Steven Toscher, Michel Stein and Evan Davis will be speaking at the upcoming Strafford webinar, “Cryptocurrency Tax Compliance in the Post-$50,000 Bitcoin World: Tax Filing Requirements, Managing IRS Examinations” on Thursday, April 22, 2021, 10:00 a.m. – 11:30 a.m. (PST), 1:00 p.m. – 2:30 p.m. (EST). 

This CLE/CPE webinar will provide tax counsel, accountants, and other advisers with a critical first look at new IRS enforcement actions on taxpayer compliance and reporting obligations for cryptocurrency transactions. The panel will discuss the IRS position on the tax treatment of cryptocurrency, analyze IRS monitoring to increase compliance, consider criminal investigations and prosecutions for failing to report cryptocurrency transactions accurately, and define proper reporting and tax treatment for “mining” and exchanging cryptocurrency. The panel will also discuss tactics in managing IRS examinations and audits.

The IRS continues to press its concern over “massive under-reporting” of income from cryptocurrency transactions. Tax advisers for clients with cryptocurrency holdings must understand the reporting requirements for exchange transactions and the IRS scrutiny cryptocurrency investors are likely to face in the future.

Cryptocurrency is a digital currency using encryption techniques–rather than a central bank–to generate, exchange, and transfer currency units. Uniquely, no bank or government authority verifies the transfer of funds.

The value of Bitcoin has topped $50,000 in the past year, prompting a massive compliance initiative aimed at taxpayers holding and trading cryptocurrency. The IRS treats all virtual currency as property rather than currency for U.S. tax purposes. The IRS requires reporting any transaction involving cryptocurrency as a sale or exchange of property, with the taxpayer bearing responsibility for calculating and maintaining basis in their virtual currency holdings.

Listen as our expert panel discusses recent IRS enforcement actions focused on cryptocurrency and provides practical guidance on the U.S. tax reporting and payment duties arising from cryptocurrency transactions.

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.

We are very pleased to announce that Sandra Brown is featured in this month’s Los Angeles Lawyer discussing the IRS Voluntary Disclosure Practice. Check out the current state of the practice and Sandra’s insights.

The tax system of the United States is often described as one of “voluntary compliance.”  However, there is little about the filing of required ax returns and paying amounts legally due that is truly voluntary.  The reality is taxpayers have a “legal duty” to comply with U.S. tax laws and, for those who fail to do so, the federal laws provide the IRS with the ability to pursue the imposition of a wide array of sanctions, including criminal prosecution.

In the article Sandra discusses when taxpayers who are not in compliance should consider the IRS Voluntary Disclosure Practice and the benefits it can provide.

Click Here to read full article.

The Internal Revenue Service will continue its focus on collecting delinquent taxes from the wealthiest taxpayers. The Treasury Inspector General for Tax Administration (TIGTA) recently published a report on the IRS efforts to collect delinquent taxes from wealthy taxpayers.

This is the second report by  TIGTA on the IRS attempts to increase compliance of this group of the taxpayer population.[i] In response to this earlier report, the IRS agreed to make changes to its non-filer strategy and issue delinquency notices to all high-income non-filers identified.[ii]

The following chart shows that delinquent taxpayers having an average AGI of over $1.5 million paid the IRS an average of 39 percent of what they owed.  These high-income taxpayers still owed over $2 billion.

TIGTA Report – Audit and Conclusions

TIGTA found that the IRS generally prioritizes these  cases by the amount of the tax liability rather than the income level of the taxpayer.[iii] The report suggests that the emphasis by the IRS on the amount of the tax liability as opposed to income of the taxpayer adds  credibility to the belief that the U.S. tax system favors the wealthy.

 In the audit conducted by the TIGTA, they identified 685,555 taxpayers who reported an AGI of $200,000 or more, on at least one Form 1040 for tax years 2013 through 2017, who owe a combined total of $38.5 billion in delinquent tax payments.[iv]  The amount owed represents 22 percent of the total amount owed by all taxpayers with at least one Form 1040 balance due on May 14, 2019.[v]  These high-income taxpayers account for 6 percent of the total taxpayers identified with delinquent tax liabilities. 

TIGTA concluded based on their audit that high-income taxpayers are not a sufficient collection priority.    TIGTA concluded that the failure to address this subgroup is problematic because these high-income taxpayers have the ability to pay their debt and that not addressing this group can lead to this debt being uncollected.[vi] The two concepts of ability to pay and early collection activity are both highly important for successful revenue collection. The probability of collecting unpaid tax debt falls dramatically in the first three years as the accounts age. A majority of IRS Revenue Officers agreed and emphasized the importance of collection activities at the time taxpayers are earning a high income.

In the response to the TIGTA report, Eric Hylton,  Commissioner of the IRS SB/SE division,  assured TIGTA  that high-income taxpayers are a high priority for the IRS collection function and that they have made significant efforts to collect on this group of taxpayers.[vii] He further stated that high-income taxpayers are more likely to resolve their liabilities while in the notice phase of the collection process, and for those who do not, the IRS Automated Collection System is well suited to resolve lower balances owed by high-income taxpayers.[viii] He also reported that IRS Collection was working or had worked 87 percent of the high-income taxpayers who had a tax liability as of May 2019.[ix]

The IRS focus on the collection from high income taxpayers is a continuation of its efforts relating to high income non- filers. A “non-filer” is a taxpayer who either does not timely file a required tax return and timely pay a tax due for the delinquent return. This group can encompass foreign legal entities or individuals that have invested and earned income in the U.S. without knowing that their activity consists of being engaged in a U.S. trade or business and thus having a U.S. tax filing obligation.[x]  Other members of this group could be uncooperative non-filers, tax protestors, or individuals that did not have a chance to file a return due to health conditions or other extraneous factors.

The IRS has several enforcement initiatives targeting high-income non-filers.  The first is the High-Income Delinquent Filer (HiDeF) Sweeps. The HiDef Sweeps target taxpayers with three years of unfiled returns and large tax balances.  They are assigned to experienced revenue officers and may result in unannounced field visits.

Another initiative is Operation Surround Sound. This is the successor effort to HiDef but only targets cases with egregious noncompliance with indicators of potential fraud.  Operation Surround Sound is a collaboration effort between the Office of Fraud Enforcement (OFE), IRS Examinations Operations, and Collections. This operation involves significant use of data analytics that compare numerous data sets for the OFE to make appropriate recommendations.  This can lead to referrals to the IRS Criminal Investigation function, examination referral, or collection for a IRS Substitute Return for the non-filing taxpayer.

Options for High-Income Non-Filers

If contacted by the IRS, the taxpayer should consult with an appropriate tax advisor to consider filing their delinquent tax returns and begin to enter into installment agreements or offer in compromises as applicable. The taxpayer should seek representation to assist with any reasonable cause arguments or first time penalty abatement arguments. Taxpayers with criminal exposure – yes the willful failure to file a tax return is a criminal offense- should consult with experienced criminal tax counsel. The OFE is involved with these cases for a reason.

Taxpayers who have not yet been contacted by the IRS should consider the IRS’s voluntary disclosure practice where there is a criminal potential. The IRS voluntary disclosure practice is discussed in Sandra Brown’s article in March 2021 edition of the Los Angeles Lawyer.

Whether the IRS gets to the taxpayer first or the taxpayer takes corrective actions in advance of IRS contact- the preferred approach— there are opportunities to get straight with Uncle Sam and avoid the serious consequences- both civil and criminal if not filing your tax return and not timely paying your income tax.  The IRS has been increasing its focus on high income non- filers and the TIGTA report will insure the focus continues and even increase.

Steven Toscher is a Principal at Hochman Salkin Toscher & Perez P.C., and specializes in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation.

Dennis Perez is a Principal at Hochman Salkin Toscher & Perez P.C., and is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization. He represents clients throughout the United States involving federal and state, civil and criminal tax controversies and tax litigation.

Tenzing Tunden is a Tax Associate at Hochman Salkin Toscher Perez P.C.


[i] Treasury Inspector General for Tax Administration, High-Income Taxpayers Who Owe Delinquent Taxes Could Be More Effectively Prioritized, Report Number 2021-30-015, (March 10, 2021), available at https://www.treasury.gov/tigta/auditreports/2021reports/202130015fr.pdf.

[ii] See Treasury Inspector General for Tax Administration, High-Income Non-filers owing Billions of Dollars Are Not Being Worked by the IRS, Report Number 2020-30-015,  34-38, (May 29, 2020), available at https://www.treasury.gov/tigta/auditreports/2020reports/202030015fr.pdf.

[iii] Id. at 1.

[iv] Id. at 4.

[v] Id.

[vi] Id. at 7-8.

[vii] Id. at 26.

[viii] Id. at 29.

[ix] Id.

[x] IRC §882(a)(1) and §11(a). IRC §871(b)(1) and §1.

“Friend of the JTPP, Robert S. Horowitz shares an update on penalties in The News from the FBAR Front Isn’t All Bad, It Only Seems That Way Sometimes. It’s good to hear the phrase “non-willful FBAR cases” even if it is a rare case. It seemed for a while that IRS wasn’t able to find an FBAR case it considered non-willful. Robert’s easy writing style and insight will guide you through the variety of cases he reviews.”

Claudia Hill Editor-in-Chief

This year has seen several significant decisions in the FBAR penalty arena. While some taxpayers have been successful in defeating motions for summary judgment in FBAR willful cases, in those cases that have gone to trial the taxpayers have ultimately lost. In the non-willful FBAR area, however, the taxpayers this year were successful in convincing two district courts that the maximum non-willful penalty is $10,000 per annual form and not per account. This article will discuss some of the FBAR cases that were decided over the past year.

Click Here to read full article.

The IRS Criminal Investigation division isn’t focusing its enforcement efforts specifically on cannabis businesses, but is instead treating them like any other cash-intensive business, according to a division official.

Jonathan Kalinski of Hochman Salkin Toscher Perez PC told Tax Notes in part that “. . . practitioners with cannabis clients might need to keep a closer watch for potential criminal activity than they do for other clients.”

Click Here to see full article.

Steven Toscher recently had the opportunity to moderate a Federal Bar Association panel on the IRS new Office of Fraud Enforcement. While much attention was paid on the panel to the  unveiling some of IRS Crown Jewels by the new OFE Director Damon Rowe and it’s “Operation Hidden Jewels” in its cryptocurrency enforcement efforts, Steve was quoted in Forbes on his thoughts on the established of the new OFE and what it will mean for taxpayers and their advisors:

“The new Office of Fraud Enforcement looks like it will be a game changer in tax enforcement. We expect to see more referrals for criminal prosecution and assertions of the 75% civil fraud penalty. When the current leaders of the IRS took over a few years ago they decided that a more vigorous enforcement of the tax laws, including the use of criminal investigations and civil fraud penalties, was essential to fairness for all taxpayers. The Office of Fraud Enforcement is the product of that increased focus.”

Stay tuned.  Click Here for Full Article

« Newer Posts - Older Posts »

Categories