Cryptocurrency Tax Compliance
Despite the name, cryptocurrencies are not “currencies” at all for tax purposes. The IRS treats virtual currency as property (i.e., assets). General tax principles applicable to property transactions apply to purchase and sale of virtual currencies.
As an asset, the taxable income from the sale of a cryptocurrency unit is determined by subtracting the sales price minus the basis.
If purchased, the basis is the cost at with the units were purchased. If received as payment for goods or services, the basis is the fair market value of the virtual currency in U.S. dollars as of the date of receipt.
If mined, then when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.
District Court says FBAR Civil Penalties Capped at $100,000
A recent decision in an FBAR case (U.S. v. Colliot) in the Western District of Texas might be huge win for taxpayers who have been incorrectly assessed FBAR civil penalties under 31 U.S. Code 5321(a)(5)(C).
In December 2016, the Internal Revenue Service (IRS) initiated a lawsuit to reduce to judgment outstanding civil penalties assessed against Colliot….The penalties were assessed for Colliot’s repeated and willful failures to timely file Form TD F 90-22.1, entitled “Report of Foreign Bank and Financial Accounts” and commonly referred to as an “FBAR,” from 2007 to 2010…For 2007, the IRS assessed penalties of $548,773 for four separate FBAR violations.
Defendant filed a motion for summary judgment arguing that while 31 U.S. Code 5321(a)(5)(C) provides a maximum penalty of the greater of (i) $100,000 or (ii) 50% of the undisclosed foreign accounts, the related regulation, 31 C.F.R. § 103.57 sets a lower ceiling. That regulation allows the assessment of a maximum penalty of the greater of (i) the balance in the account (not to exceed $100,000) or (ii) $25,000. Read more
Foreign earned income exclusion audits
The IRS has been increasingly auditing taxpayers who’ve claimed the foreign earned income exclusion (FEIE). It was identified as a compliance campaign by IRS LB&I last year (link).
It’s easy to see why the IRS would audit this issue. A qualifying individual may exclude up to $104,100 (for 2018) of foreign earned income from U.S. taxation, plus a housing exclusion. In a typical 3 year audit, an adjustment favorable to the IRS could lead to additional taxes (plus penalties and interest) on more than $300,000 of incorrectly-excluded income.
Sometimes FEIE is claimed along with foreign tax credits (although scaled down). Likely the taxpayers with the highest audit potential are those that rotated in foreign countries with no income tax since there would be no foreign tax credits to claim in lieu of the FEIE. Most notably are contractors working in Middle Eastern countries such as Saudi Arabia and UAE. Short-term rotators generally do not qualify for the FEIE – although a series of 1 year rotations may qualify (see Linde v. CIR, T.C. Memo 2017-180).
What to do after the Offshore Voluntary Disclosure Program ends?
Earlier this year the IRS announced that it would be ending the offshore voluntary disclosure program on September 28, 2018. There are signs that the the program could be replaced by a new program. After the announcement, the IRS requested comments from the public for its federal register on the following topics pertaining to the OVDP (link):
- whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility;
- the accuracy of the agency’s estimate of the burden of the collection of information;
- ways to enhance the quality, utility, and clarity of the information to be collected;
- ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and
- estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.
SCOTUS Denies Cert in FBAR Excessive Penalty Case
The U.S. Supreme Court on Monday declined to review a Ninth Circuit decision imposing a $1.1 million FBAR penalty on a taxpayer. The Internal Revenue Service assessed the penalty after finding the taxpayer failed to report assets exceeding $1 million in a Swiss bank account.
The taxpayer argued the amount of the assessment violated the Eighth Amendment protection against excessive fines and said the IRS improperly obtained nontax information, such as the existence of the foreign account, through the Swiss-U.S. tax treaty.
Below are details from the appellate history in United States v. Bussell.
IRS: Offshore tax cheating remains on ‘Dirty Dozen’ list of tax scams
The IRS released their yearly Dirty Dozen tax scams for 2018. Offshore tax cheating remains on its list this year, despite the large number of taxpayers who have voluntarily come forward since the offshore voluntary disclosure program was implemented. Here’s are some figures from the IRS’ offshore compliance efforts:
- There have been more than 56,400 disclosures and the IRS has collected more than $11.1 billion from the Offshore Voluntary Disclosure Program (OVDP) since it opened in 2009.
- In addition, another 65,000 taxpayers have made use of separate streamlined procedures to correct prior non-willful omissions and meet their federal tax obligations.
- The IRS conducted thousands of offshore-related civil audits that resulted in the payment of tens of millions of dollars in unpaid taxes. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.
Source: IR-2018-62, March 19, 2018.
IRS to End Offshore Voluntary Disclosure Program
The IRS announced recently that it is ending the OVDP program which has been in existence since 2009. Here are more details from the announcement.
WASHINGTON – The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.
“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”
IRC 6038 Penalties in Dewees v. United States
Dewees v. United States, 16-cv-01579 (D.C. 2017) is a difficult case. The IRS appears to have been unusually tough on this taxpayer.
Dewees is a U.S. citizen living in Canada, where he operates a consulting business. Because the business is incorporated abroad, Dewees was required to furnish certain annual information about the company to the IRS. Unfortunately for Dewees, he neglected to do so for over a decade.
U.S. citizens who hold controlling interests in foreign corporations must annually file IRS Form 5471, which discloses certain ownership and financial information about the corporation. In addition, U.S. citizens living abroad must disclose holdings in foreign bank accounts over certain thresholds by filing a Report of Foreign Bank and Financial Accounts (“FBAR”).
Form 8938 & Statute of Limitations
IRC § 6038D, enacted on Mar. 18, 2010, and effective for taxable years beginning after the date of enactment, imposes reporting requirements with respect to certain “specified foreign financial assets”. The requirements are satisfied by an accurately filed Form 8938.
Form 8938, Statement of Foreign Financial Assets, is required to be filed by specified individuals who are beneficial owners of specified foreign assets in excess of the filing threshold.
IRS statute of limitations are time periods established by law to review, analyze, and resolve taxpayer and/or IRS tax-related issues. The Internal Revenue Code requires the IRS to assess, refund, credit, and collect taxes within specified limits. Once the applicable statute of limitations has expired, the IRS cannot assess additional tax, allow a claim for refund, or take collections action.
The general statute of limitations on assessment of taxes on a tax return is three years under IRC § 6501(a). There are at least two exceptions unique to offshore compliance cases:
- IRC § 6501(e)(1)(A)(ii) Where income attributed to a specified foreign financial asset is omitted and in excess of $5,000, the statute may be extended to 6 years with respect to the omitted income from the specified asset.
- IRC§ 6501(c)(8)(A) Where Form 8938 or any other international information return is required to be filed with a tax return, the statute is extended for any tax imposed under Title 26 with respect to any tax return, event, or period to which such information relates for three years after the information is provided (e.g., filing an accurate and complete form). Read more
CFCs, Tax Deferral, and Subpart F Income
While a U.S. corporation is subject to tax on its earnings and then its shareholders on their dividends, the U.S. has no taxing jurisdiction on a foreign corporation that neither receives U.S.-source income nor has income effectively connected with the conduct of a U.S. trade or business. However, any dividends earned by U.S. shareholders from foreign corporations are taxable. Without anti-deferral rules in place, U.S. individuals could make investments through foreign entities and indefinitely defer taxation in the U.S. by not issuing dividends. In addition to PFIC rules, Subpart F provisions are powerful anti-deferral mechanisms to prevent this deferral of foreign earned income. Subpart F rules, discussed below, apply to CFCs.