TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

Introduction: The term “Release the Kraken” may bring to mind its origin in the movie “Clash of the Titans,” but the real battle is now in the realm of tax compliance. In a recent development that could have significant implications for cryptocurrency users, one of the largest cryptocurrency exchanges, Kraken, has notified its customers that it will release user data to the IRS. This follows a recent district court ruling enforcing a 2021 John Doe summons issued by the IRS to Kraken’s parent company to obtain information on digital asset transactions between 2016 and 2020.[i] While the court’s decision limited the scope of the data Kraken must provide, it remains crucial for cryptocurrency investors to understand the potential implications of this disclosure for their tax returns.

What information will be shared: Kraken will be supplying “limited data” on its users to the IRS, as mandated by the court. This data will include information on accounts with at least $20,000 worth of transactions in any one year between January 1, 2016, and December 31, 2020, and will include user details such as name, date of birth, tax identification number, address, phone number, email address, and transaction data from the 2016-2020 period.

CP2000 Notices: One of the immediate consequences of this data release could be the issuance of CP2000 notices by the IRS to affected taxpayers. CP2000 notices are sent when the IRS identifies discrepancies between a taxpayer’s reported income and information reported to the IRS by third parties. These notices serve as a preliminary step in the IRS’s efforts to determine whether a taxpayer’s return correctly reports income, gain, deductions, and credits. They often require a response from the taxpayer. See https://www.irs.gov/taxtopics/tc652. 

Why You Shouldn’t Ignore CP2000 Notices: It’s crucial to understand that receiving a CP2000 notice should not be taken lightly or ignored. In this case, the data provided by Kraken may be incomplete or may contain inaccuracies, such as missing data, omitted transactions, or misclassifications of income as ordinary or capital gains. Responding to a CP2000 notice is crucial. However, this response must be accurate and timely. It is recommended that taxpayers who receive a CP2000 Notice consult with a tax professional to determine the appropriate response. Ignoring the notice can lead to problems later in down the road.

Possible IRS Actions: While CP2000 notices are one potential outcome, it is essential to be aware that the IRS may also initiate audits or, in rare instances, even criminal investigations based on the data received. These potential actions by the IRS underscore the need for taxpayers who used Kraken to consult with a qualified tax professional.

Taking Action: If you are a Kraken user who may be affected by this data release, you should consider taking the following steps:

1. Review Your Tax Returns: Assess whether your previous tax returns accurately reflect your cryptocurrency transactions, especially those during the 2016-2020 period.
2. Consult a Tax Professional: If you suspect any errors or discrepancies in your tax filings, it is advisable to consult with a certified public accountant (CPA) or a tax lawyer who can help you rectify any issues.
3. Amend Your Tax Returns: If necessary, you may need to amend your tax returns to ensure that your cryptocurrency income is accurately reported. In certain instances, a voluntary disclosure might be required. Your tax professional will be able to navigate you through these intricacies.
4. Respond to IRS Notices: If you receive a CP2000 notice or any other communication from the IRS, respond promptly and provide the requested information. You may wish to consult with a tax professional, who can interact with the IRS, to address these IRS notices.

Conclusion: While this situation may seem daunting, being proactive in addressing any discrepancies can help you navigate these turbulent waters effectively.

The release of Kraken’s user data to the IRS carries implications for taxpayers who may have had cryptocurrency transactions during the specified period. Being informed and taking appropriate action now can help you avoid potential tax issues in the future. Don’t hesitate to seek professional guidance to ensure your tax returns accurately reflect your cryptocurrency activities and the appropriate action to take if there are errors or inaccuracies.

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[i] United States v. Payward Ventures, Inc., and its subsidiaries (collectively “Kraken”), Case No. 21-cv-02201-JCS (N.D.Cal.). 

We are pleased to announce that two of our partners will be speaking at the upcoming Hawaii Tax Institute 60th Annual Conference being held at the Sheraton Waikiki on November 5–9, 2023.

We have an excellent lineup of programs –

Understanding the Sandbox that All Wealth Transfer Advisors Play In
Featuring Sandra Brown

Dual-Purpose Communications in the Tax Context
Featuring Evan Davis

Employee Retention Credit Audits and Investigations – The Tsunami is Coming
Featuring Sandra Brown

This year’s program provides unparalleled educational and professional development opportunities delivered by a diverse and distinguished faculty of recognized tax and wealth-transfer authorities with a positive approach to current and practical subjects.

While the Institute is designed primarily to serve as a forum where tax and wealth transfer oriented people may freely exchange ideas on practical problems, professional status is not a prerequisite for registration. This program is designed for attorneys, accountants, financial planners, planned giving professionals, bank and trust administrators, insurance agents, elder law specialists, non-profit administrators, wealth management professionals, enrolled agents, educators, and others who would benefit from high quality continuing education. The highest level of learning has been the hallmark of prior Institutes and we shall endeavor to again maintain this standard.

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We are pleased to announce that Steven Toscher and Michel Stein, will be speaking at the upcoming Strafford webinar “IRS Audits of Expatriates: Section 965 Transition Tax, Exit Tax, Non-Filers, and the Examination Process” Tuesday, October 31, 2023, 10:00 a.m. – 11:50 a.m. (PST).

The IRS has and continues to audit a higher proportion of expat tax returns. The IRS 2019 Databook revealed that approximately 10 percent of expatriates’ tax returns are selected for audit. Considering the complexity of the returns, this should not be surprising.

The rules for these nonresidents are often the reverse of those for residents. The filing status Married Filing Jointly can require a special election, self-employed taxpayers often are not entitled to deduct expenses, and simple presence in the U.S. for 183 days can trigger capital gains. Remarkably, two-thirds of expats paper file these complicated returns.

In April 2023, the IRS Large Business & International Division released its list of currently active compliance campaigns. A dozen of these issues include campaigns targeting international taxpayers. These audits include expats who filed Form 8854, Initial and Annual Expatriation Statement, as well as those who did not.

Included on the list is its compliance campaign focusing on Section 965 transition tax payments. The Service required these payments by U.S. shareholders of certain foreign corporations on unrepatriated (untaxed) earnings as part of the 2017 Tax Act. The IRS stated that these audits could be expanded to other issues, particularly those relative to the 2017 Tax Act.

However, a major case pending before the U.S. Supreme Court (Moore v. United States, Case No. 22-800) is calling into question this provision on the issue of whether the 16th Amendment authorizes Congress to tax unrealized sums without apportionment among the states. Depending on how the court rules, large portions of the U.S. tax code could become legally uncertain.

Tax professionals and advisers working with individuals who have relocated abroad must understand the issues triggering these IRS audits, prepare clients for these audits, and know how to handle these demanding examinations.

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We are pleased to announce that Sandra Brown will be speaking at the upcoming Alvarez& Marsal Tax and Wolters Kluwer Virtual Coffee Talk webinar “Employee Retention Credits” Tuesday, October 31, 2023, 12:00 a.m. – 1:00 p.m. (EST).

The employee retention credit (ERC), enacted as part of the CARES Act, is a US federal tax credit that provides an incentive to employers who continued to employ individuals during the COVID-19 pandemic. Since its enactment, there have been questions as to whether a business qualified and how to interpret what qualified as a full or partial suspension of operations in order to be eligible for the credit. Companies engaged advisors – some of whom were diligent in determining a businesses’ eligibility – though others engaged advisors, whose business models created incentives to take aggressive positions on employee retention credit qualification that likely are not sustainable under audit. The IRS’s focus on fraudulent ERC claims has earned these transactions the #1 spot on the IRS’s annual Dirty Dozen list and has created opportunities for corrective action for those who may have not yet received the claimed credits and are concerned about the legitimacy of their ERC claims. This also puts increased pressure on acquirers in M&A transactions to ensure the appropriate level of diligence was performed, and if not, how buyers can contractually protect themselves in an M&A transaction.

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The IRS has recently made big headlines about focusing enforcement initiatives on wealthy individuals, but we have not heard so much about the focus on corporations -until this week. Yes—corporations are part of the tax gap.  

The recent IRS announcements regarding new corporate tax compliance initiatives mark the beginning of a new phase in the relationship between the IRS and large corporations. With the agency taking significant steps to ensure that businesses fulfill their tax obligations, it is essential for corporations to understand these initiatives and get ready to deal with the new reality of a greater focus on corporate compliance.

On October 20, 2023, the IRS released its second quarterly update, shedding light on how Inflation Reduction Act (IRA) funds are being utilized and the implementation of priorities. The update unveiled three corporate tax compliance initiatives, underscoring the IRS’s commitment to holding corporations accountable for their tax responsibilities.

1.      Transfer Pricing Soft Letter Compliance Alerts for Foreign-Owned Corporations: The IRS is set to send “compliance alerts” to approximately 150 U.S. subsidiaries of foreign corporations, indicating potential misuse of transfer pricing tactics to report diminished profits on domestic activities. These alerts suggest it’s time to take a hard look at the company’s transfer policies and practices and start getting ready to head off or prepare for a transfer pricing examination.

2.      Expansion of Large Corporate Compliance Program: In conjunction with its plan to hire 3,700 new revenue agents , the IRS is expanding its large corporate compliance program. The program scrutinizes large corporate taxpayers with substantial assets, meaning average assets of more than $24 billion, and average taxable income of approximately . $526 million per year. The expansion includes initiating an additional 60 audits of major corporations in early 2024 increasing the examination of these businesses. The IRS will apply a combination of artificial intelligence and subject matter expertise in an effort to crack down on noncompliance.

3.       Abuse of Repealed Corporate Tax Break: The IRS emphasized its efforts to address what it considers the abuse of the section 199 deduction for domestic production, which was repealed in the 2017 Tax Cuts and Jobs Act. These efforts have borne fruit, highlighted by a significant victory for the IRS in Bats Global Markets Holdings Inc. v. Commissioner (No. 22-9002, 2023 WL 4482553 (10th Cir. July 12, 2023)).

The IRS’s corporate tax compliance initiatives represent a significant step forward in the agency’s pursuit of fiscal accountability. While the path ahead promises to be challenging, corporations can proactively prepare and protect their interests. The guidance of experienced tax professionals is instrumental in effectively addressing IRS initiatives, preserving corporate rights, and navigating the landscape of corporate tax compliance. 

We are pleased to announce that Dennis Perez, Robert Horwitz and Lacey Strachan, will be speaking at the upcoming CalCPA webinar on “Office of Tax Administration: Handling A Case Before California OTA 2023,” October 31, 2023, 9:00 a.m. – 10:00 a.m. (PST).

The OTA (Office of Tax Appeals) has been in operation since January, 2018, but its rules are not well known to many tax practitioners. Learn how to guide a case through the procedural maze of the OTA regulations and avoid foot faults that can jeopardize your client’s case.

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The IRS has announced that employers who submitted an ERC claim which is still being processed by the IRS can withdraw their claim and avoid the possibility of getting a refund for which they’re ineligible.

The Employee Retention Credit (ERC), sometimes called the Employee Retention Tax Credit, or ERTC, was introduced by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020. The ERC is a refundable tax credit of up to $28,000 per employee for qualifying business and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic and meet all eligibility requirements. The period of eligibility for the credit for affected businesses covers the period between March 13, 2020, and December 31, 2021.

While many businesses legitimately applied for the credit, the IRS “continue[s] to see more and more questionable claims…” (IR-2023-135, July 26, 2023).The IRS believes  these questionable claims arise largely from aggressive and misleading marketing by promoters and tax return preparers who push businesses to apply for the credit. Promoters may make unsolicited calls to businesses, claiming the ERC is simple to claim.  They may lie about eligibility requirements and suggest that there is nothing to lose by applying for the credit. They may also offer to assist with applying for the credit without thoroughly reviewing all the facts to determine a business’s eligibility. And they may request from employers the payment of large upfront fees to claim the credit or even charge fees based on the percentage of the refund of ERC claimed.

In March of 2023, the IRS spotlighted ERC on its Dirty Dozen list of scams – a list compiled annually by that the IRS uses to warn the public of tax-related scams that taxpayers and tax professionals may encounter (IR-2023-49).

On September 14, 2023, the IRS instituted a moratorium on the processing of new ERC claims through the end of 2023. (IR 2023-169). The IRS announced that it would not accept new ERC claims following growing concerns that a substantial share of new claims from the ERC program are ineligible as a result of taxpayers following aggressive and misleading advice from promoters. The IRS emphasized that ERC claims already submitted would continue being processed, but at a slower pace due to the detailed compliance reviews the IRS had implemented.

On October 19, 2023, the IRS announced the details of a special withdrawal process to help those who filed an ERC claim and are concerned about its accuracy. (IR-2023-193). This withdrawal option allows certain employers who filed an ERC claim but have not yet received a refund to withdraw their submission and avoid future repayment, interest, and penalties. The IRS created the withdrawal option to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Claims that are withdrawn will be treated as if they were never filed and the IRS will not impose penalties or interest.

The withdrawal process is limited to ERC claims that have not been paid by the IRS or for businesses that have received a check for payment on their ERC claim but have not yet cashed or deposited the check.

For businesses that are not eligible to use the recently announced withdrawal process, consideration should be given in consultation with an experienced tax counsel whether the filing of a Voluntary Disclosure – a process by which a taxpayer “comes clean” in exchange for a civil penalty – may be appropriate at this time.

It is clear the IRS is focused on combating the filing and processing of fraudulent ERC claims and pursuing those who have obtained payment on ERC claims that it determines to have been erroneous.  That enforcement involves increased examination of ERC Claims, and the IRS Criminal Investigation special agents investigating and pursuing criminal charges in connection with the filing of fraudulent ERC claims.  We are representing a number of clients under investigation for ERC claims, and whenever a scheme ends up on the Dirty Dozen list the IRS prioritizes resources to investigate and prosecute those cases above run-of-the-mill tax cases. 

If you or a client are in the unfortunate position of having applied for what may be an ineligible, or even fraudulent, ERC claim,  then seek advice from an experienced tax counsel now. 

We are pleased to announce that Sandra R. Brown will be speaking on From the Experts: Tax Controversy and Tax Litigation – Civil & Criminal Tax Update at the upcoming NYU 82nd Institute on Federal Taxation, being held at the Westin, New York, October 22, 2023 at 1:15 p.m. (EST).

Join a leading group of tax controversy practitioners from both the private sector and the government in an open discussion regarding current IRS enforcement priorities, initiatives, and campaigns. The panel covers a broad range of topics that impact tax compliance and tax litigation, including an examination of recent cases, investigations, and programs – including familiar areas such as Microcaptive Insurance Arrangements, Digital Assets, and Offshore Accounts and Foreign Information Reporting Penalties, while also delving into hot new topics such as Monetized Installment Sales, Employee Retention Credits and Treaty Pension Benefits – many of which have come to the forefront of the attention of taxpayers and professionals alike from the flurry of IRS notices as well as the explosion of taxpayer challenges to IRS guidance and regulations. 

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We are pleased to announce that Philipp Behrendt will be speaking on Ethical Considerations for Tax Attorneys in Changing Work Environments at the upcoming ABA Virtual 2023 Fall Tax Meeting on October 20, 2023 at 1:15 p.m. (PST).

The pandemic and a new workforce ecosystem have brought about significant changes to the traditional landscape of working as a tax attorney. Many seasoned attorneys, who were accustomed to the five-days office workweek, transitioned to remote work or have found themselves managing associates who prefer remote work arrangements. Many attorneys now adopting a hybrid schedule, balancing their time between working in the office and from the comfort of their home. Furthermore, some attorneys are opting for project-based work instead of as traditional full-time employment, and several global employers are experimenting with four-day work weeks. These shifts in the working environment are reshaping the way tax attorneys approach their careers and practice. This panel will explore ethical considerations that arise from this evolving landscape of working and operating in hybrid or remote work settings, non-traditional work schedules, and other challenges and developments that impacting tax attorneys in the current workforce.

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We are extremely proud that the U.S. Government and the Internal Revenue Service (IRS) also stand with Israel by offering tax relief to those Americans affected by horrendous terrorist attacks on October 7, 2023. 

In Notice 2023-71, posted October 13, 2023 on IRS.gov, the IRS provides relief to certain taxpayers who, due to the terrorist attacks, may be unable to meet a tax-filing or tax-payment obligation, or may be unable to perform other time-sensitive tax-related actions.

1. Filing and Payment Relief

The notice postpones various tax filing and payment deadlines that occurred or will occur during the period from October 7, 2023, through October 7, 2024 (postponement period). As a result, affected individuals and businesses will have until October 7, 2024, to file returns and pay any taxes that were originally due during this period. This includes:

• Individuals who had a valid extension to file their 2022 return due to run out on Oct. 16, 2023.
• Calendar-year corporations whose 2022 extensions run out on Oct. 16, 2023.
• Retirement plan contributions and rollover

2. Who Qualifies for Relief?

The following qualify for relief under the notice:

• Any individual whose principal residence or business entity or sole proprietor whose principal place of business is in Israel, the West Bank or Gaza (the covered area).
• Any individual, business or sole proprietor, or estate or trust whose books, records or tax preparer is located in the covered area.
• Anyone killed, injured, or taken hostage due to the terrorist attacks.
• Any individual affiliated with a recognized government or philanthropic organization and who is assisting in the covered area, such as a relief worker.

The IRS will continue to monitor events and may provide additional relief. 

The IRS will automatically identify taxpayers whose principal residence or principal place of business is located in the covered area based on previously filed returns and will apply relief. Other eligible taxpayers can obtain this relief by calling the IRS disaster hotline at 866-562-5227. Alternatively, international callers may call 267-941-1000. 

If an affected taxpayer receives a late filing or late payment penalty notice from the IRS for the postponement period, the taxpayer should call the number on the notice to have the penalty abated.