On Tax Day, Report Offshore Accounts Too

April 17 this year is tax filing day, but it is also the due date for FBARs to report foreign accounts. The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a reminder of the due date for filing FinCEN Form 114, Report of Foreign Bank and Financial Accounts(FBAR), to report foreign financial accounts held in 2017. For over a decade, the IRS has made a major push for Americans to report their offshore income and assets. It can sometimes feel like the IRS does not want to you have anything anywhere that is not 100% American.

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Actually, you are free to have it, but you had better report it. Much of the hullabaloo about offshore assets started when the IRS went after Swiss banking. Americans are required to report their worldwide income. There have been many criminal cases, and a vastly larger number of civil ones about this issue. Large numbers of taxpayers in the last decade have stepped forward in one of several IRS disclosure programs.

After getting bruised in court battles with the IRS, in 2009, UBS paid $780 million to settle charges that it helped wealthy Americans evade taxes. Other Swiss banks followed suit. The episode triggered thousands of voluntary disclosures to the IRS, and changed bank secrecy forever. Eventually, the Swiss Parliament passed a measure enabling banks to hand over client identities to American authorities without violating Swiss bank-secrecy laws. Then, in 2010, the U.S. passed FATCA, the Foreign Account Tax Compliance Act.

Most people are surprised to learn that FBARs—also now called FinCEN Form 114, Report of Foreign Bank and Financial Accounts, have existed since 1970. They are filed with FinCEN, the Financial Crimes Enforcement Network, part of the Treasury Department. That itself is a little scary. FinCEN regulations say you must file if you have a financial interest in, or signature authority over, foreign financial accounts with a total value exceeding $10,000 during the previous calendar year. The due date this year is April 17, but if you extend your tax return due date, your extension extends your FBAR due date too.

In the meantime, don’t forget about FATCA, which spans the globe with a network of reporting that is unparalleled in the world. America is requiring foreign banks and governments to hand over secret bank data about depositors. Non-U.S. banks and financial institutions around the world must reveal American account details or risk big penalties. Offshore banks that do not hand over Americans are withholding at 30% on most transactions. Non-compliant institutions are frozen out of U.S. markets, so there is little choice but to comply. FATCA cuts off companies from access to critical U.S. financial markets if they fail to pass along American data. More than 100 nations have agreed to the law. Countries must agree to the law or face dire repercussions.

For years, the IRS has been warning offshore account holders to disclose before it’s too late. Then just this year, the IRS announced that it would end the Offshore Voluntary Disclosure Program on September 28, 2018. Those who are still exposed might want to give it a second look. After all, under FATCA, banks everywhere want to know if you are compliant with the IRS. The IRS’s long-running Offshore Voluntary Disclosure Program (OVDP remains the safest program, with amnesty even for willful acts. But for those with the right facts, the IRS Streamlined program is simpler and less costly. 

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Claiming Bitcoin 1031 Exchanges On Your 2017 Taxes

You might think the biggest tax debate about bitcoin and other crypto is whether you should report it, or whether the IRS will catch people who don’t. Actually, there’s no longer much debate about these topics. Everyone seems to know that you should report, and that the IRS is after those who do not. The IRS is tracking with software, and the IRS Summons of Coinbase is already bearing fruit with account files for the IRS. In fact, the biggest crypto tax debate still seems to be about 1031, the tax code provision that allows some like-kind exchanges. Everyone knows that 1031 currently only applies to exchanges of real estate. The Trump tax law passed right around Christmas 2017 means that for 2018, you can forget arguing that swaps of one crypto for another are tax free. But there is debate about the past. 

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If you are about to file your tax return, should you claim 1031 treatment for 2017 crypto transactions? If you are cleaning up past tax reporting before the IRS finds you, you might have the same issue for 2016 or even 2015. Claiming 1031 treatment for crypto trades for the past turns out to be a nuanced subject. Until the Trump tax bill killed it, depending on how aggressive you were, and how you could orchestrate it, you could try swapping one digital currency for another. A 1031 or like-kind exchange is a swap of one business or investment asset for another, but most swaps are taxable. Section 1031 is an exception to the rule that swaps are fully taxable. If you qualify, your tax basis stays the same, so your investment continues to grow tax-deferred. If you qualify, there is no limit on how many times or how frequently you can do a 1031.

Real estate investors do this all the time. Despite a profit on each swap, they avoid tax until they sell for cash years later, paying only one tax, ideally as a long-term capital gain. Whether 1031 (before 2018) applied to cryptocurrency is debatable. Some exchanges of personal property (say a painting or a private plane) have qualified. But exchanges of corporate stock or partnership interests never did. Classically, an exchange involves a simple swap of one property for another between two people. But the majority of exchanges are not simultaneous, but are delayed or “Starker” exchanges (named for the tax case that allowed them). In a delayed exchange, you need a middleman who holds the cash after you “sell” your property and uses it to “buy” the replacement property.

The intermediary must meet a number of requirements. That’s one reason delayed exchanges of cryptocurrency may not qualify. There are also two timing rules you must observe in a delayed exchange. Once the sale of your property occurs, the intermediary will receive the cash. Then, within 45 days of the sale of your property, you must designate replacement property in writing to the intermediary, specifying the property you want to acquire. The second timing rule in a delayed exchange relates to closing. You must close on the new property within 180 days of the sale of the old. These two time periods run concurrently. You start counting when the sale of your property closes.

Many holders of cryptocurrency probably can say they are holding their cryptocurrency for investment. The tougher hurdle is whether they swapped for property of like-kind. Section 1031 does not apply to trades of stocks or bonds, and the IRS could rely on this rule to disqualify any cross-species trade of cryptocurrency. However, different types of cryptocurrency are arguably like different types of gold coins. If a swap of one type of gold coin for another qualifies, why not swaps of cryptocurrency? The IRS may argue that swapping Ripple for Bitcoin is really more like swapping silver for gold, or vice versa. Silver for gold would be taxable, so the IRS may say that a swap of cryptocurrency should be taxable too.

Some of this may turns on the size of your gains, and how much of a chance are you willing to take. But one big issue is the mechanics of tax reporting. You need to claim Section 1031 treatment to say you met the rules. It might seem tempting not to report swaps of cryptocurrency at all. But for those trying to use 1031, failing to report is a mistake, in my view. If you want to see what to report, check out IRS Form 8824.

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As Tax Day Looms, 6 Month Extension Has Big Benefits

Tax returns are usually due April 15, but this year you’ll get an extra two days, until April 17th. Those extra few extra days might help, but they may not matter to many. Instead of rushing to file your taxes, you can go on an automatic six-month extension. You need to pay what you owe even if you go on extension. The extension is to file your return, not to pay. Some people fine tune their payment, while others do only a rough estimate. Just remember that if you owe more when you later file your return, you’ll have to settle up then. But even though you have to pay now, there can be good reasons to take the extension.

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If you do succumb to the allure of an extra six months, it is wroth considering whether you increase your odds of audit or decrease them. Few deadlines are more dreaded than the annual rush to April 15th (well, 17th this year). You may not want to delay it. You may even feel guilty if you take advantage of an automatic six-month reprieve. There’s no shame in an extension, and millions are processed every year. Everyone can get six extra months by filing (electronically or by mail) a tiny form that doesn’t even require a signature.

Here are some reasons to consider an extension. Going on extension encourages reflection. Use the time to gather records, consider reporting alternatives, and get professional advice. Remember, tax returns are filed under penalties of perjury. File accurately so you don’t have to amend later. Amended returns often come about because people rush. Although there are times you may want or need to amend, use amended returns sparingly. Amended returns are much more likely to be scrutinized. File once correctly, so you don’t have to do it again.

The extension is automatic. The IRS doesn’t have to approve the extension, and there is no discretion involved. You just get the extra six months, period. Extensions used to be four months, with two additional months only if you had a good reason. Now, automatic extensions are six months. Again, the extension is to file, not to pay. Make your payment and use the time to make your return accurate and complete.

Going on extension also allows for corrected Forms 1099 and K-1. You may be waiting for Forms K-1, gathering documents or seeking professional advice. If there are debatable points on your return, such as whether a litigation recovery is ordinary or capital, get some professional advice. But even if you have all your forms and are ready, what if you receive a K-1 or 1099 after you file? The earlier you file, the greater the risk you will receive corrections. Going on extension makes it less likely that you will be surprised by a tardy corrected K-1 or 1099. You may as well file once and file correctly.

Some people say that going on extension increases audit risk, while some people say the opposite. But there is no hard evidence to support either theory. Still, it is worth saying this again: there is no increased audit risk to going on extension. And given all the advantages of an extension, one can argue that an extension may help reduce audits.

All taxpayers worry about IRS audit risk. Opinions vary, and there are many theories about what triggers an audit. However, it is unlikely that going on extension increases IRS audit riskThe IRS releases data about audit rates based on income levels and types of tax returns. They do not release data about whether going on extension increases or decreases your chances. So, go on extension if you need the time. To extend, you can submit a Form 4868, ask your return preparer, use commercial software, or do it yourself electronically. For more guidance, IRS tax topic 304 explains extensions of time to file your tax return.

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Dear IRS, I Don’t Actually Own That Bitcoin

It’s tax time, and crypto gains can be painful, especially if you lost money after a taxable event but still have to pay the higher taxes. Taxes are an annual job, and the IRS says that bitcoin and other cryptocurrency is property for federal tax purposes. Just about any transfer can trigger taxes. Currently, a crypto for crypto exchange cannot qualify as a tax-free 1031 exchange. Transfers are treated as sales for tax purposes, even when you are buying something with your bitcoin. The fact that crypto is property might prompt you to consider the concept of ownership. Wouldn’t it be nice if some looming tax problem turned out not to be yours, but instead, someone else’s?

Ethereum, Bitcoin and Ripple coins (physical). (Photo by Ulrich Baumgarten via Getty Images)

If you are holding crypto for someone else, is it really yours, or does it belong to the person on whose behalf you are holding it? Put another way, if there are taxes to pay, and you are holding the crypto for the benefit of someone else, who has to pay the taxes? You might think the answer would be 100% clear, but it may not be. First, start with the proposition that federal income tax liability is generally allocated based on ownership under local law. See Lipsitz v. Commissioner, 220 F.2d 871, 873 (4th Cir. 1955).

The issues can be intensely factual. Who has to pay can turn on who has control over and benefits and burdens of the property. The same thing can happen with bank accounts. There may be one nominal owner, but the money might effectively be held in trust for someone else. Who has to pay tax on the interest may not be so clear. Local law ownership and beneficial ownership are not always the same. The IRS can try to tax the beneficial owner of an account, regardless of that person’s rights to the funds under prevailing local law.

The IRS and the courts often look beyond local law to impose taxes on the party who is the beneficial owner. In Chu v. Commissioner, T.C. Memo. 1996-549, a man was subject to income tax as the beneficial owner of a bank account, even though he was not the owner of the account under local law. Conversely, if you are just holding something as an agent, you shouldn’t be taxed. As one tax case put it, if someone “holds legal title to property as an agent, then for tax purposes the principal and not the [agent] is the owner.” See Montgomery v. Commissioner, T.C. Memo. 1989-295 (citing Commissioner v. Bollinger, 485 U.S. 340 (1988)).

A nominal owner is not the owner for federal income tax purposes. In general, income should be taxed to the principal, even if the agent is a joint signatory. In Bollinger, 485 U.S. at 349, the Supreme Court said that “the law attributes tax consequences of property held by a genuine agent to the principal”. The Court enunciated a three-part agency safe harbor. Under it, you won’t be treated as the owner for tax purposes if:

  • A written agency agreement is entered into with the agent contemporaneously with the acquisition of the asset;
  • The agent functions exclusively as an agent with respect to the asset at all times; and
  • The agent is held out as merely an agent in all dealings with third-parties relating to the asset.

What if you don’t meet all three conditions? The Tax Court has said that these Bollinger factors are non-exclusive. See Advance Homes, Inc. v. Commissioner, T.C. Memo. 1990-302. Even an oral agency agreement might suffice, although if you’re in a tax fight, you surely want to have it in writing. Assuming a true agency, the agent should not face taxes on income over which he has no control and no beneficial right. The Tax Court has defined beneficial ownership as the “freedom to dispose of the accounts’ funds at will.” See Chu, T.C. Memo. 1996-549. Courts may weigh factors including: (1) which party enjoys the economic benefit of the property; (2) which party has possession and control; and (3) the intent of the parties.

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Skipped FATCA Disclosures Can Be Criminal

Mess with FATCA, and you might face criminal charges. That is one lesson from a five-count superseding indictment charging Panayiotis Kyriacou, Arvinsingh Canaye, Adrian Baron, and Linda Bullock with conspiracies to defraud the United States by obstructing the functions of the IRS in its administration of the Foreign Account Tax Compliance Act (“FATCA”). FATCA requires foreign financial institutions to identify U.S. customers and report information about their financial accounts. FATCA’s primary aim is to prevent U.S. taxpayers from using foreign accounts to facilitate the commission of federal tax offenses. A grand jury had already charged Kyriacou, Canaye, Baron, Bullock with conspiracy to commit securities fraud and money laundering conspiracy, and the superseding indictment adds tax charges.

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“As alleged in the superseding indictment, Kyriacou, Canaye, Baron, and Bullock agreed to defraud the United States by opening foreign bank and brokerage accounts without collecting FATCA information to report to the IRS,” stated United States Attorney Donoghue. “The charges announced today reflect the commitment of this Office and our law enforcement partners to combat tax evasion by identifying fraudulent offshore safe havens that facilitate hiding financial assets from the IRS and to prosecute those individuals who violate U.S. tax laws.” 

“The Justice Department and the Internal Revenue Service are committed to investigating and prosecuting those who promote and facilitate the use of offshore bank accounts to evade U.S. tax,” said Principal Deputy Assistant Attorney General Zuckerman. “We will continue to pursue those around the globe who seek to violate the Foreign Account Tax Compliance Act and to help U.S. taxpayers conceal such accounts from the Treasury Department and the IRS.”

For Americans, transparency has become a necessity. The IRS requires worldwide reporting and disclosure, and the consequences of noncompliance can be dire. The resources of the U.S. government on these points are vast. FATCA—the Foreign Account Tax Compliance Act—requires foreign banks to reveal American accounts holding over $50,000. With a treasure trove of data, the IRS now has the ability to check. In many ways, a cover-up today can be far worse than the crime. And the IRS and Justice Department take FATCA seriously.

As alleged in the superseding indictment, between August 2016 and February 2018, Kyriacou, an investment manager at Beaufort Securities, and Canaye, a general manager at Beaufort Management, together with others, conspired to defraud the United States by failing to comply with FATCA. In the fall of 2016, an Undercover Agent contacted Kyriacou and stated that he was a U.S. citizen interested in opening brokerage accounts at Beaufort Securities from which he could execute trades in several multi-million dollar stock manipulation deals. In furtherance of the stock manipulation scheme, Kyriacou and Beaufort Securities opened six brokerages accounts for the Undercover Agent. Even though a U.S. citizen would be the beneficial owner of each account, at no time did Kyriacou or Beaufort Securities request FATCA Information from the Undercover Agent. 

In July 2017, Kyriacou introduced the Undercover Agent to Canaye and advised that Canaye could assist with the Undercover Agent’s schemes. After meeting with the Undercover Agent and discussing the stock manipulation scheme, in January 2018, Canaye and Beaufort Management opened six global business corporations for the Undercover Agent. The Undercover Agent’s name did not appear on any of the account opening documents.         

In June 2017, the Undercover Agent met with Baron, Loyal Bank’s Chief Business Officer. During the meeting, the Undercover Agent explained that he was a U.S. citizen and was involved in stock manipulation schemes. The Undercover Agent further explained that he was interested in opening multiple corporate bank accounts at Loyal Bank. In July 2017, the Undercover Agent met with Baron and Bullock, Loyal Bank’s Chief Executive Officer. During the meeting, the Undercover Agent described how his stock manipulation deals operated, including the need to circumvent the IRS’s reporting requirements under FATCA. In July and August 2017, Loyal Bank opened multiple bank accounts for the Undercover Agent. At no time did Loyal Bank request or collect FATCA Information from the Undercover Agent. 

The charges in the superseding indictment are merely allegations. The defendants are presumed innocent unless and until proven guilty. However, these charges may be chilling to others seeking to sidestep FATCA’s web of reporting.

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Despite DMX Tax Evasion Guilty Plea, Feds Want 5 Years Prison

DMX, the recording artist, performer, and actor whose real name is Earl Simmons, was charged last year with 14 counts of federal income tax evasion involving $1.7 million in alleged tax liabilities. The list of charges was very long, potentially entitling prosecutors to seek a whopping 44 years in prison. Facing that kind of potential punishment, and with the kind of evidence it appeared the government had, in December, DMX wisely pleaded guilty to just one count. That meant a maximum of 5 years. His sentencing is set for March 29, 2018. The one-count deal was surely a savvy one, and the potential five-year prison term could end up being much less. But now, the feds want it all.

FILE – In this Sept. 23, 2009 photo, DMX arrives at the 2009 VH1 Hip Hop Honors at the Brooklyn Academy of Music in New York. (AP Photo/Peter Kramer, file)

The Manhattan U.S. Attorney’s Office has asked Judge Jed Rakoff to sentence DMX from 57 months to the maximum prison term of five years. Prosecutors have called for the sentence “to send the message to this defendant and others that star power does not entitle someone to a free pass, and individuals cannot shirk the duty to pay their fair share of taxes.” Prosecutors point to what they call an “extensive” criminal history, including 29 convictions over the past three decades. Prosecutors even said that DMX had been “on a one-man crime spree for the past 30 years.” If you want a sense of the list of charges, read the U.S. v. Earl Simmons Indictment

Beginning in 1997, Simmons released a series of hip-hop albums that sold in the millions. Many of his albums went platinum, and occupied top positions on musical charts. He performed at venues across the United States and around the world, and has acted in motion pictures. The 14 count indictment included: one count of corruptly endeavoring to obstruct and impede the due administration of Internal Revenue Laws, one count of evasion of payment of income taxes, six counts of evasion of assessment of income tax liability, and six counts of failure to file a U.S. individual income tax return.

Guilty pleas are common in tax cases, in part because the government usually has plenty of evidence before they charge a tax crime. As is typical in cases of high profile defendants, prosecutors made much of DMX’s financial success and public acclaim. His alleged actions were hard to explain without using the word “willful.” The Indictment claims that for years, he made millions. Part of tax cases is about intent or willfulness, and prosecutors claimed that he did not just have sloppy records or was forgetful about handling taxes. Prosecutors alleged that DMX went out of his way to evade taxes. They claim he avoided personal bank accounts, set up accounts in other people’s names, and paid personal expenses in cash. 

The indictment alleges that Simmons’ earnings from musical recordings and performances from 2002 through 2005 meant that he owed federal income tax liabilities of approximately $1.7 million. Those early liabilities went unpaid. Then, in 2005, the IRS began efforts to collect on these unpaid tax liabilities. That’s when Simmons’ alleged conduct went from bad to worse. Plus, from 2010 through 2015, Simmons earned over $2.3 million. Even so, prosecutors say he did not file tax returns for those years. Instead, he orchestrated a scheme to evade payment of his outstanding tax liabilities. He maintained a cash lifestyle, and avoided using personal bank accounts.

He even used the bank accounts of nominees, including business managers to pay personal expenses. He received hundreds of thousands of dollars of royalty income from his music recordings, but managed to skate on taxes, prosecutors claim. Simmons would get his manages to accept the royalties, and then give Simmons cash. Simmons was also on the “Celebrity Couples Therapy” TV show in 2011 and 2012, for which he was paid $125,000. Prosecutors cite that TV show as a telling example. When taxes were withheld from Simmons’ check for the first installment of that fee by the producer, Simmons refused to tape the remainder of the show until the check was reissued without withholding taxes.

DMX may well get much less than the five years prosecutors want. And whatever happens at his sentencing, he is doubtless better off with a one count guilty plea than he would have been trying to fight all fourteen counts of the indictment–and risking up to 44 years.

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IRS Warns Not To Inflate Your Tax Deductions

Some people search high and low for tax deductions. But making them up–or artificially enhancing the ones you have–isn’t exactly keeping to the straight and narrow. Indeed, the IRS this year has specifically cautioned people about what it calls padding deductions. The IRS warns to avoid the temptation to falsely inflate deductions or expenses. In fact, the IRS includes the issue on its 2018 Dirty Dozen list of tax scams. In the IRS’s words, the majority of taxpayers file honest and accurate tax returns each year.

However, as the IRS puts it, each year some people “fudge” their information. Falsely claiming deductions, expenses or credits on tax returns is serious, regardless of their type. The IRS notes that it happens with overstating deductions such as charitable contributions, padding business expenses, or including tax credits to which you are not entitled. Two big ones to watch? The Earned Income Tax Credit and the Child Tax Credit.

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The IRS is also putting the public on notice that IRS automated systems are increasingly efficient, and they generate most IRS audits. The IRS can normally audit returns filed within the last three years. But not only three years are at risk. The IRS can add additional years for big errors or fraud. If being audited is not bad enough, the IRS warns about the penalties or worse. Significant penalties may apply for taxpayers who file incorrect returns including:

  • 20% of the disallowed amount for filing an erroneous claim for a refund or credit.
  • $5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.” A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.
  • In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75% of the amount owed if the underpayment on the return resulted from tax fraud.

If these costs are not scary enough, the IRS also reminds taxpayers that they could even be subject to criminal prosecution. The range of potential offenses includes:

  • Tax evasion;
  • Willful failure to file a return, supply information, or pay any tax due;
  • Fraud and false statements;
  • Preparing and filing a fraudulent return; or
  • Identity theft.

Criminal prosecution could lead to additional penalties and even prison time. But what is willful conduct? Innocent, even stupid mistakes can be forgiven. Intentional wrongdoing, no. Since taxes are complex, you might assume that just about anything can be called an innocent mistake. However, you can be attributed knowledge.

Willfulness involves a voluntary, intentional violation of a known legal duty. In taxes, it applies for civil and criminal violations. This definition causes many people to think they are home free. If you didn’t know, how can you be prosecuted? It’s not that simple. You may not have meant any harm, but that may not be enough. Many people think that even civil penalties cannot be imposed if you weren’t actually trying to cheat anyone.

Unfortunately, willfulness can be shown by your knowledge of reporting requirements and your conscious choice not to comply. “Gee, I didn’t know,” can get you off the hook in a variety of circumstances. Sometimes it can even work with the IRS. But it is hardly a Get Out of Jail Free card. Everyone has heard that ignorance of the law is no excuse. Even if it can explain one failure, repeated failures to comply can morph conduct from inadvertent neglect into reckless or deliberate disregard. Even willful blindness–a conscious effort to avoid learning about reporting requirements–may be enough. 

With most tax mistakes, the question is just whether you pay penalties on top of taxes and interest when they catch your mistake. The size of penalties varies but often, 25% is at stake. Civil fraud is 75%, but it is not often asserted. Criminal violations are asserted even less frequently. Still, most criminal tax cases start with civil audits. Even a smidgen of fraud or intentional misstatements can be serious enough to be potentially criminal. The burden can be placed on you to prove you are right or that your mistakes were innocent.

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