IRS Commissioner Defends Higher Staffing to House Committee

According to Law360, the IRS needs the additional funding promised in August under the Democrats' Inflation Reduction Act to hire more accountants, data scientists and economists to examine the nearly 400,000 tax filings made each year by wealthy individuals, partnerships and corporations, IRS Commissioner Daniel Werfel told a House committee Thursday.

The Internal Revenue Service currently has only about 2,600 employees with the specialized skills to audit these complex returns, and they can't keep up with the work of processing the approximately 390,000 such returns filed annually, Werfel said in testimony before the House Ways and Means Committee.

"When we have multiple sources of income, like large partnerships, corporations, billionaires and multimillionaires, it takes up to 15 times longer for the IRS to assess and then audit those returns," Werfel told the committee. 

"It Takes About Five Hours, On Average,
To Audit A Middle- And Low-Income Taxpayer
When Those Audits Do Occur.

 

It Takes 250 Hours, Or More, To Audit
A Wealthy Or More Complex Return."

Werfel's remarks came a day after the House of Representatives voted 217-215, mostly along party lines, to pass the Limit, Save, Grow Act, or H.R. 2811. The bill would tie an increase to the limit on the federal government's borrowing authority to a clawback of the increased IRS funding for enforcement and operations support, along with a repeal of most of the Inflation Reduction Act's climate and clean energy tax credits.

Earlier this month, Werfel released the agency's plan to spend the increased enforcement funding on hiring the personnel needed to carry out enforcement work, including attorneys, accountants and data scientists. The IRS is receiving $45.6 billion for enforcement as part of the nearly $80 billion funding increase over a decade provided by the new law.

The Spending Plan Calls For Hiring And Onboarding 

The First Groups Of Compliance Specialists To Focus 

On High-Income Individuals And Large Corporations 

And Partnerships In The 2023 Fiscal Year.

Under the plan, the agency would start using new compliance tactics for the wealthy and large corporations in the 2025 fiscal year.

Werfel echoed the statements made by Treasury Secretary Janet Yellen when she testified before the committee in March, saying that IRS enforcement resources will not be used to raise audit rates for households making less than $400,000 annually relative to historical levels. 

He Noted That Audit Rates Of Wealthy Corporations Have Dropped From As High As 30% In 2010 To About 5% Currently, Which Encourages These Taxpayers To Take Risks When Filing Their Returns Because They Don't Fear Getting Audited.

"But if we have the right amount of resources, and if we are effective in looking at these complex returns, then we can rebalance that and they'll take less risk, and that will be beneficial to the U.S. government," Werfel said.

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Is It Time To Request Refunds For Form 5471, 5472, 8938, and 3520 Late Filing Penalties?

On April 3, 2023, Judge Paige Marvel of the U.S. Tax Court issued its opinion in Fahy v. Commissioner, 160 T.C. No. 6 (2023) where he held that the IRS was without the authority to assess the Form 5471 imposed by Internal Revenue Code Section 6038(b). The Farhy case involved the penalties for failure to timely file Forms 5471 (“Information Return of U.S. Persons With Respect to Certain Foreign Corporations”). 

The IRS was correct on the substance of the applicable law (i.e., that the taxpayer owed the penalties in question). 

The Only Issue Before The Tax Court Was Whether
The IRS Had Followed Proper Procedure In Attempting
To Assess And Collect Those Penalties By Levy.

The IRS maintained, as it has for several years, that it has statutory authority to systematically levy penalties for failure to file some international information returns without

1. Having to pursue civil litigation to collect the penalties or 
2. providing deficiency procedures that otherwise allows taxpayers, before making a payment, to contest the penalties before the Tax Court. 

Judge Marvel Disagreed And Prevented The IRS From Proceeding With The Collection Of The Penalties By Levy Because They Were Not “Assessable Penalties” Under The Code.

While this taxpayer victory may appear to be a panacea for anyone who has ever paid a penalty for the late filing (or failure to file) of a Form 5471, it may represent a real opportunity for taxpayers whose claims for a “reasonable cause” exception to the penalty for failing to timely file international information returns were summarily rejected by the IRS. 

Although the opinion doesn’t explicitly address penalties for Forms 5472 or 8938, those penalties are both imposed under the authority of Internal Revenue Code Section 6038(b). Therefore, the IRS will have similar problems with assessing penalties for those forms. 

The penalties for failure to file Form 3520 with respect to gifts from foreign persons are not imposed under Internal Revenue Code Section 6038(b). However, the Tax Court’s logic in deciding that Form 5471 penalties cannot be assessed applies equally with respect to the penalties for not filing 3520.

The implications of the Farhy case are uncertain but could be far-reaching, it is potentially applicable to numerous other penalties for failure to file international information returns that the IRS has systematically assessed following the same procedures it followed in Farhy. 

The associated issues that need to be considered are:    

1. The complete list of information returns for which the IRS may have improperly assessed penalties in the past;
2. The running of the statute of limitations with respect to penalty refund claims;
3. Whether the IRS is legally obligated to refund any improperly assessed and collected penalties upon receipt of a properly filed refund claim; 
4. The proper procedure for claiming a refund for penalties that were improperly assessed and collected in the past;
5. The likelihood that the IRS would prevail on appeal of the Tax Court’s decision in Farhy; 
6. Whether the IRS will proceed with civil litigation to recover the penalties; and
7. What happens if IRS heads to Congress to get Congress to overrule the Tax Court decision. 

• Given the partisan nature of taxes it is anyone’s guess if a bill of this nature would pass any time soon. 
• If Congress changes the statute will the change, be retroactive? 

There are many unknows, but this may be a good time to file previously unfiled Forms 5471, 5472, 8938, and 3520 and demanded be a good time to request a refund for any failure to file (or late filing) penalty associated with Forms 5471, 5472, 8938, and 3520.

If the Tax Court’s decision is upheld and not reversed by Congress, the chances of the IRS suing for penalties maybe remote in most cases. If the Tax Court’s decision is later reversed filing the Forms now may start the statute of limitations running.

Want To Request Refunds For Form 5471, 5472,
8938, & 3520 Late Filing Penalties?

     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)

Should I Stay or Should I Go? - Expatriation Right For You?

 On January 27, 2023, we posted Should I Stay or Should I Go? - Expatriations Are Up In 4th Quarter of 2022 , where we discussed that the number of people losing or renouncing their U.S. citizenship rose back to over 1,000 in the period of October through December, from 748 in the third quarter, the IRS said in a list of those choosing to expatriate. 

Now the number of people expatriated from the U.S. fell by about half during the first quarter of 2023 compared with the previous quarter, the Internal Revenue Service said in a notice released dated April 18, 2023.

The Number Of People Losing Or Renouncing Their U.S. Citizenship Dropped to 536 For 1st Qtr of 2023.

From > 1,000 In The Previous Quarter of 2022, The IRS
Said In A List Of Those Choosing To Expatriate.

The number of people losing or renouncing their U.S. citizenship dropped to 536 in the period of January through March, from more than 1,000 in the fourth quarter of last year, the IRS said in a list of those choosing to expatriate. The list includes those losing U.S. citizenship under Internal Revenue Code Section 877(a) and Section 877A , the notice said.

It also includes long-term residents who are treated as losing citizenship under IRC Section 877(e)(2), the agency said. The number of people losing or renouncing their U.S. citizenship rose back to over 1,000 in the period of October through December, from 748 in the third quarter, the IRS said in a list of those choosing to expatriate. 

The list includes those losing U.S. citizenship under Internal Revenue Code Section 877(a)  and Section 877A .

It also includes long-term residents who are treated as losing citizenship under IRC Section 877(e)(2), the agency said.

According to CNBC the top reason why Americans abroad want to dump their U.S. citizenship include:

• Nearly 1 in 4 American expatriates say they are “seriously considering” or “planning” to ditch their U.S. citizenship, a survey from Greenback Expat Tax Services finds.  
• About 9 million U.S. citizens are living abroad, the U.S. Department of State estimates.
• More than 4 in 10 who would renounce citizenship say it’s due to the burden of filing U.S. taxes, the Greenback poll shows.

Should I Stay or Should I Go?

Need Advise on Expatriation?

 

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

IRS To Open Criminal Cyber Data Center To Crack Down On Highly Technical And Cryptocurrency-Related Crimes

According to Law360, The IRS Criminal Investigation division is close to unveiling a centralized hub that will provide additional resources to bolster the agency's efforts to crack down on highly technical and cryptocurrency-related crimes, division chief Jim Lee said on April 17, 2023.

The Advanced Collaboration and Data Center, or ACDC, will bring together expertise from data scientists, cybercrime special agents, and computer scientists and analysts, as well as experts from other federal agencies, Lee said at a tax conference at University of California, Irvine School of Law.

"Think about a center where we're equipped with the most up-to-date tools, training and resources to tackle the most notable cyber challenges that investigators around the country see daily," Lee said, noting that he hopes to open the ACDC in the "next couple of months."

The ACDC Is A Critical and Ongoing Investment To Stay In Front f The Rapidly Growing Arena of Cyber-related Crimes,

 Including The Tax Evasion And Money-Laundering Activities Involved In Cryptocurrency Transactions, Lee Said.

The Criminal Investigation division and other law enforcement agencies have to "invest appropriately in this fast-changing environment," he said.

Lee gave the example of agents encountering digital evidence found in an operating system in a laptop or smartphone. If the agents do not have the tools, training or resources to understand the evidence, they will be able to go to the ACDC to receive assistance from a team of investigators, analysts and other experts, he said. The center will have tools that can access obsolete, broken or encrypted devices, Lee said, noting that it will provide a wide range of support.

In the past few years, the Criminal Investigation division has pursued more digital asset investigations, with half of cases involving attempts to circumvent U.S. tax laws. 

The Division Has Seized Cryptocurrency Assets Valued At Approximately $7.1 Billion And Has Forfeited Approximately $1.1 Billion In Ill-Gotten Proceeds, According To The Division's Annual Report Released In November.

The ACDC will add to the Criminal Investigation division's work to bolster its cryptocurrency expertise. In 2021, the division created the Office of Cyber and Forensic Services to bring its digital asset and cybercrime specialists under one roof. The office also supports agencywide investigations into the illicit use of digital assets to exploit the U.S. tax and financial system, according to the report.

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). 

 

 

 

IRS Smelled Something Fishy and Charged 7 Fishermen with Tax Evasion and Failing to File Returns

According to the DoJ, a federal grand juries in Providence, Rhode Island, and Boston returned separate indictments charging seven commercial fishermen with tax evasion and failing to file returns.

According to the indictments, the commercial fishermen each worked for fishing companies operating primarily out of New Bedford, Massachusetts, or Point Judith, Rhode Island, and received substantial compensation. 

The companies allegedly paid the fishermen as independent contractors and documented that income by, among other things, filing Forms 1099 with the IRS that reported the funds paid to the fishermen. 

It is alleged that notwithstanding the receipt of this income, each fisherman did not file individual tax returns or pay all the taxes owed on that income, for some defendants, they allegedly failed to file and/or pay taxes for a decade or more. 

To conceal the source and disposition of their income, the fishermen allegedly cashed paychecks and then used the cash to fund their lifestyles. One of the defendants allegedly also used the name and Social Security number of another individual to conduct business as a further effort to hide income. In some instances, the fishermen allegedly filed false tax returns for certain years by either not reporting their fishing income or by reporting false business expense deductions to reduce the amount of taxes they owed. 

Each Allegedly Evaded Tax On Between
$900,000 and $1.9 Million In Income.

The seven fishermen indicted are:

Jorge Cazarin of New Bedford, Massachusetts, was charged with five counts of tax evasion and five counts of willful failure to file tax returns for 2016 through 2020.

Christopher Garraty of Newport and East Greenwich, Rhode Island, was charged with three counts of tax evasion and three counts of willful failure to file for 2016 through 2018, and a fourth count of tax evasion related to taxes he allegedly owed for 2007 through 2011.

Wojciech Kaminski of West Warwick, Rhode Island, was charged with five counts of tax evasion for 2014 and 2016 through 2019 and four counts of willful failure to file tax returns for 2016 through 2019.

Brian Kobus of Durham, Connecticut, was charged with five counts of tax evasion for 2017 through 2021.

Rodolfo Membreno of Fall River, Massachusetts, was charged with six counts of tax evasion for 2012 and 2017 through 2021 and four counts of willful failure to file tax returns for 2017 through 2019 and 2021.

John Doe of New Bedford, Massachusetts, was charged with six counts of tax evasion for 2016 through 2021 and three counts of willful failure to file tax returns for 2016 through 2018.

Miguel Cruz Rubio of New Bedford, Massachusetts, and Elizabethtown, North Carolina, was charged with four counts of tax evasion for 2016 through 2019.

If convicted, each defendant faces a maximum sentence of five (5) years in prison for each evasion count and one (1) year in prison for each failure to file a tax return charge. 

A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.

  Have an IRS Tax Problem?

Like Your Freedom?

 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)

Some Nonresidents with U.S. Assets Must File Estate Tax Returns

Deceased nonresidents who were not American citizens are subject to U.S. estate taxation with respect to their U.S.-situated assets.

U.S.-situated assets include American real estate, tangible personal property, and securities of U.S. companies. A nonresident’s stock holdings in American companies are subject to estate taxation even though the nonresident held the certificates abroad or registered the certificates in the name of a nominee.

Exceptions: Assets that are exempt from U.S. estate tax include securities that generate portfolio interest, bank accounts not used in connection with a trade or business in the U.S., and insurance proceeds.

Having worked for the Internal Revenue Service for 32 years as a senior attorney in international estate tax, and having subsequently prepared several hundred nonresident alien estate tax returns (form 706NA) for aliens who died owning property in the US with a value in excess of $60,000, I am aware that many attorneys/accountants who prepare tax returns in this somewhat limited area (perhaps 1,200 to 1,500 filings per year) are not familiar with a number of tax savings devices which are not intuitively obvious. 

The most obvious device for reducing tax, is a tax treaty or convention between the United States and the country from which the decedent originated or was domiciled. Estate tax treaties between the U.S. and other countries often provide more favorable tax treatment to nonresidents by limiting the type of asset considered situated in the U.S. and subject to U.S. estate taxation. Executors for nonresident estates should consult such treaties where applicable.

However, this will not cover most countries since there are approximately 193 countries in the world and the treaties encompass about 20 of these countries. The bulk of the countries covered by treaty are in Europe, England, and Canada. The treaties themselves are very poorly written and difficult to understand so I would recommend that when you do use such a treaty, you also look at the interpretation of the treaty created by the Treasury Department so that mere humans can understand the incomprehensible.

Beyond treaties, there were a number of devices which exist, the purpose of which is to reduce the federal estate tax. The most prevalent of these is offered in section 2106, IRC, where one is invited to, by verifying the value of the gross estate outside the United States, take apportioned deductions for debts and expenses incurred worldwide by the decedent or his estate. Very critical to remember is the fact that the IRS must believe your depiction of the non-US assets and their fair market value. Many people come to me and said that they want to use a zero figure for the gross estate outside the United States and that the IRS will have to live with it. Wrong! If the IRS has even a scintilla of suspicion about the purported foreign assets or their value, the IRS will simply disallow all the debts and expenses.   

At that point, if you wish to continue to pursue the deductibility of the debts and expenses, you are required to prove both the expenses themselves and the fair market value of the assets which means, words that you don't like to hear, an IRS audit!  It is much easier to try to verify the value of the foreign assets as part of your due diligence and avoid a confrontation with an estate tax attorney. 

Community property is an area with rich rewards for the tax preparer; it is also very poorly understood. If the decedent lived in a country in which the presumption of marriage is community property of assets, all assets (except gifts and inheritances) obtained by the wedded couple become community property. When one of them dies, irrespective of title, one half of the assets are excluded from the estate since they are legally the property of the other person. Generally the IRS is somewhat skeptical about this claim so if I have an estate from which I wish to exclude a portion based on community property, I generally get an opinion of law from counsel in the country where the marriage occurred. 

The marital deduction-since the 1990s, the IRS is not allowed a marital deduction for property passing to a nonresident alien spouse. The criteria for this was that in virtually every instance, the nonresident alien would receive the assets, tax free, and leave the US, paying no tax on assets which had been sitused in the United States. Ergo, no more marital deduction. To try to soften this blow, Congress, in section 2056A, created the qualified domestic trust. The qualified domestic trust basically allows assets passing through a special trust to a nonresident alien spouse to qualify for a marital deferral. Each time the spouse removes assets from the trust, he/she, is required to file a form 706QDT. 

Executors for nonresidents must file an estate tax return, Form 706NA, United States Estate (and Generation-Skipping) Tax Return, Estate of a nonresident not a citizen of the United States, if the fair market value at death of the decedent's U.S.-situated assets exceeds $60,000. 

However, if the decedent made substantial lifetime gifts of U.S. property, and used the applicable $13,000 “unified credit exemption” amount to eliminate or reduce any gift tax on the lifetime gifts, a U.S. estate tax return may still be required even if the value of the decedent’s U.S. situated assets is less than $60,000 at the date of death (due to the decrease in the “unified credit exemption” for the lifetime gifts). See Unified Credit (Applicable Credit Amount) Section in Publication 559, Survivors, Executors, and Administrators, and the Form 706NA Instructions for more information.

Have a US Estate Tax Problem?

 

Estate Tax Problems Require

an Experienced Estate Tax Attorney

Contact the Tax Lawyers at

Marini & Associates, P.A.

 for a FREE Tax Consultation Contact US at

www.TaxAid.com 

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

Robert S. Blumenfeld  - 

 Estate Tax Counsel

Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.