We frequently blog on cryptocurrency tax matters and on cases involving the Foreign Bank Account Report (FBAR) penalty. The question of whether FBARs have to be filed must be answered by taxpayers and tax return preparers every year around the same time. For some years now, with the IRS’s increased focus on virtual currency, holders of hosted or unhosted wallets have asked

 if they have to file an FBAR and if so, whether they can get an automatic extension to file that report past April 15. 

Let’s first start with the FBAR filing requirement. With the tax filing deadline right around the corner, for those who are now panicking, a quick relief. FinCEN grants filers failing to meet the April 15th deadline an automatic extension to October 15th each year. Unlike an income tax return, all you need to do is … nothing. No extension request is needed. That means there is now additional time to figure out whether or not you are required to file an FBAR.

Last month, the IRS published a reference guide for the report of foreign bank & financial accounts (FBAR) (see: https://www.irs.gov/pub/irs-pdf/p5569.pdf) to assist U.S. persons who must file the FBAR as well as professionals who prepare and electronically file FBARs. It is also a contribution for a consistent and fair administration of FBAR examination and penalty program through the IRS examiners.  Amongst other things, the guide provides information of when cryptocurrency must be reported on the FBAR.

What is the purpose of the FBAR?

FBARs are not tax returns. No payment obligations are imposed through filing an FBAR. It is rather a financial reporting obligation.

The filing of the FBAR, which is FINCEN Form 114, became a legal obligation in 1970, under the Bank Secrecy Act (BSA), Title 31 of the U.S.C. It is used by the U.S. government to identify individuals who are using financial accounts abroad to circumvent U.S. law, and to identify illicit funds or unreported income.

Who has to file an FBAR?

The answer seems simple on its surface but tricky in its details. Let us begin with the general requirement. Everyone has to file who:

(1)     Is a U.S. person,

(2)     has an interest in financial accounts overseas for any reason, and

(3)     The aggregated maximum value of foreign financial accounts exceeds $10,000 at any time during the calendar year.

Since every good rule has exceptions, so does this one. The IRS guide lays out the exceptions on page 8.

(1) The first requirement is quite intuitive, if you leave special tax treatments – like disregarded entities – aside. A U.S. person means:

  • A citizen or resident of the United States; or
  • An entity or estate created, organized, or formed in the United States or under the laws of the United States, its states or territories.

Pitfall:         Since FBARs are not a tax reporting obligation, exemptions under the tax code (Title 26) do not relieve you from the obligation to file an FBAR. Even if your entity is disregarded for tax purposes, this has no effect for the FBAR filing obligation imposed by the BSA.

(2) The second requirement asks for financial accounts overseas. The meaning of financial accounts is broader than just bank accounts. The IRS guide contains a list of included accounts. These are:

  • Bank accounts such as savings and checking accounts, and time deposits,
  • Securities accounts, such as brokerage accounts, securities derivatives accounts, or other financial instruments accounts;
  • Commodity futures or options accounts;
  • Insurance or annuity policies with a cash value (such as a whole life insurance policy);
  • Mutual funds or similar pooled funds (i.e. a fund available to the public with a regular net asset value determination and regular redemptions), and;
  • Any other accounts maintained in a foreign financial institution or with a person performing the services of a financial institution.

Pitfall:         Life insurance, retirement funds or other pooled funds are considered financial accounts. Hedge funds and private equity funds are not.

Overseas is every location outside of the U.S. and certain territories.

The physical presence of an account, rather than whether it is held through an American Organization, is what is relevant. An account at a German branch of a bank is still overseas, whether the bank itself is a U.S. institute or not.

Last but not least, the U.S. person must have a financial interest in or signature authority over that account. That includes not only the holder of the account but also a person with power of attorney over the account. If a U.S. person’s instruction is required or sufficient to move the funds, he or she has a financial interest in the account under the FBAR rules.

Pitfall:         If you are a majority shareholder of a company that owns a foreign corporation, be aware of your FBAR obligations. That foreign company’s financial accounts can easily exceed the $10,000 threshold. Even if the company you own files an FBAR, that does not release you from your obligation to file, imposed because you directly or indirectly own more than 50% of the shares of stock of the foreign corporation.

(3) The third requirement is the account value throughout the year. That sounds intuitive again. Just look at the balance and see if the amount in the account was more than $10,000 at any time during the year covered by the report.

However, whether or not the account value exceeds $10,000 can be tricky, given that foreign accounts are often not held in USD or have a USD reporting available, but in local or some other currency. Exchange rates fluctuate, and the exchange rates reported on various websites can differ, so the U.S. person and the return preparer must be careful in ensuring that they accurately calculate the amount in each foreign account.

The IRS guide provides a clear and simplified method to determine the maximum account value.

The account value is determined in two steps. First, the maximum value of the account during the year in the local currency is determined, and then converted into U.S. dollars using the exchange rate on the last day of the calendar year. To determine the exchange rate, use the table of the Treasury Report Rates of Exchange (https://fiscaldata.treasury.gov/datasets/treasury-reporting-rates-exchange/treasury-reporting-rates-of-exchange).

Pitfall:         If a taxpayer has a financial interest in more than one account, the aggregated maximum value is relevant. Even if no single account value exceeds $10,000, if the aggregated value exceeds the $10,000 threshold, an FBAR has to be filed and all accounts must be reported. Relevant is the sum of the maximum values of all reportable accounts during the year, not the aggregated value on a single day of all reportable accounts. If a U.S. person had two accounts in Belgium, one had a high balance of $6200 on January 21 and the other had a high balance of $4000 on November 15, but the combined high balance on any single day never exceeded $10,000, an FBAR must be filed because the aggregated maximum value does exceed the threshold.

Pitfall:         If a U.S. person has an ownership interest in a foreign account whose highest balance did not exceed $10,000, and signatory authority over a second foreign account whose highest balance did not exceed $10,000, an FBAR is required if the highest aggregate balance of the two accounts exceeded $10,000.

The rules triggering the filing obligation are very technical. As a general rule:        

Ask yourself if there is an instrument of pooled valuables abroad, which can be used or moved by your instruction and the total amount of all the valuables so identified may exceed $10,000 at any given moment throughout the year. If that is the case, you should file an FBAR, or seek professional guidance on whether to file.

Is my crypto wallet financial account?

You are lucky. The newest update to the IRS guide addresses your question.

“A foreign account holding virtual currency is not reportable on the FBAR (unless it’s a reportable (…) because it holds reportable assets besides virtual currency).” 

At the same time, the IRS guide warns that while virtual currency funds are not reportable yet, FinCEN has indicated it intends to make them reportable in the future.

Why is the IRS involved?

The answer is simple. In April 2003, FinCEN delegated FBAR enforcement authority to the IRS. Since then, the IRS has been responsible for investigating potential violations, assessing and collecting civil penalties, and issuing administrative rulings.

How do I file and where?

Do not file the FBAR report in the way you would file an income tax return.  To satisfy the FBAR obligation, the FinCEN Form 114 needs to be submitted through the BSA E-Filing System only.

U.S. income tax returns contain FBAR-related questions and information returns. These include:

  • Form 1040, Schedule B, questions 7a and 7b;
  • Form 1041, “Other Information” section, question 3;
  • Form 1065, Schedule B, question 8; and  
  • Form 1120, Schedule N, questions 6a and 6b.

In preparing and filing these tax returns, make sure that these questions are answered accurately.

Do I have to keep records?

Yes, records of accounts that must be reported need to be kept for a minimum of 5 years from the due date of the report. The due date is April 15th of the year following the calendar year being reported. If the report is filed after April 15th, the records must be kept five years from the filing date.

These records must include

  • Name in which each account is maintained;
  • Number or other designation identifying the account;
  • Name and address of the foreign financial institution or other person with whom the account is maintained;
  • Type of account; and
  • Maximum value of each account during the reporting period.

If you are not sure whether or how to file your FBAR, you may want to seek legal assistance rather than take your chances. Even if FBAR is only a reporting requirement, besides civil monetary penalties, criminal penalties can be imposed for non-compliance.

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.

Philipp Behrendt is an Associate at Hochman Salkin Toscher Perez P.C., and a graduate of University of Southern California (USC) Gould School of Law (LL.M.) and a former associate of the leading German tax firm.  Philipp’s prior experience includes representing wealthy individuals and companies in global tax settings, cross-border investigations and audit matters, as well as handling complex voluntary disclosure issues for U.S. and other international companies, stemming from tax avoidance structures as well as crypto assets.

Dear Colleague-

We cordially invite you to save the date for this years UCLA Extension Tax Controversy Institute which will be live this year and held on October 27, 2022 at the Beverly Hills Hotel in Beverly Hills, California. 

The Institute is entering its 38th year and is recognized as one of the top tax controversy programs in the country. 

We will be covering the most important topics for practitioners including —

The New Landscape in IRS Examinations- What Can We Expect in the Post-Covid Tax Enforcement Environment. 

Handling California Tax Disputes Before the Franchise Tax Board and the California Office of Tax Appeals. 

Cryptocurrency Enforcement – Where Do We Go From Here. 

The Internal Revenue Service’s Criminal Enforcement Program- How to Keep your Client out of Jail. 

The IRS Focus on Promoters and Other Enablers. 

Join us, your fellow practitioners and top government officials for a day filled with critical insights on the hot topics and current developments relevant to all tax practitioners. And since we are back in person at the Beverly Hills Hotel, you will also get to enjoy a great lunch program and an excellent cocktail party for networking and gathering together with old and new tax colleagues alike. 

Click Here for early registration.

We look forward to seeing you on October 27, 2022.

Steven Toscher and Sandra Brown, Co-Chairs
Hochman Salkin Toscher Perez P.C.

We are pleased to announce that Steven Toscher will be speaking at the upcoming 14th Annual STEP International Tax and Estate Planning Forum seminar, “Cryptocurrency Developments” on Thursday, May 5, 2022, 3:00 p.m. (PST) at the Surf & Sand Resort, Laguna Beach, California.

Cryptocurrency has become a fact of life for professional advisors which cannot be ignored. Join Steve for a keynote presentation on current developments in the cryptocurrency area, including taxation, criminal and civil tax enforcement and regulation.

Click Here for more information.

We are pleased to announce that Jonathan Kalinski will be speaking at the upcoming BHBA webinar, “Tax Implications of Acquiring, Holding or Selling NFTs” on Friday, April 1, 2022, 12:30 p.m. – 1:30 p.m. (PST).

The recent explosion of the creation and sale of NFTs has brought about significant concerns regarding the taxation of these transactions for sellers, purchasers, and investors. Tax counsel and accountants for clients holding and selling NFTs must understand applicable tax rules, reporting requirements for these transactions, and the tax treatment of NFTs.

An NFT is a digital certificate of certain rights associated with a digital or physical asset. Thus far, NFTs have been created and sold for various assets within the art, music, and sports industries worldwide. However, since NFTs and NFT transactions are fairly new, the IRS has yet to issue guidance directly addressing NFTs. This forces taxpayers to rely on general tax law principles and current IRS guidance on digital assets and virtual currency.

NFTs are typically acquired in exchange for virtual currency and, as such, are treated as property resulting in recognition of gain or loss on the taxpayer. However, the characterization of an NFT and related transactions can depend on how the transactions are facilitated. If an NFT is treated as a collectible versus a digital asset, it can result in different tax treatment (i.e., a primary transfer may be considered a license, while a secondary market transfer is considered a sale).

Tax counsel and advisers must recognize applicable tax rules for NFTs, differences to cryptocurrencies, and define proper reporting and tax treatment for NFT transactions.

Listen as our panel discusses critical tax considerations for NFT transactions, tax issues for creators and investors, and other key issues for NFTs.

Click Here for more information.

Jonathan Kalinski is a principal at Hochman Salkin Toscher Perez, P.C. and specializes in both civil and criminal tax controversies as well as sensitive tax matters including disclosures of previously undeclared interests in foreign financial accounts and assets and provides tax advice to taxpayers and their advisors throughout the world.  He handles both Federal and state tax matters involving individuals, corporations, partnerships, limited liability companies, and trusts and estates. Mr. Kalinski has considerable experience handling complex civil tax examinations, administrative appeals, and tax collection matters.  Recently, he has focused on the taxation of cannabis and cryptocurrency.  Prior to joining the firm, he served as a trial attorney with the IRS Office of Chief Counsel litigating Tax Court cases and advising Revenue Agents and Revenue Officers on a variety of complex tax matters.  Jonathan Kalinski also previously served as an Attorney-Adviser to the Honorable Juan F. Vasquez of the United States

As part of the 2004 Jobs Act, Congress added several provisions as part of the interminable effort to clear the tax system of abusive tax shelters:

  • Sec. 6111, which requires “material advisors” to file returns disclosing information about reportable (including listed transactions);
  • Sec. 6700, which imposes a penalty for failure to file a return, or filing an incomplete or false return, required under sec. 6111 of $50,000 or, in the case of a listed transaction, the greater of (a) $200,000 or (b) 50% of the gross income (75% for an intentional failure) derived prior to the filing of the return with respect to the transaction; and
  • Sec. 6707A, which imposes a penalty on any person who fails to provide information on a reportable transaction required under sec. 6011.

Sec. 6707A(c) defined “reportable transaction” and “listed transaction” as

  • Reportable transaction – The term “reportable transaction” means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.
  • Listed transaction – The term “listed transaction” means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.

Besides civil penalties under secs. 6707 and 6707A, a person who willfully failed to file a return or filed a false return regarding a reportable or listed transaction could be subject to criminal penalties.

When it enacted these provisions, Congress did not address whether the IRS would have to comply with the Administrative Procedure Act when

     identifying and defining reportable and listed transactions.

          Since the 1990s, the IRS has been identifying what it determined were abusive tax avoidance transactions through various means.  Sometimes the IRS would issue a regulation that identified a particular type of transaction as abusive, such as Treas. Reg. sec. 1.643(a)-8 (identifying abusive use of charitable remainder unitrusts).  Other times the IRS would issue a revenue ruling identifying a transaction as abusive, such as Rev. Rul. 2000-12 (identifying certain debt straddles as abusive).  Mostly, the IRS issued notices.  See, IRS’s webpage Recognized Abusive and Listed Transactions, available online at https://www.irs.gov/businesses/corporations/listed-transactions#4.

          Unlike regulations, notices are usually issued without offering interested persons notice and an opportunity to comment.  One of the Notices was Notice 2007-83, which identified as listed transactions certain transactions involving the purchase of cash value life insurance policies connected to employer benefit plans. 

In Mann Construction, Inc. v. United States, Dkt. No. 21-1500 (6th Cir. March 3, 2022), https://www.opn.ca6.uscourts.gov/opinions.pdf/22a0041p-06.pdf, the plaintiff corporation had an employee benefit plan in effect from 2013-2017 that paid premiums of cash value life insurance policies benefiting its principals.  In 2019, the IRS determined that the transaction was that identified in Notice 2007-83.  It assessed penalties against both the corporation and its principals, all of whom paid the penalties and filed refund claims.  After the administrative route got them nowhere, they filed suit in district court, challenging the validity of the Notice because it (a) was issued without providing for notice and comment in violation of the Administrative Procedures Act (APA); (b) constituted unauthorized agency action; (c) was arbitrary and capricious; and (d) did not apply to the transaction engaged in by the taxpayers.  The district court ruled for the Government on all issues and the taxpayers appealed to the Sixth Circuit, which reversed the district court, holding that Notice 2007-83 was invalid because it was issued in violation of the notice and comment requirements of the APA.

The Government argued that Notice 2007-83 was an “interpretive rule,” not a “legislative rule,” and, thus, was exempt from the APA’s notice and comment provisions.  Addressing this argument, the Sixth Circuit focused on the difference between legislative and interpretive rules and found that the notice fell on the legislative side of the border:

Legislative rules have the “force and effect of law”; interpretive rules do not. Perez, 575 U.S. at 96–97 (quoting Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87, 99 (1995)). Legislative rules impose new rights or duties and change the legal status of regulated parties; interpretive rules articulate what an agency thinks a statute means or remind parties of pre-existing duties. Tenn. Hosp. Ass’n, 908 F.3d at 1042. When rulemaking carries out an express delegation of authority from Congress to an agency, it usually leads to legislative rules; interpretive rules merely clarify the requirements that Congress has already put in place. Id. at 1043.

Measured by these metes and bounds, Notice 2007-83 amounts to a legislative rule. The Notice has the force and effect of law. It defines a set of transactions that taxpayers must report, and that duty did not arise from a statute or a notice-and-comment rule. It springs from the IRS’s own Notice. Taxpayers like Mann Construction had no obligation to provide information regarding listed transactions like this one to the IRS before the Notice. They have such a duty after the Notice. Obeying these new duties can “involve significant time and expense,” and failure to comply comes with the risk of penalties and criminal sanctions, all characteristics of legislative rules. CIC Servs., LLC v. IRS, 141 S. Ct. 1582, 1591 (2021); see also id. at 1592; Kristin E. Hickman, Unpacking the Force of Law, 66 Vand. L. Rev. 465, 524 (2013) (characterizing penalties as a leading indicator that a regulation is legislative rather than interpretive).

Slip op. at p. 5.

          The Court dismissed the Government’s argument that the notice merely “interpreted” what was a “tax avoidance transaction” and, therefore, was an interpretive rule.  Not so, responded the Court since under the notice a transaction that fell within its penumbra must be reported or the taxpayer faced a penalty.  This made it a legislative rule.

          The Sixth Circuit also rejected the Government’s argument that reportable/listed transaction notices were exempted by Congress from the APA’s notice and comment provisions.  There is a baseline assumption that every agency action that will have the force and effect of law must comply with the notice and comment provisions before it becomes final.  While Congress may carve out exceptions from the notice and comment requirement, the Government is required to show that Congress expressly did so.  That was not the case with respect to sec. 6707A.  Neither expressly nor by implication did the statute make the notice and comment provisions inapplicable nor did it create new procedures for determining what are listed or reportable transactions.  “The statutes merely establish a disclosure and penalty regime for the IRS to administer. As to the statutory text, Congress did not change the background procedural requirements of the APA or otherwise indicate an exemption from those requirements in a ‘clear’ or ‘plain’ way that would make the APA’s procedures inapplicable to the IRS.”  Slip op. at p. 9.

          The Government also argued that, since a regulation in effect when sec. 6707A was enacted,  which stated the IRS could identify listed and reportable transactions by “notice, regulation, or other form of published guidance,” Congress meant to exempt the identification of listed and reportable transactions from the APA’s notice and comment provisions.  To the Court, this did not show what the Government claimed.  All the regulation did was list the types of written documents in which it would identify listed and reportable transactions, not the procedure it would follow in issuing the guidance.  Since Notice 2007-83 did not comply with the APA’s notice and comment provisions it was invalid.  Thus, the district court was reversed.

This is not the first time that the IRS has run afoul of the APA  over its failure to give notice and provide an opportunity for comment prior to issuing a listed transaction notice.  In CIC Services, LLC v. Internal Revenue Service, 141 S.Ct. 1582 (2021), a unanimous Supreme Court held that the Anti-Injunction Act did not bar a material advisor on micro-captive insurance transactions from challenging Notice 2016-66, which identified certain micro-captive transactions as reportable transactions.  On remand, the district court granted a preliminary injunction against the IRS enforcing the notice because it was a “legislative rule” that was invalid since it was issued without a notice and comment period, in violation of the APA.  CIC Services, LLC v. Internal Revenue Service, 2021 WL 4481008 (E.D. TN, Sept. 21, 2021).  CIC Services is appealable to the Sixth Circuit, so it is highly likely that the the micro-captive notice in that case will be held to be invalid.  If courts in other circuits follow the Sixth Circuit, all listed/reportable transaction notices could be invalidated for failing to abide by the APA’s notice and comment requirement.

          It has been more than ten years since the Supreme Court in Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44 (2011) stated  that “[W]e are not inclined to carve out an approach to administrative review good for tax law only.”  While no one could doubt the importance of the listing rules to curb abusive tax avoidance transactions, the notice and comment requirements of the APA are equally important and if Congress believes the IRS should be relieved of the requirement, it must clearly say so.

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.

We are pleased to announce that Lacey Strachan and Michael Greenwade have published an article, “Close It Out — Past, Present & Future,” in the February issue of Los Angeles Lawyer Magazine. In 2021, the Tax Court ruled against the IRS in Crandall v. Commissioner, holding the IRS to the finality of a closing agreement.  This article discusses the Crandall case and the importance of closing agreements as a potentially strategic tool for taxpayers to use to resolve issues with the IRS.  The article includes a discussion of the possible uses of closing agreements, procedural requirements, and pitfalls to be aware of.

Click Here for full article.

We are pleased to announce that Sandra Brown will be speaking at the upcoming ABA seminar, “In the Eye of the Beholder: What Moves a Tax Case from Civil to Criminal” on Wednesday, March 2, 2022, 10:00 a.m. – 11:45 a.m. (PST).

The IRS puts the current gross tax gap at more than $1 trillion dollars. The gap consists of underreporting, underpayment, and non-filing, and each of these areas includes potential criminal targets. So what moves tax noncompliance from the civil to the criminal realm? This panel will address the IRS focus on civil fraud enforcement and criminal referrals, including the creation, organization, and initiatives of the IRS Office of Fraud Enforcement, current IRS enforcement priorities, recent criminal tax prosecutions, what happens when a criminal tax investigation is discontinued or declined, and more.

Click Here for more information.

This week, the IRS updated the Voluntary Disclosure Practice Preclearance Request and Application, Form 14457. Most notably, it includes a new section on disclosing virtual currency information. 

When it comes to the new information that has to be disclosed, two points stand out. The first is that you must disclose all aliases and citizenship.  Although the prior version of the form required you to list all passport information, which would imply citizenship, the new version goes a step further.  

The IRS is likely requiring this information for a few reasons.  One, the IRS might be able to cooperate and gain information from the country of which the taxpayer is a citizen.  It could also supply information to that country.  Those coming forward should make sure they are tax compliant in other countries.  This information could also increase collection of future liabilities.  The IRS has made an emphasis recently that it will pursue collection even if an individual’s assets are overseas. 

For years now the IRS has focused on virtual currency enforcement and this is the latest step. The previous form required you to list if the disclosure was related to virtual currency, but only required you to list financial accounts as part of the preclearance.  This arguably did not include virtual currency wallets and the like. 

Virtual currencies now must be disclosed in Part 1, Line 13. This includes not only transactions of virtual currencies during the disclosure period but also assets owned or controlled directly or indirectly. The disclosure also requires the inclusion of the location where the virtual currency has been held.

This section still raises several questions including whether NFTs need to be disclosed. The use of the word virtual currency may suggest a limited disclosure requirement for assets with some form of fungibility. And while the case can be made that IRS experts are aware of the distinction between fungible and non-fungible assets, the instructions make it clear that the IRS is looking for a full and complete disclosure. The instructions acknowledge that virtual currency is a dynamic area and that, for the purposes of this form, the term “encompasses assets beyond what many define as virtual currencies.” The reference to the IRS FAQ on virtual currency transactions shows that the IRS has a rather broad understanding and describes virtual currency as “a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (‘real currency’), that functions as a unit of account, a store of value, and a medium of exchange.”  When in doubt, disclose. 

Note also that the form requires you to disclose “noncompliant” assets.  For virtual currency, that is any asset that should have been reported on a federal income tax return or other required federal information return that was not previously disclosed.  Simply holding virtual currency does not require you to disclose the asset on a return.  The noncompliance comes from not reporting a taxable transaction.

The Preclearance request is not the time not to make a full and fair disclosure.  The purpose of a voluntary disclosure is to come into tax compliance and eliminate criminal exposure and reduce civil penalties, not to use technicalities to not disclose assets. The preclearance request is only the first step in a long process. Any further non-compliance bears the risk of rejection (and a possible criminal investigation) right at the start and must be avoided. Questions of whether a transaction is or is not taxable can be resolved down the road, but not at this point.

The new form also requests information on the use of mixers and tumblers, including identification of the one used and an explanation of why it was used.  Mixers and tumblers are services offering to mix crypto currency streams of different users to blur the otherwise traceable origin and thereby enhance the privacy; a service that can easily be abused to obscure the source of tainted funds. This reflects the IRS continued use of all programs to expand data collection and analysis. The IRS can use this information to identify new mixers and tumblers for potential further investigations or a potential John Doe summons by receiving information directly from former customers. The question also shines a light on the taxpayer’s transactions to identify potentially illicit funds or assets. If the taxpayer’s source of income is of an illicit nature, the taxpayer would not qualify for a voluntary disclosure.

To become compliant through the IRS voluntary disclosure program, the taxpayer is therefore well advised to seek professional assistance from someone who is both familiar with the intricacies of the voluntary disclosure practice and who understands virtual assets.

Jonathan Kalinski is a principal at Hochman Salkin Toscher Perez, P.C. and specializes in both civil and criminal tax controversies as well as sensitive tax matters including disclosures of previously undeclared interests in foreign financial accounts and assets and provides tax advice to taxpayers and their advisors throughout the world.  He handles both Federal and state tax matters involving individuals, corporations, partnerships, limited liability companies, and trusts and estates.

Mr. Kalinski has considerable experience handling complex civil tax examinations, administrative appeals, and tax collection matters.  Recently, he has focused on the taxation of cannabis and cryptocurrency.  Prior to joining the firm, he served as a trial attorney with the IRS Office of Chief Counsel litigating Tax Court cases and advising Revenue Agents and Revenue Officers on a variety of complex tax matters.  Jonathan Kalinski also previously served as an Attorney-Adviser to the Honorable Juan F. Vasquez of the United States Tax Court.

Philipp Behrendt is an Associate at Hochman Salkin Toscher Perez P.C., and a graduate of University of Southern California (USC) Gould School of Law (LL.M.) and a former associate of the leading German tax firm.  Philipp’s prior experience includes representing wealthy individuals and companies in global tax settings, cross-border investigations and audit matters, as well as handling complex voluntary disclosure issues for U.S. and other international companies, stemming from tax avoidance structures as well as crypto assets.. 

Please join us March 3-4, 2022 for the Federal Bar Association 46th Annual Tax Conference.

Examine important tax developments and emerging policy issues in nearly 20 educational sessions featuring notable speakers from the Internal Revenue Service, Treasury Department, Department of Justice, White House, and Congress.

Steven Toscher – Enforcement & Criminal | Hot Topics: IRS Enterprise Compliance Initiatives What are the IRS’s Most Significant Compliance and Enforcement Priorities and Initiatives?

This program will provide an overview of recent civil and criminal IRS Enterprise Compliance Programs. Panelists will describe their respective offices, goals, programs and initiatives, and recent highlights. The panel will introduce the newly formed IRS Office of Promoter Investigations, which is tasked with identifying new and emerging potentially abusive transactions and promoters before harming the tax system. Panelists will also discuss the more-recently formed IRS Office of Fraud Enforcement and the IRS: Criminal Investigation Global Operations Policy & Support.

Sandra Brown – Enforcement & Criminal | State of IRS Criminal Investigation What does IRS Criminal Investigation (IRS CI) Do and Who are They Investigating?

This panel, which will feature Senior IRS Criminal Investigation and Tax leaders, will provide an overview and update on IRS CI priorities and its efforts in criminal tax enforcement.  The panel will discuss the current state of the IRS CI enforcement programs, highlight new and ongoing criminal tax enforcement actions and initiatives, as well as provide insight into the role that IRS Criminal Tax Counsel and the Department of Justice’s Tax Division play in the IRS CI’s criminal tax enforcement, including prosecution recommendations and declinations.

Click Here for more information.

The Internal Revenue Service hasn’t offered specific guidance regarding whether cryptocurrency staking constitutes taxable income upon receipt, leaving those engaged in the activity, which implicates substantial sums of potential government revenue, unsure about their tax obligations.

“There are a lot of people that use Tezos,” Evan Davis of Hochman Salkin Toscher Perez PC told Law360. The IRS is “buying a big problem if they think that they can just sweep it under the rug — people who own Tezos are no doubt exchanging information about this case.”

Click Here to Read the Full Article (Subscription Required).

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