International Financial Law Prof Blog

Tax Attorney Indicted for Facilitating $225 Million in Capital Gains Fraud for Robert E Smith

A federal grand jury in San Francisco returned an indictment today charging a Houston-based tax attorney of conspiring with the Chairman and Chief Executive Officer of a private equity firm to defraud the IRS. The grand jury further charged him with three counts of aiding and assisting in the preparation of the CEO’s false tax returns for the 2012 to 2014 tax years. The billionaire Robert F. Smith who has a non-prosecution agreement with the Department of Justice has provided evidence against his former tax attorney.

According to the indictment, from 1999 to 2014, Carlos E. Kepke helped Robert F. Smith create and maintain offshore entities that were used to conceal from the IRS approximately $225,000,000 of capital gains income that Smith had earned. In approximately March 2000, Kepke allegedly created a Nevisian limited liability company (Flash Holdings) and a Belizean trust (Excelsior Trust) to serve as the tax evasion vehicles. When Smith earned capital gains income from his private equity funds, a portion was allegedly deposited into Flash’s bank accounts in the British Virgin Islands and Switzerland. As alleged, Smith was able to hide this income because Excelsior, and not Smith, was the nominal owner of Flash. Smith then allegedly failed to timely and fully report his income to the IRS. Kepke allegedly assisted in the preparation of Smith’s false 2012 to 2014 returns.  

For his services, Smith has allegedly paid Kepke nearly $1,000,000 since 2007. These fees, as charged, included an annual payment for Kepke to purge or “securitize” his records related to Smith, Excelsior, and Flash.

Requirements for Certain Foreign Persons and Certain Foreign-Owned Partnerships Investing in Qualified Opportunity Funds and Flexibility for Working Capital Safe Harbor Plans

Internal Revenue Service on 04/14/2021

Abstract: This document contains proposed regulations that include requirements that certain foreign persons and certain foreign-owned partnerships must meet in order to elect the Federal income tax benefits provided by section 1400Z-2 of the Internal Revenue Code (Code). This document also contains proposed regulations that allow, under certain circumstances, for the reduction or elimination of withholding under section 1445, 1446(a), or 1446(f) of the Code on transfers that give rise to gain that is deferred under section 1400Z-2(a). Finally, this document contains additional guidance regarding the 24-month extension of the working capital safe harbor in the case of Federally declared disasters. The proposed regulations affect qualified opportunity funds and their investors.

Background: This document contains proposed amendments to 26 CFR part 1 under sections 1400Z-2, 1445, and 1446 (proposed regulations). Section 13823 of Public Law 115-97, 131 Stat. 2054, 2184 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), added sections 1400Z-1 and 1400Z-2 to the Code. The purposes of section 1400Z-2 and the section 1400Z-2 regulations (that is, the final regulations set forth in §§ 1.1400Z2(a)-1 through 1.1400Z2(f)-1, 1.1502-14Z, and 1.1504-3) are to provide specified Federal income tax benefits to owners of qualified opportunity funds (QOFs) to encourage the making of longer-term investments, through QOFs and qualified opportunity zone businesses, of new capital in one or more qualified opportunity zones designated under section 1400Z-1 and to increase economic growth in such qualified opportunity zones. See § 1.1400Z2(f)-1(c)(1) (describing the purposes of section 1400Z-2 and the section 1400Z-2 regulations; Notice 2018-48, 2018-28 I.R.B. 9, and Notice 2019-42, 2019-29 I.R.B. 352 (setting forth the combined list of population census tracts designated as qualified opportunity zones).

Section 1400Z-1 provides the procedural rules for designating qualified opportunity zones and related definitions. Section 1400Z-2 provides two main tax incentives to encourage investment in qualified opportunity zones. See section 1400Z-2(b) and (c). First, a taxpayer, upon making a valid election, may generally defer, until the earlier of an inclusion event or December 31, 2026, certain gains in gross income that would otherwise be recognized in the tax year if the taxpayer invests a corresponding amount in a qualifying investment in a QOF within 180 days of the date of the sale or exchange. See section 1400Z-2(b)(1)(A) and (B). The taxpayer may potentially exclude ten percent of such deferred gain from gross income if the taxpayer holds the qualifying investment in the QOF for at least five years. See section 1400Z-2(b)(2)(B)(iii). An additional five percent of such gain may potentially be excluded from gross income if the taxpayer holds the qualifying investment for at least seven years. See section 1400Z-2(b)(2)(B)(iv). Second, a taxpayer, upon making a second valid election under section 1400Z-2(c), may also exclude from gross income any appreciation on the taxpayer's qualifying investment in the QOF if the qualifying investment is held for at least ten years. Section 1400Z-2(e)(4) provides that the Secretary of the Treasury or his delegate shall prescribe regulations as may be necessary or appropriate to carry out the purposes of section 1400Z-2, including rules to prevent abuse.

On October 29, 2018, the Treasury Department and the IRS published in the Federal Register (83 FR 54279) a notice of proposed rulemaking (REG-115420-18) providing guidance under section 1400Z-2 for investing in qualified opportunity funds (83 FR 54279 (October 29, 2018)) (October 2018 proposed regulations). A second notice of proposed rulemaking (REG-120186-18) was published in the Federal Register (84 FR 18652) on May 1, 2019, containing additional proposed regulations under section 1400Z-2 (May 2019 proposed regulations). The May 2019 proposed regulations also updated portions of the October 2018 proposed regulations. On January 13, 2020, final regulations (TD 9889) under section 1400Z-2 were published in the Federal Register (85 FR 1866, as corrected at 85 FR 19082), effective for taxable years beginning after March 13, 2020 (section 1400Z-2 regulations).

Under the section 1400Z-2 regulations, a taxpayer qualifies for deferral under section 1400Z-2(a) only if the taxpayer is an eligible taxpayer. Section 1.1400Z2(a)-1(a)(1). An eligible taxpayer is defined as a person that is required to report the recognition of gains during the taxable year under Federal income tax accounting principles. Section 1.1400Z2(a)-1(b)(13). If an eligible taxpayer that is a partnership does not elect to defer gain, a partner of such partnership may elect to defer its distributive share of the gain. Section 1.1400Z2(a)-1(c)(8).

The section 1400Z-2 regulations provide that only gains that are eligible gains may be deferred. Section 1.1400Z2(a)-1(b)(11). In general, an eligible gain is gain that (i) is treated as a capital gain or is a qualified 1231 gain, (ii) would be recognized for Federal income tax purposes and subject to tax under subtitle A of the Code before January 1, 2027, if section 1400Z-2(a)(1) did not apply to defer the gain, and (iii) does not arise from a sale or exchange of property with certain related persons. Id. Thus, for example, a nonresident alien individual or foreign corporation generally may make a deferral election with respect to an item of capital gain that is effectively connected with a U.S. trade or business, because this gain otherwise is subject to Federal income tax. When a partnership chooses to make a deferral election, the section 1400Z-2 regulations provide an exception to the general requirement that gain be subject to Federal income tax in order to constitute eligible gain, subject to an anti-abuse rule. Section 1.1400Z2(a)-1(b)(11)(ix)(B).

Foreign persons are generally subject to U.S. income tax on amounts that are effectively connected with the conduct of a trade or business within the United States (ECI). A foreign person that directly or indirectly is engaged in a trade or business in the United States must file a U.S. income tax return and pay any tax due.

To ensure the collection of tax, in certain circumstances, the Code imposes withholding requirements on payments or allocations of ECI to foreign persons. See sections 1445, 1446(a), and 1446(f). The amount of withholding under these provisions is intended to serve as a proxy for the amount of the foreign person's substantive tax liability and may not match the actual amount of tax due. The amount withheld may be claimed as a credit against the amount of tax due and shown on the foreign person's tax return.

Specifically, section 1445(a) requires a transferee to withhold tax on a disposition of a United States real property interest (as defined in section 897(c)) (U.S. real property interest) by a foreign person. Generally, the transferee must withhold 15 percent of the amount realized and deposit the tax with the IRS within 20 days of the transfer. Certain exceptions and reductions to the rate of withholding can apply, including by the foreign person obtaining a withholding certificate from the IRS to reduce or eliminate the amount required to be withheld on the transfer.

Section 1445(e)(1) requires a domestic partnership, trust, or estate that disposes of a United States real property interest to withhold on any portion of the gain that is allocable to a foreign partner or beneficiary. The rate of withholding is the highest rate of tax in effect under section 11(b) (currently 21 percent).

Section 1445(e)(2) requires a foreign corporation that recognizes gain on the distribution of a United States real property interest to withhold on the gain at the highest rate of tax in effect under section 11(b).

Section 1445(e)(3) requires a domestic corporation that is or has been a United States real property holding corporation to withhold 15 percent of a distribution to a nonresident alien or foreign corporation.

Section 1445(e)(6) requires a qualified investment entity to withhold at the highest rate of tax specified in section 11(b) on the amount of the distribution that is treated as gain from the sale or exchange of a United States real property interest.

Section 1446(a) generally requires a partnership to withhold tax on effectively connected taxable income as determined under § 1.1446-2 (ECTI) allocable to a foreign partner, with limited adjustments, regardless of whether the income is distributed to the partner (section 1446(a) tax). A partnership must generally withhold section 1446(a) tax on a foreign partner's allocable share of ECTI at the highest rate of tax specified in section 1 (for a foreign partner other than a corporation) or section 11(b) (for a foreign partner that is a corporation). A partnership is generally required to pay the section 1446(a) tax in four installment payments. The partnership may consider certain partner-level deductions and losses as a reduction to the ECTI on which it must withhold section 1446(a) tax. See § 1.1446-6.

Section 1446(f) requires withholding under certain circumstances in connection with a disposition of a partnership interest. Specifically, if, on a disposition (which includes a distribution from a partnership to a partner) of a partnership interest, section 864(c)(8) treats any portion of a foreign partner's gain as effectively connected gain, section 1446(f) requires the transferee to withhold tax equal to 10 percent of the amount realized, unless an exemption or reduced rate of withholding applies. The transferee must deposit the tax with the IRS within 20 days of the transfer. See § 1.1446(f)-2. For purposes of section 1446(f), a transferor may in certain cases certify to the transferee that the transfer is not subject to withholding or otherwise qualifies for an exception to withholding or an adjustment to the amount required to be withheld. Id.

Under sections 33 and 1462, a foreign person subject to withholding under section 1445, 1446(a), or 1446(f) may credit the amount withheld against the amount of income tax liability shown on the person's tax return.

What drives people and businesses to pay taxes?

Unlocking what drives tax morale – the intrinsic willingness to pay tax – can greatly assist governments in the design of tax policies and their administration, particularly in developing countries where compliance rates are low. However, voluntary compliance is not only determined by tax rates or the threat of penalties, but also by a wide range of socio-economic factors – such as age, gender, education levels – and institutional factors – such as perception of the tax administration and complexity of the tax system – all of which vary across regions and populations. While much remains to be done to build a sustainable taxpaying culture, a greater focus on tax morale can provide a route to increased voluntary compliance, for a tax system that is fair and equitable for all taxpayers around the globe. More information on our work on tax morale: http://oe.cd/tax-morale

 

 

IRS sending soft letters to encourage compliance with foreign trust reporting

Practice Area:  Withholding & International Individual Compliance

Lead Executive: John Cardone, Director, WIIC

Campaign Point of Contact: Robert G. Davis

This campaign will take a multifaceted approach to improving compliance with respect to the timely and accurate filing of information returns reporting ownership of and transactions with foreign trusts. The Service will address noncompliance through a variety of treatment streams PDF including, but not limited to, examinations and penalties assessed by the campus when the forms are received late or are incomplete.

 

John McAfee Indicted for Tax Evasion

Allegedly Hid Cryptocurrency, a Yacht, Real Estate and Other Properties in Nominee Names to Evade Taxes Download Indictment

An indictment was unsealed today charging John David McAfee with tax evasion and willful failure to file tax returns, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division and U.S. Attorney D. Michael Dunavant for the Western District of Tennessee. The June 15, 2020 indictment was unsealed following McAfee’s arrest in Spain where he is pending extradition.

According to the indictment, John McAfee earned millions in income from promoting cryptocurrencies, consulting work, speaking engagements, and selling the rights to his life story for a documentary. From 2014 to 2018, McAfee allegedly failed to file tax returns, despite receiving considerable income from these sources. The indictment does not allege that during these years McAfee received any income or had any connection with the anti-virus company bearing his name.

According to the indictment, McAfee allegedly evaded his tax liability by directing his income to be paid into bank accounts and cryptocurrency exchange accounts in the names of nominees. The indictment further alleges McAfee attempted to evade the IRS by concealing assets, including real property, a vehicle, and a yacht, in the names of others.

If convicted, McAfee faces a maximum sentence of five years in prison on each count of tax evasion and a maximum sentence of one year in prison on each count of willful failure to file a tax return. McAfee also faces a period of supervised release, restitution, and monetary penalties.

John McAfee has over the past decade been held responsible for a murder in a Florida court of his Belize neighbor, arrested in the Dominican Republic on weapons charges,  bragged about not filing tax returns, among other chaos:. See by example https://www.cnet.com/news/john-mcafee-released-from-confinement/ and Yahoo Finance story

Multilateral Convention to tackle tax evasion and avoidance continues to expand its reach in developing countries, as Botswana, Eswatini, Jordan and Namibia join

Today, at the OECD Headquarters in Paris, four countries have signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention), bringing the total number of jurisdictions that participate in the Convention to 141.

Today's signing by Botswana, Eswatini, Jordan and Namibia which takes place as the world addresses the impact of COVID-19, underlines the commitment of the signatories to participate in international tax co-operation and exchange of information and further strengthens the global reach of the Convention, in particular in Africa. In addition to over 8000 exchange relationships in place, these signings will trigger 554 new exchange relationships under the Convention for the four signing jurisdictions following their ratification, allowing them to engage in the exchange of information with 140 other jurisdictions, including all major financial centres.

The Convention enables jurisdictions to engage in a wide range of mutual assistance in tax matters: exchange of information on request, spontaneous exchange, automatic exchange, tax examinations abroad, simultaneous tax examinations and assistance in tax collection. It guarantees extensive safeguards for the protection of taxpayers' rights.

The Convention is the primary instrument for swift implementation of the Standard for Automatic Exchange of Financial Account Information in Tax Matters (CRS). The CRS – developed by the OECD and G20 countries – enables more than 100 jurisdictions to automatically exchange offshore financial account information.

Beyond the exchange of information on request and the automatic exchange pursuant to the Standard, the Convention is also a powerful tool in the fight against illicit financial flows and is a key instrument for the implementation of the transparency standards of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project.

• View the 141 jurisdictions participating in the Convention

IRS offers blanket settlement for syndicated conservation easement transactions: Pay 10% penalty but deduct costs of transaction

The Internal Revenue Service this week released Notice 2021-001, containing information on Chief Counsel's settlement initiative for certain pending Tax Court cases involving abusive syndicated conservation easement transactions. Prior coverage of the settlement initiative can be found in IRS news release IR-2020-196.

As part of a continuing effort to combat abusive transactions, the Internal Revenue Service announced today the completion of the first settlement under its initiative to resolve certain docketed cases involving syndicated conservation easement transactions.

On June 25, 2020, the IRS Office of Chief Counsel announced that it would offer to settle certain cases involving abusive syndicated conservation easement transactions. Since then, Chief Counsel has sent letters to dozens of partnerships involved in these transactions whose cases are pending before the U.S. Tax Court.

"We are seeing movement on these settlements," said IRS Chief Counsel Mike Desmond. "Given the potential for significant penalties, we anticipate more taxpayers will take similar actions and ultimately accept these offers, and we encourage them to do so."

The IRS will continue to actively identify, audit and litigate these abusive transactions as part of its vigorous effort to combat abuse in this area. These transactions undermine the public's trust in tax incentives for private land conservation and in tax compliance in general. Ending these abusive schemes remains a top priority for the IRS. The IRS continues to strongly recommend that participants seek the advice of competent, independent advisors in considering the potential resolution of their matter.

The settlement requires a concession of the tax benefits claimed by the taxpayers and imposes penalties:

• All partners in an electing partnership must agree to settle to receive these terms,

  and the partnership must make a lump-sum payment representing the aggregate tax, penalties and interest for all of the partners before settlement is accepted by the IRS.

• Chief Counsel will allow investors to deduct the cost of acquiring their partnership

  interests but it will require a penalty of at least 10 percent.

• Partners who are promoters of conservation easement schemes are not allowed

  any deductions and must pay the maximum penalty asserted by IRS (typically 40 percent).

• If less than all the partners agree to settle, the IRS may settle with those partners

  but will normally impose less favorable terms on the settling partners.

This week, the first settlement under the terms of the initiative was finalized. Coal Property Holdings, LLC and its partners agreed to a disallowance of the entire $155 million charitable contribution deduction claimed for an easement placed on a 3,700-acre tract of land in Tennessee. On October 28, 2019, the Tax Court issued its Opinion (153 T.C. 126) granting the government's motion for partial summary judgment holding that the "judicial extinguishment" provisions of the easement deed did not satisfy the requirements of section 1.170A-14(g)(6), Income Tax Regs.

Under the terms of the settlement, the investor partners were permitted to deduct their cost of investing in the conservation easement transactions and paid a 10 percent penalty, whereas the promoter partner was denied any deduction and paid a 40% penalty. The taxpayers also fully paid all tax, penalties, and interest in conjunction with the settlement. The settlement will be reflected in a stipulated decision document entered by the Tax Court and in a separately entered closing agreement. A public statement acknowledging the settlement was part of the agreement between the IRS and the taxpayer.

IRS Commissioner Chuck Rettig thanked the trial team for their exceptional dedication and work on the case: "The IRS is pleased that the partnership in the Coal Property transaction has agreed to this settlement, and we encourage other participants in qualifying easement cases to accept the terms of the Chief Counsel's initiative," Rettig said.

Coal Property was represented by Christopher S. Rizek and Scott D. Michel of the Washington, D.C. law firm Caplin & Drysdale. "In light of the significance of the Court's ruling on the perpetuity issue, our client decided to take advantage of an assured penalty reduction in the IRS initiative and settle this matter under the IRS's terms, and it is pleased that this case is resolved," Rizek said.

IRS expands enforcement focus on abusive micro-captive insurance schemes

With the Oct. 15th filing deadline quickly approaching, the Internal Revenue Service today encouraged taxpayers to consult an independent tax advisor if they participated in a micro-captive insurance transaction.

The IRS encourages any taxpayer who has continued to engage in an abusive micro-captive insurance transaction to not anticipate being able to settle its transaction with the IRS or Chief Counsel on terms more favorable than previously announced settlement offers and that any potential future settlement initiative that the IRS may consider will require additional concessions by the taxpayer.

With this in mind, the IRS encourages taxpayers to consult an independent tax advisor if they participated in a micro-captive insurance transaction. These taxpayers should seriously consider exiting the transaction and not claiming deductions associated with abusive micro-captive insurance transactions, just like many other taxpayers did who were contacted by the IRS in March and July 2020.

For those taxpayers that do not exit the transaction and continue taking such deductions, the IRS will disallow tax benefits from transactions that are determined to be abusive and may also require domestic captives to include premium payments in income and assert a withholding liability related to foreign captives. The IRS will also assert penalties, as appropriate, including the strict liability penalty that applies to transactions that lack economic substance under sections 7701(o) and 6662(i).  The IRS Office of Chief Counsel will continue to litigate these abusive transactions in Tax Court. 

"The IRS enforcement efforts will continue on these abusive transactions,” IRS Commissioner Chuck Rettig said. “Any future settlement terms will only get worse, not better. The IRS has never been better positioned in its quest to eradicate abusive transactions following the stand-up of a dedicated promoter office, a new Fraud Enforcement Office, enhanced service-wide coordination with Criminal Investigation and the Office of Professional Responsibility, and our advanced data analytics and mining capabilities. Taxpayers are strongly encouraged to use this opportunity to put this behind them and get into compliance.”

Abusive micro-captives have been a concern to the IRS for several years. The transactions first appeared on the IRS "Dirty Dozen" list of tax scams in 2014 and remain a priority enforcement issue for the IRS. In 2016, the Department of Treasury and IRS issued Notice 2016-66 (PDF), which identified certain micro-captive transactions as having the potential for tax avoidance and evasion.  In March and July 2020, IRS issued letters to taxpayers who participated in a Notice 2016-66 transaction alerting them that IRS enforcement activity in this area will be expanding significantly and providing them with the opportunity to tell the IRS if they’ve discontinued their participation in this transaction before the IRS initiates examinations.  Early responses indicate that a significant number of taxpayers who participated in these transactions have exited the transaction. 

This summer, the IRS issued a new round of section 6112 letters to material advisors who filed with the IRS pursuant to Notice 2016-66. In addition, the IRS has deployed 12 newly formed micro-captive examination teams to substantially increase the examinations of ongoing abusive micro-captive insurance transactions.

Also, as part of IRS’s continued focus in this area, the IRS has become aware of variations of the abusive micro-captive insurance transactions.  Examples of these variations include certain Puerto Rico and offshore captive insurance arrangements that do not involve section 831(b) elections.

These variations appear to be designed and marketed with the express intent of avoiding reporting under Notice 2016-66 and yet perpetuating in some cases the same or similar abusive elements as abusive micro-captive insurance transactions.  The IRS is aware of these abusive transactions and is actively working to counter their proliferation.  The IRS cautions taxpayers that, to the extent they engage in variations of abusive micro-captive transactions that are substantially similar to Notice 2016-66, they must be disclosed.  Otherwise, the IRS will impose penalties for the failure to disclose.

Tax Inspectors Without Borders Report for Developing Countries to Increase Tax Revenues and Address COVID-19 challenges

The international community continues to make progress towards strengthening developing countries' ability to effectively tax multinational enterprises, despite the adverse impact of the COVID-19 crisis on domestic resource mobilisation efforts.

Tax Inspectors Without Borders (TIWB), a joint OECD/UNDP initiative launched in July 2015 to strengthen developing countries' auditing capacity and multinationals' compliance worldwide, has gained increased relevance in the COVID-19 era as a practical tool to help developing countries collect all the taxes due from multinational enterprises. To-date, TIWB assistance has delivered more than USD 537 million in additional revenue for developing countries up to June 2020, according to its latest annual report.

The report was presented today by OECD Secretary-General, Angel Gurría, and United Nations Development Programme Administrator, Achim Steiner, during a ministerial panel discussion in the margins of the 75th session of the United Nations General Assembly. The meeting was co-hosted by the Permanent Mission of Finland to the United Nations, the OECD and UNDP.

With programmes across Africa, Asia, Eastern Europe, Latin America and the Caribbean, the TIWB initiative has 80 completed and ongoing programmes in 45 countries and jurisdictions worldwide. An additional 19 programmes have been requested and are in the pipeline. The report notes strong support from a broad range of partners, including regional and international organisations, as well as key donors of official development assistance (ODA). Sixteen countries have deployed their serving tax officials to provide hands-on, learning-by-doing assistance to auditors in developing countries. Among the partner administrations are those engaged in South-South co-operation including India, Kenya, Mexico, Morocco, Nigeria and South Africa.

The success of the current TIWB model has also triggered the expansion of the initiative on tax crime investigations and the use of information exchanged automatically between governments, both of which will help fight Illicit Financial Flows. New programmes will also cover tax treaty negotiations, the extractives and environmental tax issues.

"Despite the constraints that the COVID-19 crisis has imposed, the TIWB initiative remains fully 'open for business' thanks to measures instituted to support experts in continuing to deliver assistance remotely," said OECD Secretary-General Angel Gurría. "Not only are we open, but we are extending the TIWB focus to provide support in other areas of taxation to fight against corruption and promote integrity."

"Tax Inspectors Without Borders is playing a key role in helping developing countries to recover from the pandemic - their new service aims at increasing domestic revenues while supporting the transition to greener, more sustainable economies," said Mr Steiner, UNDP Administrator.

In his address to the meeting, H.E. Ville Skinnari, Finland's Minister for Development Co-operation and Foreign Trade, said "I congratulate UNDP, OECD and the wider UN-system to promote tax justice and domestic resource mobilisation. We have done our homework in Finland, too: In June this year we launched Government of Finland's new Taxation for Development Action Programme."

J5 reflects on two-years pursuing global tax cheats

Leaders from five international tax organizations are marking the two-year anniversary of the formation of the Joint Chiefs of Global Tax Enforcement (J5) this week.

The J5 includes the Australian Taxation Office (ATO, the Canadian Revenue Agency (CRA), the Dutch Fiscal Information and Investigation Service (FIOD), Her Majesty's Revenue and Customs (HMRC) from the UK and the Internal Revenue Service Criminal Investigation Division (IRS-CI) from the US.

Taking advantage of each country's strengths, the J5's initial focus was on enablers of tax crime, virtual currency and platforms that enable each country to share information in a more efficient manner. Within the framework of each country's laws, J5 countries shared information and were able to open new cases, more completely develop existing cases, and find efficiencies to reduce the time it takes to work cases. Operational results have always been the goal of the organization and they have started to materialize.

"While operational results matter, I've been most excited at the other benefits that this group's existence has provided," said Don Fort, Chief, IRS Criminal Investigation. "In speaking with law enforcement partners domestically and abroad as well as stakeholders in various public and private tax organizations, there is real support for this organization and tangible results we have all seen due to the cooperation and global leadership of the J5."

During the two years since the J5's inception, hundreds of data exchanges between J5 partner agencies have occurred with more data being exchanged in the past year than the previous 10 years combined. Each J5 country brings different strengths and skillsets to the J5 and leveraging those skills and capabilities enhance the effectiveness and success of the J5.

Experts from the J5 countries have seen indications that tax offenders are embracing ever more complex methods to conceal their wrongdoings, creating multiple mechanisms and structures that are split across jurisdictions, taking advantage of those areas that offer secrecy and regulatory benefits. With this information, the J5 finds itself continuously adapting to the latest criminal methods and changing behaviors to prioritize the collective operational activity to tackle this dynamic threat picture.

Since the inception of the organization, two J5 countries have hosted events known as "Challenges" aimed at developing operational collaboration. FIOD hosted the first J5 "Challenge" in Utrecht in 2018 and brought together leading data scientists, technology experts and investigators from all J5 countries in a coordinated push to track down those who make a living out of facilitating and enabling international tax crime. The event identified, developed, and tested tools, platforms, techniques, and methods that contribute to the mission of the J5 focusing on identifying professional enablers facilitating offshore tax fraud. The following year, the U.S. hosted a second "Challenge" in Los Angeles and brought together investigators, cryptocurrency experts and data scientists in a coordinated push to track down individuals perpetrating tax crimes around the world.

Last week, a Romanian man was arrested in Germany and admitted to conspiring to engage in wire fraud and offering and selling unregistered securities in connection with his role in the BitClub Network, a cryptocurrency mining scheme worth at least $722 million. This plea was the first for a case under the J5 umbrella and stemmed from collaboration with the Netherlands during the "Challenge" in Los Angeles in 2019.

"The value of the Challenges cannot be overstated," said Fort. "When you take some of the smartest people from each organization and put them in a room for a few days, the results are truly impressive. Each country found investigative leads and was able to further cases utilizing tools and techniques created by each country's experts specifically for the Challenge. I see us doing more of these events in the future."

Last year, the United States and the World Bank hosted cyber training in Washington, DC bringing together more than 120 international and domestic law enforcement partners from approximately 20 countries to address emerging areas associated with cybercrime, virtual currency, blockchain and the dark web. Additionally, to ensure J5 countries were using all law enforcement and legal tools available during their collaborative work, trainings were held in Sydney and the Netherlands on international elements of the UK corporate criminal offense legislation and prosecution opportunities to lawyers and public prosecutors.

After two years of collaboration, data sharing and accelerated casework, the J5 began seeing operational results in early 2020. J5 countries participated in a globally coordinated day of action to put a stop to the suspected facilitation of offshore tax evasion. The action was part of a series of investigations in multiple countries into an international financial institution located in Central America, whose products and services are believed to be facilitating money laundering and tax evasion for customers across the globe. Evidence, intelligence and information collection activities such as search warrants, interviews and subpoenas were undertaken in each country and significant information was obtained and shared as a result. That investigation is ongoing.

"To see each country participate in a coordinated enforcement action all over the world at the same time with the same goal in mind was a real watershed moment for this organization," said Fort. "And that was just the beginning. With dozens of cases in our collective pipelines, I'm excited to see what the next year brings in terms of operational results."

In addition to the group's work with enablers and virtual currency, the J5 also focused on platforms that enable each country to share information in a more organized manner. FCInet is one such platform that each country has invested in to further that goal. FCInet is a decentralized virtual computer network that enables agencies to compare, analyze and exchange data anonymously. It helps users to obtain the right information in real-time and enables agencies from different jurisdictions to work together while respecting each other's local autonomy. Organizations can jointly connect information, without needing to surrender data or control to a central database. FCInet doesn't collect data, rather it connects data.

The J5 was formed in 2018 after a call to arms from the OECD Taskforce on Tax Crime and has been working together to gather information, share intelligence and conduct coordinated operations, making significant progress in each country's fight against transnational tax crime.

For more information about J5, please visit www.irs.gov/j5

to prohibit the use of tax flow-through entities and the provision of trust services to high-risk third countries and EU Blacklisted jurisdictions

Loyens & Loeff writes that the Netherlands government proposal entails the following prohibitions:

1. The prohibition to facilitate the use of a flow-through entity, which currently is one of the trust services under the Wtt 2018.
2. It will be prohibited to enter into a business relationship or provide a trust service in case a client, object company or the UBO of a client or object company resides in or has its seat in (a) a high-risk third country or (b) a non-cooperative jurisdictions for tax purposes. The original list of high-risk third countries adopted by the European Commission may be found here, more countries were added to the list in October 2017, December 2017 and July 2018. A list of non-cooperative jurisdictions for tax purposes is kept by the EU Council and can be found here.

Proposals in Dutch from Dutch Ministry here

Multiple IRS Job Announcements in IRS Tax Exempt & Government Entities

The IRS has announced multiple Internal Revenue Agent job openings in both Employee Plans and Exempt Organizations as part of the IRS Pathways Recent Graduate Program. These positions are open in multiple cities and have a starting pay scale of GS 5 – 9.

Revenue agents in Employee Plans examine the books and records of employer-sponsored retirement plans such as 401(k) plans.

You can learn more about, and apply for, one of the recent graduate positions on USAjobs.gov, but you need to hurry.

These job openings close on May 8, 2020. 

Eighth Circuit Upholds Determination that Wells Fargo is Liable for Penalties for Engaging in Abusive Tax Shelter Scheme

The Eighth Circuit Court of Appeals issued a precedential opinion on Friday, April 24, 2020, affirming a district court decision that a transaction designed to generate massive foreign tax credits (referred to as the STARS tax shelter) lacked economic substance and business purpose and was subject to the accuracy-related penalty for negligence, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman and Deputy Assistant Attorney General Joshua Wu of the Justice Department’s Tax Division.

In Wells Fargo v. United States, No. 17-3578, the Eighth Circuit Court of Appeals affirmed the decision of the U.S. District Court for the District of Minnesota and the position of the United States. Wells Fargo, like several other U.S. banks, had entered into the STARS shelter, a transaction promoted to them by Barclays PLC and KPMG as a method of generating foreign tax credits on U.S. income. The Eighth Circuit rejected the transaction as an economic sham subject to penalties, consistent with the decisions of three other courts of appeals. In rejecting Wells Fargo’s appeal, the court agreed with the government that “STARS was an elaborate and unlawful tax avoidance scheme, designed to exploit the differences between the tax laws of the U.S. and the U.K. and generate U.S. tax credits for a foreign tax that Wells Fargo did not, in substance, pay.” 

Principal Deputy Assistant Attorney General Zuckerman thanked Tax Division attorney Judith Hagley and former Tax Division attorneys Gilbert Rothenberg and Richard Farber, who handled the case on appeal for the government, as well as Chief Senior Litigation Counsel Dennis Donohue, Senior Litigation Counsel Kari Larson, trial attorneys William Farrior, Harris Phillips, Matthew Johnshoy, and former Tax Division attorney Viki Economides Farrior, who litigated the case in the district court.

Additional information about the Tax Division and its enforcement efforts may be found on the division’s website.

IRS announce relaxation of U.S. tax resident "days count" related to COVID-19 emergency

The Internal Revenue Service today issued guidance that provides relief to individuals and businesses affected by travel disruptions arising from the COVID-19 emergency. 

The guidance includes the following:

1. Revenue Procedure 2020-20, which provides that, under certain circumstances, up to 60 consecutive calendar days of U.S. presence that are presumed to arise from travel disruptions caused by the COVID-19 emergency will not be counted for purposes of determining U.S. tax residency and for purposes of determining whether an individual qualifies for tax treaty benefits for income from personal services performed in the United States;
2. Revenue Procedure 2020-27, which provides that qualification for exclusions from gross income under I.R.C. section 911 will not be impacted as a result of days spent away from a foreign country due to the COVID-19 emergency based on certain departure dates; and
3. An FAQ, which provides that certain U.S. business activities conducted by a nonresident alien or foreign corporation will not be counted for up to 60 consecutive calendar days in determining whether the individual or entity is engaged in a U.S. trade or business or has a U.S. permanent establishment, but only if those activities would not have been conducted in the United States but for travel disruptions arising from the COVID-19 emergency. 

Covid-19 Tax Facts News: Health Plans. Worthless Securities Deduction.

Texas A&M University School of Law has launched a Covid-19 expert response team.  Listen to Professor Neal Newman and William discussing the Covid-19 SBA forgiveness loans, deferral on paying the employer's Social Security tax, and the Employee Retention Tax Credit (YouTube). Find the response team members from all disciplines here: Download Texas A&M Coronavirus_Experts

Editor’s Note: New rulings from the IRS help clarify that COVID-19 expenses can be paid by HDHPs (before the deductible has been met) and FSAs can pay for genetic testing when the information is intended to be provided to a medical professional for treatment purposes. Note that the decision on genetic testing comes in the form of a PLR that addresses some rather unique facts, so it may not be very broadly applicable. We also have a new (and regrettably timely) ruling on worthless securities.

IRS Announces HDHPs Can Pay Coronavirus Costs The IRS announced that high deductible health plans are permitted to cover the costs associated with the coronavirus. HDHPs can cover coronavirus-related testing and equipment needed to treat the virus. Generally, HDHPs are prohibited from covering certain non-specified expenses before the covered individual's deductible has been met. Certain preventative care expenses are excepted from this rule. HDHPs will not jeopardize their status if they pay coronavirus-related expenses before the insured has met the deductible, and the insured will remain HSA-eligible. The guidance applies only to HSA-eligible HDHPs. For more information on the rules governing HDHPs, visit Tax Facts Online. Read More

Tax Court Rules on Deduction The Tax Court held that a worthless securities deduction may be permitted even if the entity that issued the securities still held some value. In a complex case involving a number of rounds of financing over several years, the court found it was reasonable to believe that a junior interest may be worthless if there are not funds to pay currently, or anticipated in the future, the senior interests. For more information on the worthless securities deduction, visit Tax Facts Online. Read More

IRS Finds Health FSA Can Reimburse a Portion of Ancestry Genetic Testing In a private letter ruling (applicable only to the taxpayer requesting the ruling), the IRS found that a portion of the ancestry genetic test could be reimbursed by the health FSA. In the redacted PLR, the IRS discussed whether the genetic testing service could be classified as medical care. The taxpayer's goal was to provide genetic information to their healthcare provider, but it was impossible to purchase the genetic information without also purchasing the ancestry services. The IRS found that portions of the testing may be considered medical care, although ancestry reports could not be classified as reimbursable medical care. The IRS directed the taxpayer to use a "reasonable method" to allocate between medical and non-medical services. For more information on health FSAs, visit Tax Facts Online. Read More

2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-0874

Employee Retention: SBA Loan or Tax Credits? Which offers more money to my business, and when?

Texas A&M University School of Law has launched a Covid-19 expert response team.  Listen to Professor Neal Newman and William discussing the Covid-19 SBA forgiveness loans, deferral on paying the employer's Social Security tax, and the Employee Retention Tax Credit (YouTube). Find the response team members from all disciplines here: Download Texas A&M Coronavirus_Experts

For a business with by example 400 employees, a $5,000 credit per employee is worth $2,000,000 of tax-free tax credit that can be more beneficial than an SBA Loan.  The SBA loan is not straight forward and regardless, is not in general allowed for business above 500 employees.  The taxpayer must choose either one or the other - the PPP (forgivable employee retention) SBA loan or the employee retention tax credit.  For small employers with less than say 250 employees (not exactly 'small' in most American minds) the answer is probably the SBA loan. But for employer with more than 350 employees, the answer is probably that the Employee Retention Tax Credit is worth more to the business.  Watch the webinar above or ask your questions live this Thursday, April 16th (Register now for our webinar on Wednesday, April 16, at 2:00 EDT)

 

2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-0874

another reason to (re) locate a business to Texas: New York state and city do not adopt the CARES Act tax provisions

• Deloitte covers New York's new budget that purposefully 'decouples' from the CARES Act tax relief for New York based business and other states' business that have income within New York.
• BDO explains it here as well.
• Pillsbury here.

Anything that improves the employment of tax professionals, I am for.  Thus, states with their own tax codes that do not correspond to the federal Internal Revenue Code, at least for my students and alumni, are OK by me.  Unless I own a business.  Then it's maddeningly complex, and compliance expensive, to operate in several tax regimes.

Not saying that the CARES Act provisions made good tax policy sense.  But unless New York state (and city) has something better to offer, the Covid-19 meltdown does not seem like an opportune time to 'stick it' to Congress' because Congress seems to enact ineffectual tax provisions. Not that the typical New York voter understands or cares about 163(j) relief or NOL. But New York based business in particular may come to understand when the CPA / tax advisor informs that on the federal return Covid-19 stimulus relief is allowable but not so on the NY state return. Some NY based businesses are going to feel that their state didn't have their backs.  Other businesses that are large enough and able because of industry to relocate operations have time a plenty at this moment to think about such relocation.  (And by the way, Texas will be open for business again soon).      

Determining the Employer's Obligations Under the New Proposed Withholding Regulations

Texas A&M University School of Law has launched a Covid-19 expert response team.  Listen to Professor Neal Newman and William discussing the Covid-19 SBA forgiveness loans, deferral on paying the employer's Social Security tax, and the Employee Retention Tax Credit (YouTube). Find the response team members from all disciplines here: Download Texas A&M Coronavirus_Experts

Determining the Employer's Obligations Under the New Proposed Withholding Regulations The regulations are clear that the employer is not required to ascertain whether the withholding allowance claimed by the employee is greater than those to which the employee is actually entitled. However, the IRS (or published guidance) may direct an employer to submit employees’ withholding certificates (or the certificates relating to groups of employees) to the IRS. Further, the IRS may notify the employer that an employee is not entitled to claim more than a certain withholding allowance. For more information on the new withholding regulations, visit Tax Facts Online. Read More

2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-0874

Tax Impact of Stimulus' RMD Waiver, Early Withdrawals: Bloink & Byrnes Webinar

Sign up now for ThinkAdvisor's free tax webinar on Thursday, April 16, from 2-2:30 p.m. EDT.

The $2 trillion stimulus plan signed into law on March 28 due to the COVID-19 pandemic, includes a temporary waiver of required minimum distribution (RMD) rules for certain defined contribution plans and IRAs during 2020.

There are also special rules for use of retirement funds that waives the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made this year.

Register now for our 30-minute webinar on Thursday, April 16, at 2:00 EDT. Hear from two expert sources about the tax implications of these withdrawals and other retirement issues in the CARES Act during our free ThinkAdvisor webcast:

• ROBERT BLOINK, Esq., LL.M., has taught at Texas A&M University School of Law and Thomas Jefferson School of Law; and
• WILLIAM BYRNES, Esq., LL.M., CWM, is an executive professor and associate dean of special projects at the Texas A&M University School of Law.

Covid-19 Tax Facts News: Coronavirus Response Act and Families First Act's Tax Relief for Small Business Owners

Texas A&M University School of Law has launched a Covid-19 expert response team.  Listen to Professor Neal Newman and William discussing the Covid-19 SBA forgiveness loans, deferral on paying the employer's Social Security tax, and the Employee Retention Tax Credit (YouTube). Find the response team members from all disciplines here: Download Texas A&M Coronavirus_Experts

William H. Byrnes, J.D.

Robert Bloink, J.D., LL.M.

The IRS provided concrete responses to the COVID-19 virus in the tax field. First, the IRS has now formally extended the income tax filing deadline for tax year 2019 to July 15, as well as the FBAR form, FATCA form, and several other reporting forms initially left out of the IRS extension. Because this is an extension of the actual filing deadline (not just an extension of time to pay owed taxes) it also pushes a number of related deadlines (e.g. for qualified plan contributions) back to July. President Trump also signed the Families First Coronavirus Response Act, which creates a paid sick leave program and related tax credits for small businesses, as well as the CARES Act calling for forgivable SBA loans (without tax consequences) or a $5,000 tax credit per employee retained for medium and large size businesses. Our comment is that for a business with by example 400 employees, a $5,000 credit per employee is worth $2,000,000 of tax-free tax credit that can be more beneficial than an SBA Loan.  The SBA loan is not straight forward and regardless, is not in general allowed for business above 500 employees.  The taxpayer must choose either one or the other - the PPP (forgivable employee retention) SBA loan or the employee retention tax credit.  For small employers with less than say 250 employees (not exactly 'small' in most American minds) the answer is probably the SBA loan.  But above 250, careful consideration and analyzing the benefits/outcomes of each program must be weighed. Watch the webinar above.. or the one forthcoming Thursday, April 16th (sign up on Tax Facts Online).

Avoid Confusion Over IRS 90-Day Extension of the Federal Tax Payment Deadline In response to the coronavirus pandemic, the IRS has announced that it will extend the tax payment deadline from April 15, 2020 to July 15, 2020. Interest and penalties during this period will also be waived. The April 15 filing deadline was also extended to July 15, although in separate guidance. Individuals and pass-through business entities owing up to $1 million in federal tax are eligible for the relief, as are corporations owing up to $10 million in federal tax. Individuals who do not anticipate being able to file by July 15 should be aware of their option for requesting a six-month filing extension to October 15. The extension is available by filing Form 4868. For more information on federal tax filing requirements, visit Tax Facts Online. Read More

Coronavirus Act Creates Paid Sick Leave Benefits for Small Business Employees The Families First Coronavirus Response Act applies to private employers with fewer than 500 employees (and government employers), and makes several key changes to paid time off laws. The bill: (1) provides 80 hours' additional paid sick leave for employees (pro-rated for part-time workers) and (2) expands FMLA protections. The additional paid sick leave is capped at $511 per day (total of $5,110) for employees who cannot go to work or telecommute because they (1) are experiencing COVID-19 symptoms and seeking a diagnosis, or (2) are subject to government-mandated quarantine or a recommendation to self-quarantine. The additional paid sick leave is capped at 2/3 of the employee's pay rate, subject to a maximum of $200 per day or $2,000 total if the employee (1) is caring for or assisting someone subject to quarantine, (2) caring for a child whose school or care provider is unavailable or (3) experiencing "substantially similar conditions" specified by HHS. For more information on the family and medical leave tax credit available for business owners, visit Tax Facts Online. Read More

Coronavirus Response Act: Tax Relief for Small Business Owners The law contains a tax credit to help small business owners subject to the new paid sick leave and expanded FMLA requirements. The tax credit is computed each quarter, and allows as a credit (1) the amount of qualified paid sick leave wages paid in weeks 1-2, and (2) qualified FMLA wages paid (in the remaining 10 weeks) during the quarter. The credit is taken against the employer portion of the Social Security tax. Amounts in excess of the employer Social Security taxes due will be refunded as a credit (in the same manner as though the employer had overpaid Social Security taxes during the quarter). The Act also provides a tax credit for qualified health plan expenses that are allocable to periods when the paid sick leave or family leave wages are paid. For more information on refundable tax credits, visit Tax Facts Online. Read More

2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-0874