TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

What It’s About

On February 7, the Justice Department announced a seven-count indictment against Frank Richard Ahlgren III, charging him with filing false tax returns and structuring transactions based on his cryptocurrency dealings between 2017 and 2019. Ahlgren faces three counts of filing false tax returns under 26 U.S.C. section 7206(1), related to underreporting or not reporting the sale of $4 million worth of bitcoin. In 2017, he allegedly inflated the basis of bitcoin sold and failed to report several bitcoin sales in subsequent years. Additionally, he is charged with four structuring charges for attempting to evade currency reporting requirements during cash deposits of sale proceeds.

Significance of the Case

This indictment represents a departure from previous cases primarily focused on money laundering or fraud, instead centering squarely on tax charges stemming from cryptocurrency transactions. This shift marks a significant move towards criminal enforcement for tax non-compliance in the crypto space.

What sets this case apart is its temporal context. Many tax professionals anticipated that the first instance of solely tax-related charges would occur for tax periods starting with tax year 2020 or later, given the prominent placement of the crypto question on the first page of the tax returns during those periods, making it more conspicuous. However, these charges span the years 2017 through 2019. Notably, while the 2019 tax return included a crypto-related question, albeit not on the front page, the 2017 and 2018 returns lacked any crypto-related question.

As an aside, what may have contributed to DOJ’s reach back to 2017 is the very public civil litigation between the defendant and the trustees of the Ahlgren Management Trust, Case no. D-1-GN-20-001472 261st Judicial District, Travis County, Texas, which was filed in 2020. A June 15, 2023 Memorandum Opinion by the Texas Court of Appeals spent a fair amount of time discussing the 2017 Bitcoin traceable transactions. 

Lessons for Taxpayers

The Ahlgren case serves as a sobering reminder for taxpayers involved in cryptocurrency transactions. Despite ongoing debates surrounding reporting thresholds and requirements, the obligation to report capital gains and ordinary income remains non-negotiable.

While the outcome of the case in court remains uncertain, it signifies the commencement of a heightened level of tax enforcement within this domain. The Department of Justice is sending a clear message – tax charges are a real possibility for failure to report cryptocurrency transactions, thus elevating the stakes of tax compliance in the cryptocurrency realm.

The DOJ press release highlighted that the IRS is investigating the case, underscoring the collective commitment to lift its structural enforcement deficits in the crypto space. Tax compliance is key to staying out of trouble, both civilly and criminally.

Historically, taxpayers holding crypto were often left with very little guidance when it came to filing their taxes, leading to non-compliance with rules that are now becoming more clear. By taking proactive steps with knowledgeable counsel, you can rectify past discrepancies and avoid potential legal ramifications. Investing in experienced tax counsel today can safeguard your financial future tomorrow, ensuring compliance and peace of mind as you navigate the complex landscape of tax regulations.

Sandra R. Brown is a Principal at Hochman Salkin Toscher Perez P.C., and former Acting United States Attorney, First Assistant United States Attorney, and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal). Ms. Brown specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court.

Philipp Behrendt is an Associate at Hochman Salkin Toscher Perez P.C., licensed in California as well as in Germany and assists in advising clients in civil and criminal tax controversies as well as international money laundering investigations stemming from tax avoidance structures. He also focuses on the technical aspects involved in advising voluntary disclosures in connection with DeFis, NFTs, and other crypto assets.

We are also pleased to announce that Sandra R. Brown will be moderating a panel at the upcoming ABA 39th National Institute on White Collar Crime on the topic of “The Powers and Perils of Parallel Criminal and Civil Investigations” on Wednesday, March 6, 2024, 10:30 a.m. (PST), with panelists Ronald Cheng (Pillsbury Winthorp), Caroline Ciraolo (Kostelanetz), Mary Hammond (IRS Global Operations Policy & Support) and Pamela L. Johnston (Foley & Lardner). 

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We are pleased to announce that Michael Greenwade along with Andrea N. Erdahl (SBSE Examination) will be speaking at the upcoming Beverly Hills Bar Association webinar “The Fundamentals of Information Reporting” Tuesday, March 5, 2024, 12:30 p.m. – 1:30 p.m. (PST).

This program will go over the fundamentals of compliance related to international information return filings in order to provide taxpayers and professionals with up-to-date information, including potential consequences for non-compliance, resources available, and practical knowledge to resolve issues that may arise. As the landscape of global reporting requirements is ever-evolving, this program will assist with that to expect and how to prepare for the compliance standards of today.

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We are pleased to announce that Sandra R. Brown will be speaking at the upcoming Federal Bar Association 2024 Tax Law Conference on the topic of “May You Live in Interesting Times – The Latest in Criminal Investigations and Sentencings” on Tuesday, March 5, 2024, 11:00 a.m. – 12:00 p.m. (PST), along with co-panelists Caroline Ciraolo (Kostelanetz), Eric Hylton (alliantgroup), and Jeffrey Neiman (Marcus, Neiman Rashbaum & Pineiro).

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We are also pleased to announce that Sandra R. Brown will be moderating a panel at the upcoming ABA 39th National Institute on White Collar Crime on the topic of “The Powers and Perils of Parallel Criminal and Civil Investigations” on Wednesday, March 6, 2024, 10:30 a.m. (PST), with panelists Ronald Cheng (Pillsbury Winthorp), Caroline Ciraolo (Kostelanetz), Mary Hammond (IRS Global Operations Policy & Support) and Byron McLain (Foley & Lardner). 

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The Taxpayer Advocate Service (TAS) is an independent organization within the Internal Revenue Service (IRS), which prides itself on being the “Voice of the Taxpayer” with the IRS and before Congress. By statute, the National Taxpayer Advocate (NTA), a position held by Erin Collins, who heads TAS, is required to submit an Annual Report to Congress that contains, among other things, an analysis of 10 of the most critical problems encountered by taxpayers in their dealings with the IRS.

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We are pleased to announce that Robert Horwitz and Jonathan Kalinski will be speaking at the upcoming Strafford webinar “IRS’ Current Audit Campaign: Preparing for Large Partnership, Complex PTE, and HNW Taxpayer” Tuesday, February 27, 2024, 10:00 a.m. – 11:50 a.m. (PST).

In Notice 2023-166, the IRS announced its shift in focus from working-class taxpayers to wealthy taxpayers. With funds supplied by the Inflation Reduction Act, the IRS is concentrating its attention on large corporations and partnerships, high-income earners, and abusive tax avoidance promoters.

Within the notice, the IRS explained that a “major expansion in high-income/high wealth and partnership compliance work” is a key element of the new campaign. Specifically included are taxpayers with income above $1 million and more than $250,000 in tax debt, and partnerships with over $10 million in assets with ongoing balance sheet discrepancies. Perhaps the greatest cause of unrest is the IRS’ statement that its compliance team will use AI to aid in these examinations.

The IRS established a new division within its Large Business and International Division to assist with these audits. This new IRS unit will take a broader look at all complex partnerships. With the heightened reporting requirements for these flow-through entities, PTE practitioners and owners need to be wary but ready for the IRS’ latest campaign.

Listen as our panel of notable federal tax litigation experts analyzes the IRS’ current enforcement efforts and steps partnerships and high net worth individuals must take to prepare.

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.  

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We are pleased to announce that Evan Davis will be speaking at the upcoming USD School of Law – Chamberlain International Tax Institute Conference on the on the topic of “Attorney-Client Privilege and Confidentiality Limitations in International Tax Matters” on Monday, February 19, 2024, 3:00 p.m. – 4:00 p.m. (CST), along with co-panelists  Ana Elena Domínguez, Galicia Abogados (Mexico City), Jeremy Temkin, Morvillo, Abramowitz, Grand Iason & Anello PC (New York City), and Jaime Vásquez, Chamberlain Hrdlicka (San Antonio)

This panel will focus on the limits of attorney-client privilege and confidentiality in the context of cross-border representation and tax advice. Criminal and civil tax law experts and former prosecutors will explain some of the practical limitations and what steps would often be advisable regarding advice provided to cross border taxpayers in delicate transactions.

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We are pleased to announce that Dennis Perez, Michel R. Stein, and Jonathan Kalinski will be speaking at the upcoming CalCPA webinar “Resolving Federal and State Employment Tax Matters – Worker Classification” Tuesday, February 20, 2024, 9:00 a.m. – 10:00 a.m. (PST).

The IRS is increasing both civil and criminal enforcement against taxpayers who fail to comply with withholding and remitting of employment taxes. Noncompliance can cause heavy penalties and interest against taxpayers that could destabilize a company and its operations and expose responsible company officers to personal liability. Tax professionals and advisers must grasp a complete understanding of tax rules and available techniques to avoid or minimize tax assessments and penalties. This webinar will guide tax professionals and advisers on critical issues relating to employment taxes. The panel will discuss essential techniques to avoid penalties and handling IRS audits stemming from employment taxes. The panel will also address worker classification issues and methods to overcome them, the impact of California AB 5, key considerations for state versus federal compliance, the Government use of injunctions and criminal aspects.

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We are pleased to announce that Michel R. Stein will be speaking at the upcoming 11^th Annual Florida Tax Institute  3-Day Conference on the on the topic of “Audits and Tax Controversy Update” on Wednesday, February 14, 2024, 2:15 p.m. – 3:15 p.m. (EST), along with co-panelists Fred Murray (IRS Special Counsel), Eric Cerelli (IRS Field Director for Global High Wealth), Judy McNamara (IRS Field Director for International Individual Compliance) and Niles Elber (Caplin & Drysdale).

The IRS continues to prioritize examinations of high-wealth individuals and inbound and outbound investment and business transactions, as well as collection of outstanding tax liabilities of these taxpayers. The reviews are expected to include the individual tax return of the sophisticated taxpayer as well as related partnerships, foundations, trusts, retirement plans, and other business structures. The IRS also has reaffirmed its interest in cross-border activities with the announcement of new campaigns targeting Nonresident Aliens who receive rental income from U.S. real property; FIRPTA compliance in connection with the withholding of tax and reporting obligations on the disposition of U.S. real property interests; and the U.S. activities of financial service entities and whether foreign investors participating in “inbound” lending transactions were engaged in a U.S. trade or business and generated income effectively connected with a U.S.-situs lending trade or business. Examination of partnerships and other flow-through entities are in themselves a focus of a number of examinations. The panel will discuss current developments and their implications for high wealth foreign and domestic taxpayers.

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In two recently issued decisions, the U.S. Tax Court reaffirmed the validity of the so-called “Cohan Rule” that allows the Court to estimate the amount of a taxpayer’s deductible expenses so long as the taxpayer clearly shows that he or she incurred the expenses and the Court has a reasonable basis for making such an estimate. On December 28, 2023, and January 3, 2024, the Tax Court issued Villa v. Commissioner, T.C. Memo 2023-155, and Alvarado v. Commissioner, T.C. Memo 2024-1, both of which explained that, while the Cohan Rule may not be invoked to estimate expenses covered by the strict substantiation requirements of I.R.C. § 274(d), the Rule does allow the Court to estimate otherwise unsubstantiated costs of goods sold. The burden of proof, however, remains upon the taxpayer, and any inexactitude in the amount of unsubstantiated deductions will be held against the taxpayer.

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