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Glen E. Frost

Attorney at Law *
Certified Public Accountant **
Certified Financial Planner®
Master of Laws in Taxation
Every Tax Problem has a Solution

10480 Little Patuxent Pkwy, Ste. 400
Columbia, MD 21044
Phone:  (410) 497-5947
Fax:      (888) 235-8405

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Permalink 02:04:31 pm, by dmerritts Email , 624 words   English (US) latin1
Categories: News

District Court Maintains $100,000 Regulatory Cap for Willful FBAR Violations

By: Eli Noff, Partner & Mary Lundstedt

On May 16, 2018, in United States v. Colliot,[1] the District Court for the Western District of Texas held that the Internal Revenue Service (IRS) is precluded from assessing a willful Report of Foreign Bank and Financial Accounts (FBAR) penalty exceeding the $100,000 limit provided in Federal Regulation (Reg.) §1010.820. The decision is a victory for taxpayers—forcing the government to either appeal the decision or promulgate new regulations.

In December of 2016, the IRS sued to collect willful FBAR penalties assessed against Mr. Colliot. The assessed penalties were for tax years 2007-2010. The amounts for two of these years were each well over $100,000. The IRS argued that the penalties were authorized under Internal Revenue Code (IRC) §5321(a)(5) and Reg. §1010.820(g)(2). Mr. Colliot moved for summary judgement, arguing that the IRS violated the very regulation it was citing.

The government’s discretionary authority for imposing civil monetary penalties for FBAR violations is found in IRC §5321(a)(5). Originally, this section limited the maximum amount of such penalty to the greater of the account balance (not to exceed $100,000) or $25,000. The corresponding regulation issued thereafter and promulgated via proper notice-and-comment rulemaking, mimicked this language—maintaining the $100,000 cap.[2] As late as 2002, after the Financial Crimes Enforcement Network (FinCEN) obtained authority to assess this penalty, the IRS reiterated that existing regulations were effective "until superseded or revised."[3]

In 2004, Congress amended the statute in order to increase the penalty amount up to the greater of $100,000 or 50% of the account balance. However, the pertinent regulation was not revised; rather, in 2010, the IRS re-numbered the regulation as Reg. §1010.820, maintaining the language capping the penalty at $100,000.[4]

This history of the regulation at issue was central to the court’s decision. The court’s analysis emphasized how the regulation "continued to indicate the maximum civil penalty for willful failure to file an FBAR" as capped at $100,000. The court summed up its decision by stating:

In sum, §1010.820 is a valid regulation, promulgated via notice-and-comment rulemaking, which caps penalties for willful FBAR violations at $100,000.31 C.F.R. § 1010.820. Rules issued via notice-and-comment rulemaking must be repealed via notice-and-comment rulemaking. See Perez v. Mortgage Bankers Ass'n, 135 S. Ct. 1199, 1206 (2015) (requiring agencies to "use to the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance"). Section 1010.820 has not been so repealed and therefore remained good law when the FBAR penalties in question were assessed against Colliot. Consequently, the IRS acted arbitrarily and capriciously when it failed to apply the regulation to cap the penalties assessed against Colliot. 5 U.S.C. § 706(2) (requiring agency action to be "in accordance with law"); see also Richardson v. Joslin, 501 F.3d 415, (5th Cir. 2007) ("[A]n agency must abide by its own regulations.") (citing United States ex rel. Accardi v. Shaughnessy, 347 U.S. 260(1954)).

One should note that the court did not address the issue of the appropriate relief here. The court stated that "neither party has briefed the Court on what relief might be appropriately afforded Colliot in these circumstances." In other words, the court did not decide whether the IRS’s violation of the regulation means that the entire penalty was invalid, or if the IRS may still collect the amount up to the cap.

Again, although we await the government’s response to this decision (ie appeal the decision, or issue new regulations), this has the potential to greatly benefit taxpayers—particularly those who did not enter the Offshore Voluntary Disclosure Program. Taxpayers currently facing the statutory language allowing for 50% of the account balance—potentially exceeding $100,000—may have the means to challenge the IRS.

If you have questions regarding FBAR rules and violations, please contact Frost & Associates, LLC today.

[1] W.D. Texas No. AU-16-CA-01281-SS.

[2] Reg. §103.57

[3] Treasury Order 180-01, 67 Fed. Reg. 64697 (2002).

[4] This regulation was even further amended more recently in 2016—still preserving this cap


Permalink 04:46:01 pm, by dmerritts Email , 1465 words   English (US) latin1
Categories: News

Notice CC-2018-005: How Chief Counsel Attorneys Handle Passport Actions

By: Mary Lundstedt, Esq.

On April 5, 2018, the Chief Counsel's Office provided advice in Notice CC-2018-005 to Chief Counsel attorneys who handle I.R.C. §7345 passport actions. The Chief Counsel's Office detailed both the certification and reversal processes for "seriously delinquent taxpayers," as well as the procedures for the judicial review of certifications. Lastly, the Notice indicates that since this is a new area of litigation, with questions still unanswered, these cases are ultimately to be coordinated with Procedure & Administration, Branches 3 and 4.

Guidance re Certification and Reversal Processes

Under the Fixing America's Surface Transportation Act (FAST Act), the State Department must deny a passport application by any individual certified by the IRS as having a "seriously delinquent tax debt." [1] Additionally, the FAST Act authorizes the State Department to revoke a passport held by an individual with seriously delinquent tax debt. The certification process itself is governed by I.R.C. §7345, which also provides taxpayers a limited right to judicial review.

The elements of a "seriously delinquent tax debt," provided by the Notice, are as follows:

1.) It is an unpaid, legally enforceable federal tax liability of an individual.[2]

2.) The liability must be assessed.[3]

3.) The liability must exceed $50,000.[4]

4.) The IRS must have filed a notice of federal tax lien under I.R.C. §6323,[5] or levied under §6331 with respect to the liability[6]

Under I.R.C. §7345(b)(2), "seriously delinquent tax debt" does not include, (1) a liability being paid timely pursuant to an installment agreement or an offer-in-compromise, and (2) a liability for which a collection due process (CDP) hearing or innocent spouse relief request is pending.[7]

Notice CC-2018-005 also advises that the IRS "will rely on automated systems to identify every module (electronic record of tax liability) on an individual's account with an unpaid assessed tax liability that is not statutorily excepted from the definition of seriously delinquent tax debt or otherwise in a category excluded from certification." Once identified, according to the Notice, the systems will total the amount of unpaid liabilities; if the resulting total exceeds the statutory threshold, then the taxpayer will be identified as having a seriously delinquent tax debt. The Notice clarifies that under these circumstances, a Transaction Code (TC) 971 Action Code (AC) 641 will then post to each module.

Next, according to the Notice, the Small Business/Self Employed Commissioner will make the certification, and the IRS will provide the list of all certified individuals to the State Department. Upon receipt of this list, the State Department will not issue a passport to a listed individual, and it may revoke an already-issued passport, except as necessary for return travel to the United States. Notice CC-2018-005 also states that along with the certification, the IRS will notify individuals of their certification by issuing them a CP508C Notice by regular mail. Among other things, the CP508C Notice will inform the individual of the right to judicial review in a federal district court or the Tax Court.

Furthermore, Notice CC-2018-005 provides that I.R.C. §7345(c) requires reversal of certification when:

1.) Certification is found to be erroneous,

2.) The seriously delinquent tax debt is fully satisfied, or

3.) The debt ceases to be a seriously delinquent tax debt due to an exception under I.R.C. §7345(b)(2).[8]

Once a certified module is qualified for reversal, a TC 972 AC 641 will be posted to it, according to Notice CC-2018-005. Certification "will not be reversed until all modules covered by it have been fully satisfied or otherwise meet the criteria for reversal," the Notice clarifies. After the TC 972 AC 641 is posted, the IRS will concurrently provide notice of the reversal to both the taxpayer and the State Department. The taxpayer will be notified in a CP508R Notice by regular mail.

Guidance re Judicial Review of Certifications

The Notice explains that per I.R.C. §7345(e)(1), any certified individual may bring a civil action to determine the validity of the certification or whether the certification should have been reversed. The action may be filed in either a federal district court or the Tax Court, according to the Notice. Note that if an action is filed in both federal district court and the Tax Court, the court where the first action was filed has sole jurisdiction.[9] Furthermore, if the court finds an erroneous certification, or that certification should be reversed, the court may order the IRS to notify the State Department.

Additionally, the Notice states that the Tax Court has proposed adding a new Title 34 to its Rules of Practice and Procedure. Generally, the proposed rules:

1.) Describe the court's jurisdiction,

2.) Specify the title and content of a petition,

3.) Require the filing of an answer, and

4.) State when the case is deemed at issue.

The proposed rules also require, according to Notice CC-2018-005, that a petition include a copy of the CP508C Notice.

The Notice then presents a discussion of the three issues that are expected to be raised by petitioners in certification challenges (ones that the Code fails to specifically address). These are identified in Notice CC-2018-005 as challenges to the underlying liabilities, the period of limitations for bringing an action, and the scope and standard of review in certification actions.

First, the Notice emphasizes that judicial review under I.R.C. §7345 does not include review of the amount of the liability. Secondly, since I.R.C. §7345(e) lacks a specific period of limitations within which a certification action may be brought, the Notice explains that a period of six-years will apply.[10] Thus, individuals will have six years from the issuance of a certification notice to bring an action. Finally, as I.R.C. §7345(e) also fails to specify the scope or standard of review for certification actions, the Notice provides that "review should be limited to the Service's records and whether the certification or failure to reverse the certification was 'arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.'"[11] Significantly, the Notice advises that for certification actions arising in Tax Court, I.R.C §7482(b)(1) places appellate venue in the U.S. Court of Appeals for the District of Columbia Circuit.

Notice CC-2018-005 then provides instructions for Chief Counsel Counsel attorneys as to how to handle very particular procedural aspects of certification actions in both the Tax Court and the District Courts. Included in the section for the Tax Court, is (1) a direction for attorneys to include the CP508C Notice along with the answer, in the event that the taxpayer neglects to attach it to the petition, (2) a description of five types of motions for attorneys to consider using, and (3) clarification that "a case may be resolved with a stipulated decision document when the Service erroneously certified a taxpayer, a basis for reversal of a valid certification currently exists, or the taxpayer concedes either that the certification is valid or that there is no basis for reversal." In the context of the District Courts, the Notice states that the Department of Justice will represent the Government and indicates the source of the procedures which Chief Counsel attorneys should follow.

Coordinating I.R.C. §7345(e) Cases With the National Office

Finally, the Notice ends with the advice that:

"Chief Counsel attorneys should contact Branches 3 or 4 in Procedure & Administration with questions about these cases. Additionally, any document to be submitted to the Tax Court, except for answers not making affirmative allegations and motions to change caption, must be reviewed by those branches before filing. The same is true for any defense letters to be sent to the Department of Justice. To assist in the review, the following documents should be submitted with the document being reviewed: (1) petition or complaint, (2) any attachments to the petition or complaint, (3) a copy of the CP508C if not attached to the petition or complaint, and (4) a copy of the Form 4340 for each tax period giving rise to the certification."

[1] See Fixing America's Surface Transportation Act, Pub. L. No. 114-94, § 32101(e), 129 Stat. 1311, 1732 (2015).

[2] I.R.C. §7345(b)(1). Note that this excludes criminal restitution, FBAR penalties, and past-due support payments collectible under §§6305(a) and 6402(c).

[3] I.R.C. §7345(b)(1)(A).

[4] I.R.C. §7345(b)(1)(B). The amount is indexed for inflation. I.R.C. §7345(f). For 2018, the amount is $51,000. Rev. Proc. 2017-58.

[5] Collection due process rights under I.R.C. §6320 must have lapsed or been exhausted.

[6] I.R.C. §7345(b)(1)(C).

[7] Note that the Notice also provides that "In addition to these statutory exceptions, the Service is exercising discretion to exclude additional categories of liabilities from certification. The current categories of discretionary exclusions are listed in sections and of the Internal Revenue Manual. The categories are subject to change to ensure the integrity and effectiveness of the certification program."

[8] According to Notice CC-2018-005, certification reversal will also result when the debt falls into one of the discretionary exclusions listed in sections and of the I.R.M. "either entirely or in combination with the circumstances listed in section 7345(c), or the taxpayer enters a combat zone or participates in a contingency operation within the meaning of section 7508(a)."

[9] I.R.C. §7345(e)(1).

[10] 28 U.S.C. § 2401(a).

[11] 5 U.S.C. § 706(2)(A).


Permalink 04:15:44 pm, by dmerritts Email , 606 words   English (US) latin1
Categories: News

The IRS Is Receiving Thousands of Coinbase Users' Information

By Mary Lundstedt , Esq.

In November of 2017, Coinbase, Inc. ("Coinbase"), a company that facilitates digital currency transactions, was ordered to comply with an IRS summons demanding specific Coinbase client identifying information and transaction data for Coinbase accounts "with at least the equivalent of $20,000 in any one transactions type" in any year during the period of 2013-2015.[1] Approximately 14,000 Coinbase clients will be affected. The federal district court ruled that the summons, as narrowed in its decision, "serves the IRS's legitimate purpose of investigating Coinbase account holders who may not have paid federal taxes on their virtual currency profits."

The Battle Over the "John Doe" Summons

The decision ended Coinbase's year-long resistance to the initial "John Doe" administrative summons issued by the IRS in November of 2016. The IRS employs this type of summons, recognized under IRC §7609(f) and (h)(2), when the IRS has knowledge or suspicion of questionable transactions, but lacks knowledge of the participant's identity or the transaction results. This initial IRS summons was comprehensive and sought "information regarding United States persons who, at any time during the period January 1, 2013, through December 31, 2015, conducted transactions in a convertible virtual currency as defined in IRS Notice 2014-21." The IRS argued that the Coinbase summons was necessary because the IRS had evidence of Coinbase clients' noncompliance and underreporting; however, due to the pseudo-anonymity inherent in virtual currency transactions, the IRS was unable to identify participants and transaction results without more information.

Coinbase refused to comply. The IRS eventually narrowed its demand to ask only for information pertaining to accounts "with at least the equivalent of $20,000 in any one transaction type" in any year during the period of 2013-2015.

United States Magistrate Judge Jacqueline Scott Corley considered the narrowed summons and specifically noted that:

"Coinbase itself admits that the Narrowed Summons requests information regarding 8.9 million Coinbase transactions and 14,355 Coinbase account holders. That only 800 to 900 taxpayers reported gains related to Bitcoin in each of the relevant years and that more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year suggests that many Coinbase users may not be reporting their Bitcoin gains. The IRS has a legitimate interest in investigating these taxpayers."

Judge Corley further narrowed the summons, however, preventing the IRS from acquiring:

1.) Records of Know-Your-Customer diligence,

2.) Agreements or instructions granting a third-party access, control, or transaction approval authority, and

3.) Correspondence between Coinbase and the user or any third party with access to the account/wallet/vault pertaining to the account/wallet/vault opening, closing or transaction activity.

What Happens Now?

In February of 2018, Coinbase notified its customers that it will be complying with the order. Once the IRS receives the data, it will begin investigating whether the identified individuals' returns properly account for the virtual currency transactions. Anyone who didn't properly report these transactions will likely be contacted by the IRS. Depending on the extent of non-compliance, such individuals may face anything from direction to amend a return to outright audit and penalties. It is even possible that some will attract IRS criminal investigation-if the IRS has evidence that the individuals willfully intended to evade tax obligations.

Individuals in this situation should act immediately. They may want to consider the IRS's traditional voluntary disclosure program and disclose any non-compliance promptly. Such self-disclosure may mitigate criminal exposure-but it needs to occur before the IRS discovers the non-compliance through the information received from the summons. Once the IRS knows of the non-compliance, voluntary disclosure application may be denied.

If you need assistance with issues involving virtual currency transactions, please contact Frost & Associates, LLC today at 410-497-5974.

[1] United States v. Coinbase, Inc., No. 17-cv-01431-JSC, 2017 BL 426697, 2017 ILRC 3091 (N.D. Cal. Nov. 28, 2017), Court Opinion.

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* Licensed to practice in Maryland, Florida, and the District of Columbia. May represent taxpayers nationwide in IRS disputes.
** Licensed in Maryland

10480 Little Patuxent Pkwy, Ste. 400
Columbia, MD 21044
(410) 497-5947
© 2018 Glen E. Frost