TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

An unnamed law firm that focuses on international tax law asked the U.S. Supreme Court to review a Ninth Circuit ruling holding that the firm must comply with a subpoena for attorney-client communications about tax advice for an unnamed, criminally-charged client, according to a petition for certiorari unsealed Monday.

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We are pleased to announce that Dennis Perez, Michel Stein and Robert Horwitz will be speaking at the upcoming Strafford webinar, “Federal and State Tax Residency Issues: Navigating IRS Examination Guidance, State Regulations, Remote Workers” on Thursday, May 12, 2022, 10:00 a.m. – 11:30 a.m. (PST).

This CLE/CPE webinar will provide tax professionals guidance on key federal and state tax residency rules and planning considerations for taxpayers. The panel will discuss the importance of both citizenship and residence in determining tax liabilities of individuals, challenges for remote workers, the applicability of income tax treaties, allocating income between jurisdictions, dual-residency issues, principal items targeted by regulatory authorities, and other key items.

Advising taxpayers on issues relating to residency has become even more cumbersome with increased IRS examinations focused on taxpayer residency and the application of U.S. income tax treaties. Tax professionals must navigate various federal and state tax residency rules, IRS examination guidance, and state regulations in the post-COVID-19 world to implement effective tax planning strategies for taxpayers.

Federal tax residency rules applicable to individuals or businesses are relatively straightforward but can be burdensome to evaluate depending on the facts and circumstances. Tax treaties seek to eliminate or reduce double income taxation, and benefits are available to nonresident aliens and U.S. citizens living abroad under some conditions. Due to the critical nature of residency for tax purposes, taxpayers must understand residency rules and applicable tax treaties that will determine if they are subject to taxation, the necessary forms to file, and if they qualify for any exemptions.

Also, state regulatory challenges to taxpayer residency and overcoming them is an obstacle faced by many individuals with dual-residency between states or by companies operating in multiple jurisdictions. State residency determination is based on more than declarations or physical presence in the state, and the burden of proof falls on the taxpayer in such cases. This fact is typically learned the hard way by taxpayers, resulting in the endangering of assets and being subject to tax liability that could have been limited or avoided with careful planning.

Listen as our panel discusses key components of federal and state residency rules, determining tax liabilities of individuals and businesses, challenges for remote workers, the applicability of income tax treaties, allocating income between jurisdictions, dual-residency issues, and principal items targeted by regulatory authorities.

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 pleased to announce that Dennis Perez, Sandra Brown and Evan Davis will be speaking at the upcoming CalCPA webinar, “Research and Development Tax Credits: IRS Scrutiny of Qualified Research Activity and Related Expenses” on Tuesday, May 10, 2022, 9:00 a.m. – 10:00 a.m. (PST).

Research and development (R&D) is the lifeblood of a growing and prosperous economy, and many businesses perform some type of research and development. IRC §41 creates incentives for increased R&D activities in the form of tax credits for companies involved in qualified research activities. Businesses that consider R&D tax credits soon learn, however, that the potential benefits may come at a price. This program’s learning objectives include understanding how to navigate IRC §41’s abundant and changing requirements and challenges as well as the Internal Revenue Service’s increased focus on potential abuses of the R&D tax credit. Taxpayers and their tax advisors need to be prepared even when they are merely taking advantage of a tax benefit to which they are entitled. More easily identify key strategies to minimize exposure from IRS examinations of R&D credits.

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We are pleased to announce that Steven Toscher, Michel Stein and Evan Davis will be speaking at the upcoming Strafford webinar, “Cryptocurrency Tax Compliance: Tax Filing Requirements, Managing IRS Examinations” on Wednesday, May 4, 2022, 10:00 a.m. – 11:30 a.m. (PST).

This CLE/CPE course will provide tax counsel, accountants, and other advisers with a critical first look at recent 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 prompted 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.

I am very pleased to announce and ask you to Save the Date for this years ABA National Institute on Criminal Tax Fraud & Tax Controversy to be held December 12-14, 2022 at Caesar’s Palace in Las Vegas, Nevada. I am honored again to be serving as Co-Chair with Kathryn Keneally. We look forward to the best programs in the nation on civil and criminal tax controversy and litigation and well—Las Vegas. 

The National Institute on Criminal Tax Fraud and the National Institute on Tax Controversy, combined together in one event, comprises the yearly gathering of the criminal tax controversy and criminal tax defense bar. The program brings together high-level government representatives, judges, corporate counsel, and private practitioners engaged in all aspects of tax controversy, tax litigation, and criminal tax prosecutions and defense. 

Stay tuned.  Click Here for more information.

Please join Evan Davis and Jonathan Kalinski on April 28-29, 2022 for the UCLA/CEB 44th Annual Estate Planning Institute.

The Estate Planning Institute covers issues of significant importance to the estate planning specialist, the attorney who handles a moderate number of estate planning cases, professional fiduciaries, and tax professionals. Topics are led by nationally recognized experts and assumes considerable experience in estate planning.

Evan Davis – Attorney-Client Privilege After In re

Grand Jury (9th Cir. 2022)

Evan Davis will discuss the status of the attorney-client privilege in light of the case In re Grand Jury (2021) 13 F.4th 710 (2021 U.S. App. Lexis 27420) which affirmed the lower court’s application of the “primary purpose test”, as opposed to “because of” test in deciding whether the attorney-client privilege applied to certain dual-purpose communications in response to grand jury subpoenas requesting documents and communications regarding a criminal investigation.

Jonathan Kalinski – Estate Planning for Difficult Assets (Firearms, Cannabis, Crytocurrency, and NTFs.)

Our panel of speakers will discuss methods and difficulties in planning for transfer of difficult assets following death, such as firearms, Crypto Currency and Non-fungible Tokens and Cannabis assets.

Click Here for more information.

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