US Taxpayers Are Receiving Automated $10,000 Penalty Assessments For Late Filed Form 5471's - We Can Help!

We previously posted numerous blog posts regarding that US Taxpayers are receiving automated $10,000 Penalty Assessments for late filed Form 5471's, where we discussed that we have been receiving a lot of calls from taxpayers who have recently received penalty notices regarding late filed or non-filed Form 5471. (See also, We Can Help You Eliminate Your $25,000 Late Form 5472 Penalties for $5,000 Per Penalty!)

The Internal Revenue Service imposes an automatic penalty of $10,000 whenever an individual or company is late in filing an information return disclosing their interest in a foreign corporation, regardless of whether there is any associated underreported of income or tax deficiencies.

U.S. persons including businesses with at least a 10 percent interest in a foreign corporation or who are officers of a foreign corporation in which any U.S. person owns or acquires a 10 percent interest are required to file a Form 5471 with their tax return to disclose their ownership.

The IRS has begun to automatically applying the $10,000 penalty for each Form 5471 that was filed after the due date. 

There are basically two remaining ways to defend against these automatic assessments and request penalty abatement for filing an international information return after the due date:

1.   Follow the Delinquent Information Return Procedure - The taxpayer can file through the Service's procedures for delinquent international information returns. This procedure is appropriate for taxpayers who can establish reasonable cause for their failure to file or whose failure to file has caused no or nominal tax non-compliance. In our opinion the Delinquent Information Return Procedure is no longer available after November 9, 2020, as it currently provides: 

           Taxpayers may attach a reasonable cause statement to each delinquent information return             filed for which reasonable cause is being asserted. During processing of the delinquent             information return, penalties may be assessed without considering the attached reasonable     cause statement. (What ?????)  

    

      This is nothing like FAQ #18, in our opinion, which originally established the Delinquent Information Return Procedure. So basically this is nothing more than a delinquent filing with the Reasonable Cause Defense for the assessment of the penalty. (See #2 Reasonable Cause Defense).

      Also in our opinion you should be prepared to go to the appeals division of the IRS, to get this penalty abated, based upon reasonable cause.

2.   Reasonable Cause Defense - Under Section 6038 of the tax code, which lays out the information reporting requirements for individuals and businesses with an interest in foreign corporations and the penalties for delinquent filing, penalties may be abated if a reasonable cause exists for the failure to file. However, neither the statute nor the applicable regulations define a reasonable cause standard for the abatement. Treasury Regulations Section 301.6651-1(c) provide a definition of what constitutes reasonable cause for failure to file corporate income tax returns and says that "if the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to reasonable cause." 

3.   Ask for a First-Time Offender Abatement (FTA) - Generally, an FTA can provide penalty relief if the taxpayer has not previously been required to file a return or has no prior penalties (except the estimated tax penalty) for the preceding three years with respect to the same IRS  File (IRM §20.1.1.3.6.1). With respect to a Form 5472 late-filing penalty, the IRM provides for an FTA if an FTA was applied to the taxpayer's related Form 1120 late-filing penalty or no penalty was assessed on the related Form 1120 (IRM §21.8.2.20.2).

Statute of Limitations Issue- Though a $10,000 penalty may discourage some from filing in

international information return after the deadline, there is a greater exposure to not late filing and

information return and that is that the statute of limitations for tax returns which is generally three

years does not apply for returns that are missing the information reports and the statute remains open

indefinitely. Under the indefinite statute of limitations, not only can the IRS make adjustments to

items related to the international information returns, but they also can examine any other area on

the tax return.

Has Your Company Been Assessed an
Automatic $10,000 Penalty for a Late Form 5471?

 

 

Contact the Tax Lawyers at

Marini & Associates, P.A. 

 

 for a FREE Tax Consultation Contact US at

www.TaxAid.com or www.OVDPLaw.com

or Toll Free at 888-8TaxAid (888 882-9243)

Does Reliance on IRS FAQs Provide Reasonable Cause?

At a conference sponsored by New York University, acting IRS Chief Counsel William M. Paul addressed several concerns regarding Frequently Asked Questions (FAQs) that IRS issues. 

One issue addressed was the extent to which practitioners and taxpayers may rely on FAQs. Mr. Paul noted that IRS initiated a greater reliance on issuing FAQs after the signing into law of the Tax Cuts and Jobs Act (PL 115-97) and again regarding the relief measures in response to the COVID-19 pandemic.

Paul said that there is an IRS working group that has been considering various aspects of FAQs, including the extent to which practitioners and taxpayers may rely on them.

"IRS Is Comfortable With The View That If A Taxpayer Relies in Good Faith un an FAQ and That Reliance is Reasonable Under All The Facts and Circumstances, the Taxpayer Should Have a Reasonable Cause Defense and Should Not Be Subject To a Negligence Penalty or Other Accuracy-Related Penalty,”

Paul added. IRS won’t assert FAQs in support of its positions on audit or in litigation, he said. “The flip side of that is that if an FAQ is incorrect as applied to a particular taxpayer’s facts, then the law will control.” 

IRS hopes to soon unveil a system that will archive FAQ guidance. Users of the new system will be able to search for FAQs and see the ways in which they may have been edited by IRS. "We're going to find a way to archive them so that you can keep track — you can go find an FAQ.

Until then we advise you that if you rely on an FAQ, printed out and put it in the file because these FAQs have a habit of disappearing overnight with no notice.

Have an IRS Tax Problem?

 Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

Crypto Miners Free From Reporting Rules

According to Law360, those involved in the mining of cryptocurrencies will likely be exempt from the broker reporting requirements included in last year's infrastructure legislation, an official with the U.S. Department of the Treasury told a group of senators.

Operators in the digital asset marketplace who are not in a position to provide the Internal Revenue Service with useful information will likely be exempt from the law's broker reporting requirements in forthcoming regulations, Jonathan Davidson, assistant secretary for legislative affairs at Treasury, said in a letter to the senators dated Friday.

"Persons who are just validating transactions through a consensus mechanism are not likely to know whether a transaction is part of a sale," Davidson said in the letter, which was posted on Twitter by Sen. Rob Portman, R-Ohio. "And persons who are only selling storage devices used to hold private keys or persons who merely write software code are not carrying out broker activities."

Blockchains can employ a variety of consensus mechanisms, including both mining and staking, to verify transactions and create new tokens. The infrastructure law, which Congress passed last year with bipartisan majorities in both chambers, earmarked roughly $550 billion to rebuild the nation's infrastructure. Part of the revenue for the $1.2 trillion package is supposed to come from enhanced tax reporting of cryptocurrency transactions.

Internal Revenue Code Section 6045 requires those engaging in business activities as brokers to furnish information returns for each one of their customers. 

The Infrastructure Law Expanded The Definition of Broker to Include "Any Person Who (For Consideration) is Responsible For Regularly Providing Any Service Effectuating Transfers
of Digital Assets on Behalf of Another Person."

Some groups criticized that language for being overly broad, arguing it would rope in a wide range of operators that don't act like traditional financial brokers, such as miners and digital wallet providers. But as Davidson's letter shows, those fears were unfounded, Portman said.

"Appreciate the Treasury Department affirming that crypto miners, stakers and those who sell hardware and software for wallets are not subject to tax reporting obligations," Portman said in a tweet. "As I have said from the start, this requirement only applies to brokers."

As part of a colloquy that Portman and Sen. Mark Warner, D-Va., conducted on the Senate floor last summer, the lawmakers said those actors solely involved in cryptocurrency mining and staking won't be subject to the broker reporting requirements. The same goes for those solely engaged in providing hardware and software allowing crypto users to access their private keys, the lawmakers said.

Those statements are "consistent with the Treasury Department's view that ancillary parties who cannot get access to information that is useful to the IRS are not intended to be captured by the reporting requirements for brokers," Davidson said.

In light of the legislation, Treasury also will consider the extent to which centralized and decentralized exchanges should be treated as brokers, Davidson said.

Treasury's "interpretation can always change, which is why Congress should act," Toomey said. "There is clear, broad consensus over the definition of broker, and it's imperative Congress put this bipartisan clarification into law."

For her part, Lummis told Law360 that the letter from Treasury doesn't adequately address the senators' concerns. 

"Last week's letter shows that Treasury agrees that the definition should be narrowly applied, but the letter does not go as far as promised, especially relating to the guidance the Treasury Department agreed to last year and relating to decentralized finance," she said. 

Have a Virtual Currency Tax Problem?

Value Your Freedom?

Contact the Tax Lawyers at

Marini & Associates, P.A. 

 

 for a FREE Tax Consultation Contact us at

www.TaxAid.com or www.OVDPLaw.com

or Toll Free at 888-8TaxAid (888 882-9243). 

Justice Announces First Director of National Cryptocurrency Enforcement Team

The Justice Department announced on February 17, 2022 the selection and appointment of Eun Young Choi to serve as the first Director of the National Cryptocurrency Enforcement Team (NCET).

Ms. Choi is a seasoned prosecutor with nearly a decade of experience within the department, and most recently served as Senior Counsel to the Deputy Attorney General. She will assume her duties full-time effective today.

“With the rapid innovation of digital assets and distributed ledger technologies, we have seen a rise in their illicit use by criminals who exploit them to fuel cyberattacks and ransomware and extortion schemes; traffic in narcotics, hacking tools and illicit contraband online; commit thefts and scams; and launder the proceeds of their crimes,” said Assistant Attorney General Kenneth A. Polite Jr. of the Justice Department’s Criminal Division. 

“The NCET Will Serve As The Focal Point For The Department’s Efforts To Tackle The Growth of
Crime Involving These Technologies."

Eun Young is an accomplished leader on cyber and cryptocurrency issues, and I am pleased that she will continue her service as the NCET’s inaugural Director, spearheading the department’s efforts in this area.” 

The NCET was established to ensure the department meets the challenge posed by the criminal misuse of cryptocurrencies and digital assets, and comprises attorneys from across the department, including prosecutors with backgrounds in cryptocurrency, cybercrime, money laundering and forfeiture. 

The NCET will identify, investigate, support and pursue the department’s cases involving the criminal use of digital assets, with a particular focus on virtual currency exchanges, mixing and tumbling services, infrastructure providers, and other entities that are enabling the misuse of cryptocurrency and related technologies to commit or facilitate criminal activity. 

The NCET will set strategic priorities regarding digital asset technologies, identify areas for increased investigative and prosecutorial focus, and lead the department’s efforts to coordinate with domestic and international law enforcement partners, regulatory agencies and private industry to combat the criminal use of digital assets. 

Finally, the NCET will enhance the Criminal Division’s existing efforts to provide support and training to federal, state, local, and international law enforcement to build capacity to aggressively investigate and prosecute serious crimes involving cryptocurrency and digital assets in the United States and around the world.

The NCET’s work will be furthered through close collaboration with components across the department, including the Criminal Division’s Computer Crime and Intellectual Property Section and Money Laundering and Asset Recovery Section; the U.S. Attorneys’ offices; the National Security Division; and the FBI, including the FBI’s new Virtual Asset Exploitation Unit, a specialized team of cryptocurrency experts dedicated to providing analysis, support, and training across the FBI, as well as innovating its cryptocurrency tools to stay ahead of future threats. 

“The department has been at the forefront of investigating and prosecuting crimes involving digital currencies since their inception,” said Director Choi. “The NCET will play a pivotal role in ensuring that as the technology surrounding digital assets grows and evolves, the department in turn accelerates and expands its efforts to combat their illicit abuse by criminals of all kinds. I am excited to lead the NCET’s incredible and talented team of attorneys, and to get to work on this important priority for the department. I would like to thank Assistant Attorney General Polite and the Criminal Division’s leadership for this opportunity.”   

Prior to her service as Senior Counsel to Deputy Attorney General Lisa O. Monaco, Director Choi began her career at the department as an Assistant U.S. Attorney for the Southern District of New York, where she served as the office’s Cybercrime Coordinator and investigated and prosecuted cyber, complex fraud and money laundering crimes, with a particular focus on network intrusions, digital currency, the dark web and national security investigations. 

She served as lead prosecutor in a variety of cases, including the investigation of a transnational organization responsible for the hacking of J.P. Morgan Chase and a dozen other financial companies; the operation of Coin.mx, an unlicensed virtual currency exchange; and the only U.S. prosecution brought in connection with the “Panama Papers.” 

In addition, she successfully argued the appeal before the Second Circuit in the case against Ross Ulbricht, the founder and chief administrator of the Silk Road, the first darknet marketplace. 

Earlier in her career, she served as a law clerk to the Honorable Naomi Reice Buchwald of the U.S. District Court for the Southern District of New York, and the Honorable Reena Raggi of the U.S. Court of Appeals for the Second Circuit. She is a graduate of Harvard College and Harvard Law School. 

 Have a Virtual Currency Tax Problem?

Value Your Freedom?

Contact the Tax Lawyers at

Marini & Associates, P.A. 

 

 for a FREE Tax Consultation Contact us at

www.TaxAid.com or www.OVDPLaw.com

or Toll Free at 888-8TaxAid (888 882-9243). 

11th Cir Remands Willful FBAR Penalty Case Back To IRS To Correctly Calculate Based On Balances on June 30th

On November 9, 2022 we originally posted West Palm Beach Man Must Repatriate $18.2M To Satisfy FBAR Penalty Assessment, where we discuss that a federal magistrate judge correctly decided that Isac Schwarzbaum must repatriate funds in his overseas accounts to satisfy the judgment for his failure to timely file his reports of foreign bank and financial accounts with the IRS, U.S. District Judge Beth Bloom said in an order Monday. Now on appeal, the Eleventh Circuit has conclude that the district court should have remanded the matter back to the IRS to determine the appropriate penalty amount.

Taxpayers who fail to disclose overseas accounts with more than $10,000 face penalties under the Bank Secrecy Act. For willful violations the IRS can impose a penalty of up to the greater of $100,000 or 50% of the balance in each undisclosed account at the time of the violation.

The case of United States v Schwarzbaum, involves a wealthy German-born naturalized U.S. citizen who starting in the early 2000’s had multiple bank accounts in Costa Rica and Switzerland. Schwarzbaum self-filed an FBAR in 2007 and listed only one account. He did not file any FBAR in 2008, and in 2009 he filed an FBAR that only listed three accounts. IRS assessed over $12 million in penalties, and brought suit to collect.

On appeal, Schwarzbaum argued, among other things, that the IRS’s actions in calculating the penalties were “not in accordance with the law” under 5 U.S.C. § 706(2)(A). In typical tax penalty cases, courts can take a fresh look at both the propriety of imposing the penalty and the amount of the penalty, assuming that they conclude that the penalty is warranted in the first instance. Title 31 FBAR penalties differ. The APA shines a light on agency conduct, and reviewing courts are generally empowered to examine whether the agency acted rationally and provided a reasoned contemporaneous explanation based on the record at the time of the original agency action.

Here the IRS assessed over $12 million in willful FBAR penalties on Schwarzbaum based upon the Internal Revenue Manual “formula that determines the maximum willful penalty that it will assess at 50% of the highest amount in the accounts in all willful years. The IRM then allocates that penalty in equal portions over the willful years.”

The problem with that IRM is that the statute itself sets the maximum penalty to each account’s balance as of the date that the taxpayer failed to file the FBAR, (formally June 30 and now April 15) a date that IRM formula neglects and one that the IRS did not use in calculating Schwarzbaum’s penalty.

The Eleventh Circuit held that the IRS errored in its calculations of Schwarzbaum’s FBAR penalties as it started with the wrong numbers. The statutory maximum penalty for a willful FBAR violation is the greater of $100,000 or 50% of the account’s June 30 balance. See 31 U.S.C. § 5321(a)(5)(C)(i), (D)(ii); 31 C.F.R. § 1010.306(c).

The IRS’s Errored In It Calculations Of Schwarzbaum’s FBAR Penalty By Using 50% Of The Highest Amount In The Accounts During The Year. 

This led the Eleventh Circuit to conclude that the district court should have remanded the matter back to the IRS to determine the appropriate penalty amount. In vacating the district court’s judgment, the Eleventh Circuit instructed the district court to remand the matter back to the IRS to recalculate the penalties.

This is consistent with our post on May 20, 2020, IRS Loses 2 FBAR Penalty Calculation Cases, where we discussed that n Margaret J. Jones v. U.S and in U.S. v. Isac Schwarzbaum the courts both held that the penalty assessed by the government did not conform to statutory requirements because they did not use utilizing 50% of the balance in each account at the time of the violation, which was the deadline to file the FBAR or June 30 of each year.

Have an FBAR Penalty Problem?  

 

 

 Contact the Tax Lawyers at 

Marini& Associates, P.A. 

 

 

for a FREE Tax Consultation at: 

www.TaxAid.com or www.OVDPLaw.com 
or Toll Free at 888-8TaxAid (888) 882-9243

 

IRS Provides Further Details On Relief For Certain Partnerships Preparing K-2 and K-3 And K-3 For 2021

WASHINGTON -  The IRS today provided further details on additional transition relief for certain domestic partnerships and S corporations preparing the new schedules K-2 and K-3 to further ease the change to these new schedules. Those eligible for the relief will not have to file the new schedules for tax year 2021.

The new schedules K-2 and K-3 improve reporting by standardizing international tax information to partners and flow-through investors, making it easier for them to report these items on their tax returns. In addition, the changes ease flow-through return preparation compliance by clarifying obligations and standardizing the format for reporting. 

Notice 2021-39 provides penalty relief for good-faith efforts to adopt the new schedules. Today’s transition relief, appearing in new frequently asked questions (FAQs) on Schedules K-2 and K-3, allows an additional exception for tax year 2021 filing requirements by certain domestic partnerships and S corporations.

The IRS is providing an additional exception for tax year 2021 to filing the Schedules K-2 and K-3 for certain domestic partnerships and S corporations. To qualify for this exception, the following must be met:

• In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates or foreign trusts. 
• In tax year 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated or may reasonably expected to generate foreign source income (see section 1.861-9(g)(3)).
• In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders nor did the partners or shareholders request the information regarding (on the form or attachments thereto):
• Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
• Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, section 250, section 864(c)(8), section 721(c) partnerships, and section 7874) (line 17d for Form 1120-S).
• The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.

If A Partnership or S Corporation Qualifies For This Exception, The Domestic Partnership or S Corporation Does Not Need
To File Schedules K-2 And K-3 With The IRS
or With Its Partners or Shareholders.

However, if the partnership or S corporation is subsequently notified by a partner or shareholder that all or part of the information contained on Schedule K-3 is needed to complete their tax return, then the partnership or S corporation must provide the information to the partner or shareholder. 

If a partner or shareholder notifies the partnership or S corporation before the partnership or S corporation files its return, the conditions for the exception are not met and the partnership or S corporation must provide the Schedule K-3 to the partner or shareholder and file the Schedules K-2 and K-3 with the IRS.

The IRS welcomes additional comments on Schedules K-2 and K-3. This feedback and inquiries can be sent to lbi.passthrough.international.form.changes@irs.gov

Have an IRS Tax Problem?

 Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)