News

An Increase in Cryptocurrency Enforcement?

As the value of cryptocurrencies continues to soar, it seems likely that compliance efforts on the part of the IRS will really begin to ramp up in 2021. In the past few years, the IRS has issued John Doe summonses to ascertain the identity of people that hold Cryptocurrencies. The John Doe summonses to Coinbase in 2018 was one of the most well known but there have been others. IRC § 7609 grants the IRS the authority to issue summonses and subpart (f) of that code section contains certain additional requirements namely that: the summons relates to the investigation of a particular person or ascertainable group or class of persons, there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and the information sought to be obtained from the examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources. IRC § 7609(f); see also IRM 25.5.7 (containing IRS procedures for the issuance of John Doe summonses). These summonses are…

Deductibility of Expenses and the Paycheck Protection Program (PPP)

After intense negotiations, it looks like Congress is going to give businesses the ability to deduct expenses that were paid with the paycheck protection program loan. After nearly a year of handwringing on the part of many business owners and many more accountants and attorneys, it looks like we may all be able to breathe a collective sigh of relief. For those that may have missed a bit of the background, initially Congress stated that it intended for businesses that paid for expenses with PPP loan money to deduct those expenses for tax purposes. However, Congress did not codify this intended benefit. As a result, the Treasury took the intuitive position that if a business receives a PPP loan, receives—or reasonably expects to receive—forgiveness for that loan, then it cannot also claim a deduction for the expenses related to this loan. Rev. Rul. 2020-27. The IRS’s position is intended to deny a double benefit for businesses and prevent what was considered an unintended windfall. Today, Congress will likely pass the second round of stimulus and will show Treasury that it intended this windfall by including a provision that makes the double benefit law. This is good news for many businesses…

Expanding the Foreign Earned Income Exclusion (IRC Sec. 911)

US citizens that are working and living abroad may qualify for the IRC § 911 earned income exclusion. This provision allows eligible individuals to exclude income (up to $107,600 for 2020) from taxation in the US. This does not mean that those individuals are exempt from worldwide taxation, but rather that Congress has allowed US citizens living abroad to exclude some income and housing related expenses. The prevailing wisdom is that the that Congress wanted an administratively simple way for its citizens living abroad and paying taxes abroad to avoid double taxation without having to claim the more time intensive foreign tax credit under IRC § 901. For years there have been issues between the IRS and contractors, specifically those working in military areas, whether or not they qualify for the requirements of IRC § 911. In particular, the dispute centered on whether those US citizens maintained a tax home abroad. A person can be forgiven for missing the reference to tax home in IRC § 911 since it is nestled in the definition section: “The term ‘qualified individual’ means an individual whose tax home is in a foreign country and” who meets the bona fide residence test or the 330-day test.…

Freedom of Information Act Requests and Tax Controversy

Have you thought about making a Freedom of Information Act (FOIA) request in the context of tax controversy? Many professionals do not think about FOIA requests in this context, but this may be one of the most underrated tools in our arsenal. FOIA requests can help determine if—and when—a penalty was approved by the immediate supervisor. This is becoming more and more important in the post-Graev era. With the Tax Court routinely providing nuance to the IRC § 6751(b) rule regarding penalty approval by the immediate supervisor, it is crucial for a taxpayer’s attorney to see exactly when and how the penalty was approved. In the correspondence exam context, it may be important to see if a taxpayer responded to the IRS 30-day letter. It could be that a taxpayer was responsive, but that the IRS failed to get immediate supervisory approval for the penalty in a CEAS case. Something that would help your client when challenging the validity of the penalty. In other cases, a practitioner may see IRS making a penalty determination early in the examination but not getting the required IRC § 6751(b) approval until after the IRS sent the taxpayer official communications containing the application of the penalty.…

Entity Classification and the Check-the-box Rules

Entity classification is not the most exciting topic and as such it is often overlooked by professionals and laypersons alike. However, understanding the entity classification rules can mean the difference between getting the treatment you want and ending up in the proverbial ditch. Domestic Entity Classification: In the domestic context, the issue is usually whether an entity is a partnership or a disregarded entity. A partnership with two or more members is treated as a passthrough entity under Subchapter K. (Under state law a partnership is required to have two or more members). Much like a partnership, an LLC with two or more members is also treated as a passthrough. However, a single member LLC is a disregarded entity. Treas. Reg. § 301.7701-3(b)(1). In addition, a partnership or an LLC owned by husband and wife may either be a passthrough entity or a disregarded entity. The classification will usually depend upon whether the entity is formed in a community property state. In a community property state, it is important to review Rev. Proc. 2002-69 to understand the correct treatment and, if necessary, make the required election. Finally, an eligible entity may want to elect to be treated as a corporation, or…

Biden’s Tax Plan May be Dead on Arrival

Joe Biden, the president-elect, has been eyeing a tax plan that would increase taxes on those with income over $400,000. Biden has stated that he wants to end the carried interest “loophole,” the capital gains preference, and the increased estate and gift tax limits. At this moment, any chance of repealing portions of the Tax Cut and Jobs Act would require that the Democrats win at least 50 seats in the Senate—Vice President Harris would act as the tie-breaker in the Senate. (Democrats could use the same Budget Reconciliation procedures to pass changes to Title 26 that Republicans used in 2017 to pass the Tax Cuts and Jobs Act). At the present, it looks like Democrats are unlikely to win more than one senate seat in Georgia—and even that single seat looks like a long shot—which means that Biden’s proposed changes may not be happening in the near future. But here are a few things to be on the look out for if Democrats manage to win both senate seats in Georgia. First, Biden is likely to raise the top marginal rate back to 39.6%. Second, Biden may remove the capital gains preference for individuals earning more than $1,000,000 per…

Passthrough Taxation

When people discuss passthrough taxation they are either talking about a partnership or an S-corporation. Both function in a similar fashion, income “flows” through the entity and it is taxed at the individual level rather than at the entity level. However, there are some key differences to consider. What is an S-corporation? An S-corporation is an entity that has elected treatment under Subchapter S of Title 26. An election is made by timely filing the Form 2553 with the IRS. An eligible entity must: Be a domestic corporation, Have only allowable shareholders (individuals, certain trusts, and estates and not partnerships, corporations, or non-resident alien shareholders), Have no more than 100 shareholders, Have only one class of stock, and Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations). The first requirement, “be a corporation,” can mean one of two things. Either the entity can be organized as corporation for state law purposes. Or, the entity can be an LLC or a partnership that has elected to be treated as a corporation for federal income tax purposes. In either of those cases, the entity would be a corporation for purposes of an S-election and could…

Foreign financial institutions must report US accounts.

International exchange of offshore financial account information and tax records between governments has become the norm when it comes to international taxation. The United States initiated the trend of exchange of information by implemented the Foreign Account Tax Compliance Act (the “FATCA”) then, the OECD followed by introducing the Common Reporting Standard (CRS) for Automatic Exchange of Information (AEOI) in 2014. The main purpose of these programs is to combat tax evasion and improve financial transparency. FATCA was enacted on March 18, 2010, under the Hiring Incentives to Restore Employment (the “HIRE”) Act. It was a response to a series of scandals. The most famous is the 2009 Swiss banking scandal which concluded UBS agreeing to pay $780 million in penalties to the U.S. government.1  (The whistleblower a UBS private banker, received prison time, but received $104 million from the U.S. government for his role in exposing the scandal. FATCA requires most foreign financial institutions (FFIs) to register with the Internal Revenue Service (IRS) to obtain a Global Intermediary Identification Number (GIIN). Some FFIs are exempt from both registration and reporting requirements; for example, governmental entities, non-profit organizations, and small/local FFIs. Other FFIs are required to register, but they may be able…

OECD Action 13: Country-by-Country Reporting – is it working as intended?

The OECD initiative on base erosion and profit shifting (BEPS) is an ambitious effort to inhibit multinational corporations from avoiding taxes. One of the most important components of the initiative is OECD Action 13, which mandates country-by-country reporting by multinationals of important financial information about their subsidiaries in the countries in which they operate. The parent company is required to collect information like: The number of employees working in each country Where the subsidiary has its “permanent establishment” Revenues Profit before tax Tax paid Amount of capital is employed Value of tangible assets The information is then sent to the tax jurisdiction in which the parent company is headquartered. The intent was to have a record of the amount of tax paid by multinationals, because it was widely assumed the effective tax they were paying was lower than the statutory requirements. The thinking was that companies would not want to be seen as being tax avoiders and would change their behavior to pay taxes closer to what was required. This reporting requirement was initially met with trepidation, if not alarm. Country-by-country reporting (CbCR) has been substantially in place for two years now. Has it had the effect that was intended…

IRS Reminds Taxpayers with Tax Debt over $52,000 to Resolve Their Debt to Avoid Revocation of U.S. Passports

In the Issue IR-2019-141, the IRS indicated that they are required to notify the State Department on taxpayers with more than $52,000 in tax debt which could lead to denial or revocation of the taxpayer’s passport. Under the Fixing America’s Surface Transportation (FAST) Act, the IRS notifies the State Department of taxpayers with seriously delinquent tax debt. Any amount above $52,000 is treated as seriously delinquent tax debt. The FAST Act authorized the State Department to reject such taxpayer’s passport application or renewal application. The law can limit a taxpayer’s ability to travel outside the United States by revoking the passport. A taxpayer should receive the Notice CP508C when the IRS certifies or notifies a taxpayer to the State Department. There are different paths to resolve tax issues. The taxpayer can enter various programs that can bring relief for unpaid taxes. These options can reverse the adverse actions taken by the State Department which could hinder the taxpayer’s ability to travel or conduct business around the world. ABOUT THEVOZ ATTORNEYS, PLLC The THEVOZ Attorneys, PLLC is an international law firm that advises on domestic and international tax matters. The law firm has offices in the United States and Europe. As…

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