Hot Topics in the Federal Tax Controversy: The
Latest Developments in Audits, Investigations,
and Tax Litigation
• All audio is streamed through your computer speakers.
• There will be several attendance verification questions during the
LIVE webinar that must be answered via the online quiz at the
conclusion to qualify for CPE.
• For the archived/recorded version of this webinar, there are also 3
review questions per hour and the link to the attendance
verification quiz is a final exam on the topics covered during the
presentation.
• Please note: You will not hear any sound until the webinar begins.
Matthew D. Lee
Matthew D. Lee
Partner
Blank Rome LLP
215.569.5352
Lee-M@BlankRome.com
Matthew D. Lee is a former U.S. Department of Justice trial attorney who
concentrates his practice on all aspects of white collar criminal defense and federal
tax controversies. He has extensive experience in advising clients on issues
regarding foreign bank account reporting (FBAR) obligations, the Foreign Account
Tax Compliance Act (FATCA), and the Internal Revenue Service’s 2009 Offshore
Voluntary Disclosure Program, 2011 Offshore Voluntary Disclosure Initiative, and
2012 Offshore Voluntary Disclosure Program. He has represented hundreds of U.S.
taxpayers with undisclosed foreign bank accounts. Mr. Lee has published numerous
articles regarding the IRS voluntary disclosure programs and FBAR and FATCA
reporting obligations and speaks frequently on these topics. He is the author of a
forthcoming treatise on FATCA to be published by the Practising Law Institute.
He has also represented clients in all stages of proceedings before the Internal
Revenue Service, including audits, appeals, and collections, and Tax Court and
district court litigation. Mr. Lee also has experience in conducting corporate internal
investigations and advising clients as to corporate compliance issues involving the
Bank Secrecy Act, the USA Patriot Act, FATCA, and anti-money laundering laws and
regulations.
Mr. Lee has represented both corporations and individuals in criminal investigations
involving tax, money laundering, health care, securities, public corruption, and fraud
offenses, and has significant experience in handling all stages of federal litigation
including trials and appeals.
Mr. Lee publishes a blog devoted to addressing the latest developments in the tax
controversy field at www.taxcontroversywatch.com.
2
Learning Objectives
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Upon completion of this webinar you will be able to:
Define foreign asset & FBAR reporting requirements.
Identify who is required to file an FBAR.
Determine FBAR filing exemptions.
Identify FBAR penalties for non-compliance.
Define the Foreign Account Tax Compliance Act FATCA and the Obligations of
Foreign Financial Institutions and of U.S. Taxpayers to Report Foreign Assets.
Identify who is required to file Form 8938 and the rules for Form 8938.
Determine reporting thresholds for domestic taxpayers and taxpayers living
abroad.
Apply special rules for trusts and estates.
List penalties for non-filing of Form 8938.
Differentiate options for U.S. taxpayers with undisclosed foreign bank
accounts.
Specify the risks of “Quiet Disclosure”.
3
Setting the Stage:
The Tax Gap
4
Background: The Tax Gap
5
Components of the Tax Gap
6
Current IRS Enforcement Priorities
7
IRS Audit Rates
8
IRS-Criminal Investigation Priorities
• International tax fraud
• Identity theft fraud
• Return preparer fraud
• Employment Tax
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10
IRS Budget Woes
• Since FY2010, IRS has absorbed funding cuts of $1 billion (nearly 8 percent);
caused loss of $8 billion of revenue over the same period
• Loss of nearly 10,000 employees (9 percent of workforce)
• Sequestration caused an additional $618 million last year (including furlough
days)
• FY2013 request: $12.9 billion (increase of 8.8%)
• FY2013 appropriation: $11.3 billion
• Enforcement priorities in FY2013 budget request:
– Prevention of fraud and identity theft
– Addressing offshore tax evasion
– Using new information reporting requirements to reduce underreporting
– Strengthening exam and collection activities
– Expanding enforcement efforts among corporate and high-wealth
taxpayers
– Strengthening return preparer compliance (“core to the IRS tax gap
strategy”)
11
IRS-Criminal Investigation staffing
12
International Tax Compliance
• Intense focus on curtailing offshore tax avoidance using
“carrot and stick” approach
– U.S. Tax Gap: $450 billion
– U.S. Senate PSI Report (2/26/14): Offshore tax schemes cause $150 billion
in lost tax revenue
• The “carrot”
– Current Offshore Voluntary Disclosure Program (OVDP) which follows
highly successful 2009 and 2011 amnesty programs
• Provides participating taxpayers with amnesty from criminal prosecution by filing of
amended tax returns and payment of taxes, interest, and penalties
• 43,000 voluntary disclosures since 2009 (versus 100 annually under traditional
voluntary disclosure program)
• Over $6 billion in additional revenue collected to date
– Newly announced Streamlined Filing Compliance Procedures (June 2014)
13
International Tax Compliance
(continued)
• The “stick”
– Collaboration with Justice Department in filing unprecedented number of
criminal prosecutions of U.S. taxpayers with offshore accounts and their
non-U.S. “enablers”
– Increased audit activity (both income and FBAR exams)
– Ongoing criminal investigations of banks in Switzerland, Israel, India, and
the Caribbean
– United States-Switzerland global “deal” announced in August 2013; 106
Swiss banks enrolled in program
14
Enforcement Efforts to Date
• UBS Deferred Prosecution Agreement (Feb. 2009)
• Approximately 150 investigations of offshore account holders since
2009
– Over 60 account holders have been criminally charged
– 55 guilty pleas have been entered
– 5 convictions after trial
• A number of facilitators who helped clients hide assets offshore have
been indicted, including 30 banking professionals
15
Credit Suisse Guilty Plea
May 19, 2014
• Second largest Swiss financial institution (after UBS AG)
• Credit Suisse and its subsidiaries engaged in an extensive
and wide-ranging conspiracy to help U.S. taxpayers evade
taxes. The conspiracy spanned decades.
• Credit Suisse will pay a total of $2.6 billion in fines.
• Credit Suisse agrees to provide information to help IRS/DOJ
make a treaty request for information.
16
Wegelin & Co. Guilty Plea
January 3, 2013
• Oldest Swiss financial institution
• Wegelin & Co. indicted
• Subsequently closed down
• $74 million penalty
• 5% of the bank’s accounts were U.S. account holders
• $1.2 billion in U.S. assets
• Non-U.S. accounts were sold to Raiffeisen
• John Doe summons issued to bank
17
Prosecution of Facilitators in 2014
• Credit Suisse Bankers
– Andreas Bachmann
– Josef Dörig
• Mizrahi Israeli Bank
– Shokrollah Baravarian (CDCA)
• Leumi Bank
– Employees and Bank identified as co-conspirators
• Three Caribbean bankers (EDVA)
18
Prosecution of clients
• Robert C. Sathre pleaded guilty to tax evasion. He hid
assets in a Caribbean bank account to avoid 1995 and
1996 tax assessments. He was sentenced to 36 months.
• Dr. Patricia Hough was convicted at trial for failing to
report business proceeds from a Caribbean medical
school. She was sentenced to 24 months. Her husband
fled before indictment and remains a fugitive.
• John Cote was convicted at trial for tax evasion. Cote
used Caribbean and Swedish bank accounts to hide
assets. He was sentenced to 46 months.
19
Swiss Bank Voluntary Disclosure Program
• Bloomberg reports that over 100 Swiss banks entered program as
Category II, meaning bank has “reason to believe” it violated U.S.
tax laws.
• Swiss banks will receive non-prosecution agreement in exchange
for certain information and payment of penalty.
• Category 2 Swiss banks can minimize the penalty imposed if they
can show that their clients have filed FBARs (or entered OVDP).
• Program requires production of Leavers List.
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Leavers List
• Account holders’ names not produced
• Information – by account – concerning the transfer of funds into
and out of the account on a monthly basis, including
–
–
–
–
Amounts
Date of transfers
Financial Institution that received transfers
Host country of financial institution
• Essentially everything necessary to make a treaty request to
identify the account holder
21
John Doe Summons
• Recent publicized John Doe Summons
– Wegelin & Co.
– FirstCaribbean International Bank (FCIB), a Barbados-based
bank with branches across the Caribbean
• Requires banks to produce records for account holders
– Civil and Criminal statute of limitations are tolled for account
holders if the case is not resolved after six months
– Civil tolling is in addition to any other tolling provisions
22
GAO: Increasing Rates of
Foreign Bank Account Reporting
23
However, Taxpayer Advocate Disagrees
• U.S. Taxpayer Advocate 2013 Report to Congress
– 7.6 million U.S. citizens reside abroad and many more U.S.
residents have FBAR filing obligations
– IRS received only 807,040 FBAR submissions in 2012
– signals “significant information reporting noncompliance”
24
Foreign Account Tax Compliance Act
(FATCA)
25
Foreign Account Tax Compliance Act
(FATCA)
• “The Foreign Account Tax Compliance Act (FATCA) is an important
development in U.S. efforts to improve tax compliance involving
foreign financial assets and offshore accounts.” (www.IRS.gov)
• “FATCA was enacted in 2010 by Congress to target non-compliance by
U.S. taxpayers using foreign accounts. FATCA requires foreign financial
institutions (FFIs) to report to the IRS information about financial
accounts held by U.S. taxpayers, or by foreign entities in which U.S.
taxpayers hold a substantial ownership interest.” (www.treasury.gov)
• Effective as of July 1, 2014
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Two Primary FATCA Requirements
• Foreign financial institutions are annually required to
report directly to the U.S. government information about
financial accounts held by U.S. taxpayers, or held by
foreign entities in which U.S. taxpayers hold a substantial
ownership interest.
• U.S. taxpayers with specified foreign financial assets that
exceed certain thresholds must report those assets to the
IRS annually on an information return.
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FATCA Policy in Context of U.S. Tax Laws
• U.S. taxpayers’ investments have become increasingly global in
scope
• Recognition that foreign financial institutions (FFIs) are in best
position to identify and report with respect to their U.S. account
holders
• Absent reporting by FFIs, some U.S. taxpayers may attempt to
evade U.S. tax by hiding money in offshore accounts
• “To prevent this abuse of the U.S. voluntary tax compliance
system and address the use of offshore accounts to facilitate tax
evasion, it is essential in today’s global investment climate that
reporting be available with respect to both the onshore and
offshore accounts of U.S. taxpayers.” (Preamble to Final
Regulations)
28
What Does FATCA Require of FFIs?
• FATCA requires Foreign Financial Institutions (FFIs) to report to
the IRS information about financial accounts held by U.S.
taxpayers, or by foreign entities in which U.S. taxpayers hold a
substantial ownership interest. In order to avoid withholding
under FATCA, a participating FFI will have to enter into an
agreement with the IRS to:
– Identify U.S. accounts,
– Report certain information to the IRS regarding U.S. accounts, and
– Withhold a 30 percent tax on certain U.S.-connected payments to
non-participating FFIs and account holders who are unwilling to
provide the required information.
29
International Coordination and
Model Intergovernmental Agreements
• Treasury is collaborating with foreign governments to develop
two alternative model intergovernmental agreements that
facilitate the effective and efficient implementation of FATCA.
• Model 1 IGA: FFIs in jurisdictions that have signed Model 1 IGAs
report the information about U.S. accounts required by FACTA to
their respective governments who then exchange this
information with the IRS.
• Model 2 IGA: A partner jurisdiction signing an agreement based
on the Model 2 IGA agrees to direct its FFIs to register with the
IRS and report the information about U.S. accounts required by
FATCA directly to the IRS.
30
International Coordination
(continued)
• To date, Bermuda, Canada, Cayman Islands, Chile, Costa Rica,
Denmark, Finland, France, Germany, Guernsey, Honduras,
Hungary, Ireland, Isle of Man, Italy, Japan, Jersey, Luxembourg,
Malta, Mauritius, Mexico, the Netherlands, Norway, Spain,
Switzerland, and United Kingdom have signed or initialed model
agreements.
• Treasury is engaged with more than 50 other countries and
jurisdictions to curtail offshore tax evasion, and more signed
agreements are expected to follow in the near future.
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FATCA/Form 8938
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FATCA Foreign Asset
Reporting Requirements
• IRC 6038D: new Internal Revenue Code provision enacted as part
of FATCA
• Requires reporting of specified foreign financial assets if
aggregate value exceeds certain thresholds
• Applies to tax years beginning after March 18, 2010
• Requires that new information return be attached to a taxpayer’s
U.S. income tax return: Form 8938, “Statement of Foreign
Financial Assets”
• Only applies to individual taxpayers, for now
33
Who Is Required to File Form 8938?
You must file Form 8938 if:
1.
You are a “specified individual.”
AND
2.
You have an interest in “specified foreign financial
assets” required to be reported.
AND
3.
The aggregate value of your specified foreign
financial assets is more than the reporting threshold that
applies to you.
34
Review Questions for Self Study CPE:
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35
What is a
“Specified Foreign Financial Asset”?
A specified foreign financial asset (SFFA) is:
• Any financial account maintained by a foreign financial
institution
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–
–
–
–
Foreign bank accounts
Foreign mutual funds
Foreign hedge funds
Foreign private equity funds
Certain foreign insurance products
36
What is a SFFA?
(continued)
• Other foreign financial assets held for investment that are not in
an account maintained by a U.S. or foreign financial institution,
namely:
– Stock or securities issued by someone other than a U.S. person
– Any interest in a foreign entity
– Any financial instrument or contract that has as an issuer or
counterparty that is other than a U.S. person
– Foreign pensions and deferred compensation plans
– Foreign trusts and estates (if “specified individual” is aware of
its existence)
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Reporting Thresholds for Domestic Taxpayers
• Unmarried taxpayers living in the U.S.: The total value of specified
foreign financial assets is more than $50,000 on the last day of the tax
year or more than $75,000 at any time during the tax year.
• Married taxpayers filing a joint income tax return and living in the
U.S.: The total value of specified foreign financial assets is more than
$100,000 on the last day of the tax year or more than $150,000 at any
time during the tax year.
• Married taxpayers filing separate income tax returns and living in the
U.S.: The total value of specified foreign financial assets is more than
$50,000 on the last day of the tax year or more than $75,000 at any
time during the tax year.
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Reporting Thresholds for Taxpayers Living Abroad
• You are a taxpayer living abroad if:
– You are a U.S. citizen whose tax home is in a foreign country and you are
either a bona fide resident of a foreign country or countries for an
uninterrupted period that includes the entire tax year, or
– You are a U.S. citizen or resident, who during a period of 12 consecutive
months ending in the tax year is physically present in a foreign country or
countries at least 330 days.
• A taxpayer living abroad must file if:
– You are filing a return other than a joint return and the total value of your
specified foreign assets is more than $200,000 on the last day of the tax
year or more than $300,000 at any time during the year; or
– You are filing a joint return and the value of your specified foreign asset is
more than $400,000 on the last day of the tax year or more than
$600,000 at any time during the year.
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Form 8938 – Part I
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Form 8938 – Part II
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Form 8938 – Part II (continued)
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Form 8938 Requires Disclosure of Tax
Items Attributable to SFFAs
• Part III of Form 8938 requires that filers must summarize tax
items attributable to SFFAs
• Individuals must identify specific tax items (interest, dividends,
gains/losses, deductions, credits, etc.) that correspond to SFFAs
• Individuals must also list the form, schedule, and line upon which
these tax items are reported
43
Form 8938 – Part III
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No Duplicative Reporting Required
• If you are required to file a Form 8938 and you have a specified
foreign financial asset reported on Form 3520, Form 3520-A,
Form 5471, Form 8621, Form 8865, or Form 8891, you do not
need to report the asset on Form 8938. However, you must
identify on Part IV of your Form 8938 which and how many of
these form(s) report the specified foreign financial assets.
• Even if a specified foreign financial asset is reported on a form
listed above, you must still include the value of the asset in
determining whether the aggregate value of your specified
foreign financial assets is more than the reporting threshold that
applies to you.
• NOTE: FBAR (FinCEN Form 114) must still be filed
45
No Duplicative Reporting Required
(continued)
• Form 3520 – Annual Return To Report Transactions With Foreign
Trusts and Receipt of Certain Foreign Gifts
• Form 3520-A – Annual Information Return of Foreign Trust With
a U.S. Owner
• Form 5471 – Information Return of U.S. Persons With Respect to
Certain Foreign Corporations
• Form 8621 – Information Return by a Shareholder of a PFIC or
Qualified Electing Fund
• Form 8865 – Return of U.S. Persons With Respect to Certain
Foreign Partnerships
46
Form 8938 – Part IV
47
Guidance for Valuing SFFAs
• The regulations provide that the appropriate value of specified foreign financial
assets for purposes of Form 8938 reporting is each such asset’s highest fair
market value during the year, and must be reported in U.S. dollars. If the asset is
denominated in foreign currency, the maximum value is first determined in the
foreign currency and is then converted to U.S. dollars at the taxable year-end
spot rate for converting that currency. Specific guidelines are provided for which
exchange rate should be used.
• For financial accounts, a reasonable estimate of the maximum value is allowed.
Periodic account statements provided at least annually may be relied on to
determine the maximum value, provided that the taxpayer does not have reason
to know that the statement does not reflect the maximum value. For other
financial assets, the fair market value on the last day of the taxable year can be
used, unless the taxpayer knows that this is not a reasonable estimate (for
example, if the taxpayer knows that the asset value declined during the year).
• Joint owners of a SFFA generally each include the full value of the asset for
determining whether threshold is met (except for married taxpayers filing jointly)
48
Penalties for Non-Filing of Form 8938
• Failure to file Form 8938 may result in a $10,000 civil penalty as well as
an additional $10,000 continuation penalty for each 30 day period after
the taxpayer is notified by the IRS of the failure to file (not to exceed
$50,000)
• Exception if failure to file is due to reasonable cause and not due to
willful neglect
• The fact that a foreign jurisdiction would impose a civil or criminal
penalty for disclosing the required information is NOT reasonable
cause
• Criminal penalties may also apply
• Failure to file Form 8938 or certain assets on Form 8938 may keep the
statute of limitations open for ALL items on a return until 3 years after
Form 8938 is filed.
49
Section 6038D filing by domestic entities
• Proposed Regulations issued on December 14, 2011
• 3 requirements:
– U.S. entity must have an interest in a specified foreign financial asset with
an aggregate value exceeding $50,000 on the last day of the tax year or
more than $75,000 at any time during the tax year;
– U.S. entity is “closely held” by one U.S. individual taxpayer; and
• “Closely held” means 80% of the vote or value of the stock, capital
interests or profits interests is held by one U.S. individual taxpayer;
– Either:
• At least 50% of the U.S. entity’s gross income for the tax year is passive income
or 50% of the U.S. entity’s assets at any time during the tax year produce or are
held for the production of passive income; or
• 10% passive income or assets plus the U.S. entity is formed or availed of by a
specified individual with a principal purpose to avoid reporting under Section
6038D.
• Notice 2013-10: Filing by domestic entities deferred until 2014
50
Foreign Bank Account Reporting
51
Foreign Bank Accounting Reporting
• Required as part of Bank Secrecy Act since 1970s
• U.S. taxpayers with foreign accounts have two obligations
– Answer question “yes” on Form 1040, Schedule B, Part III (due April
15 or due date of extended return) or other applicable tax return
– Electronically File FinCEN 114, Report of Foreign Bank and Financial
Accounts (“FBAR”) (due June 30)
52
Foreign Bank Account Reporting
Form 1040, Schedule B
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Foreign Bank Account Reporting
Forms 1120 and 1120-S
54
Foreign Bank Account Reporting
Form 1065
55
Foreign Bank Account Reporting
Form 706
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Foreign Bank Account Reporting
Form 990 (Not yet updated to reflect FinCEN
114 as of this presentation)
57
FinCEN 114 (FBAR)
• New form and instructions issued July 2013
• Required to be filed annually by June 30
• All forms are required to be filed electronically
• No extensions of deadline are available
• If filing on behalf of client, obtain a FinCEN authorization form
(Form 114a)
• Form TD F 90-22.1 is now obsolete.
58
FinCEN 114 (FBAR) (continued)
• Must register with BSA to access online filing system.
• To register, go to:
http://bsaefiling.fincen.treas.gov/Enroll.html
• FinCEN 114 is almost identical to TD F 90-22.1
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FinCEN 114
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FinCEN 114
61
FinCEN 114
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FinCEN 114
63
FBAR Filing Requirements
The FBAR must be filed if all of the following requirements are satisfied:
–
–
–
–
The filer is a U.S. Person;
The U.S. Person has a financial account;
The financial account is in a foreign country;
The U.S. Person has a financial interest in, or signature or other authority
over, the financial account; and
– The aggregate account balance of all such foreign accounts exceed $10,000
(in U.S. dollars) at any time during the calendar year.
64
FBAR Penalties for Non-Compliance
• Criminal penalties for willful violations:
– Up to 5 years imprisonment and $250,000 fine
• Civil penalties
– Non-willful violation: Up to $10,000 for each violation
– Willful violation: Greater of $100,000 or 50 percent of the balance in the
account at the time of the violation
• Both civil and criminal penalties can be imposed together.
65
FBAR Litigation: United States v. Zwerner
• First litigated suit against a U.S. citizen for penalty(also first suit
brought against a non-felon).
• Zwerner had foreign account for many years.
• Charged with failing to report account each year for four years
• Balance of account was about $1,400,000.
• 86 years old when DOJ filed suit.
• Government sought 200% of account balance plus additional
penalties.
• Jury found three violations (150%)
• Unpaid taxes were negligible ($25,000 ≈ 3.4%).
• Settled for $1,800,000.
66
Circular 230 and FBAR Reporting
67
Circular 230 Obligations
• OPR has published “Professional Responsibility and the Report of
Foreign Bank and Financial Accounts” (revised June 2013) on IRS
website
• Key points:
– “Practitioners who prepare an individual’s Form 1040 have a duty under Circular
230 to inquire of their clients with sufficient detail to prepare proper and correct
responses to the foreign bank account questions on Schedule B.” See Circular 230
sec. 10.22
– “[G]ood faith reliance contemplates that a practitioner will make reasonable
inquiries when a client provides information that implies possible participation in
overseas transactions/accounts subject to FBAR requirements.”
– Preparer has no obligation to prepare FBAR for taxpayer, but “does have an
affirmative obligation to advise the client of the need to file the FBAR form and the
consequences of failing to do so.”
68
Circular 230 Obligations and FBAR Reporting
• Best practices for return preparers:
– Engagement letters should advise of FBAR filing obligation and
address whether the preparer will prepare FBARs
– Questionnaire/organizer should request information about foreign
bank accounts and assets, and preparer should follow up to ensure
client responds in writing
– Document any oral conversations with taxpayer in writing
69
Other IRS Enforcement Priorities
70
Questionable Return Preparer Fraud
• IRS and DOJ engaged in aggressive campaign to combat return
preparer fraud
• IRS getting better at using data mining to detect QRP schemes
• Civil penalties of $5,000 per return
• IRS can obtain injunctions against non-legacy preparers
• IRS Office of Professional Responsibility can ‘disbar’ legacy
preparers
• Criminal prosecution is also likely
71
Typical fraudulent practices
• Preparing phony tax-return forms with fabricated businesses
and income (e.g., EITC Fraud)
– The IRS estimates that 21 to 25 percent of EITC payments were issued
improperly in Fiscal Year 2012. The dollar value of these improper
payments was estimated to be between $11.6 billion and $13.6 billion.
• Claiming false and inflated deductions
• Claiming false filing status and dependents
• Schemes du jour
– Telephone Excise Tax in Tax Year 2006
– First Time Homebuyer Credit in Tax Year 2008
72
Stolen Identity Tax Refund Fraud
• Refers to use of stolen or otherwise wrongfully acquired personal
identification information to file a fraudulent claim with the IRS
for a tax refund.
• Occurs when a social security number, or list of numbers, is
stolen or bought; a false tax return showing a refund due is filed
electronically, usually at the beginning of filing season before the
legitimate taxpayer has filed for the year; and the refund is
loaded to a prepaid card, sent to a bank account or mailed to an
address accessible by those involved in the scheme.
• From 2008 to 2012, IRS identified more than 550,000 victims
• During FY2013, the Justice Department filed criminal charges in
more than 580 cases against more than 880 defendants
73
Why do refunds schemes work?
• IRS uses high dollar “filters” and will pay other refund claims
• Low level clerks review returns initially
• IRS slow at recognizing schemes and wants to make system
accessible to all taxpayers
– Beginning in January 2015, it will impose a limit of three electronic
direct deposits of tax refunds into a single financial account or
prepaid debit card
74
Employment Tax Fraud
• Criminalizes IRC 6672 penalty
• All the government needs to show is that payments were
voluntarily and intentionally made to creditors other than the
United States with knowledge that the withheld funds were
due to the United States
• There is no separate requirement that the government prove
that the payments were without justification
75
Employment Tax Fraud scenarios
• Paying personal expenditures in lieu of payroll taxes
• Long term operation of unprofitable business without making
payroll tax payments
• “Pyramiding” business entities
• Cash payroll
– Motive often times to avoiding other liabilities (e.g., workers
compensation)
– Frequently detected by other illegal activities
76
Gift tax return compliance initiative
• IRS estimates that between 60% and 90% of taxpayers that
transfer real property to family members for little or no
consideration fail to file gift tax returns
• 15 states have voluntarily provided data to IRS on real property
transfers among family members
• In December 2011, federal court authorized “John Doe”
summons to California Board of Equalization for real property
transfer data
• Dickerson v. Commissioner (U.S. Tax Court March 8, 2012)
– Gift made in 1999
• Redstone v. Commissioner (U.S. Tax Court April 12, 2013)
– Gift to children made in 1972
77
Form 1099-K/Small Business Initiative
• Tax gap attributable to small businesses: $140 billion
• Since fall 2012, IRS has sent out 20,000 letters to small
businesses notifying them of “possible income under-reporting”
• Focus is on identifying businesses that receive “an unusually high
portion” of sales through credit card transactions, suggesting
that cash transactions are being underreported
• Businesses as asked to respond with an explanation within 30
days
78
FY2012 IRS Collection Activities
• Federal tax liens filed: 707,768 (1.04 million in FY2011)
• Notices of levy served: 2.9 million (3.7 million in FY2011)
• Seizures: 733 (776 in FY2011)
• OIC’s received: 64,000 (59,000 in FY2011)
• OIC’s accepted: 24,000 (20,000 in FY2011)
• Civil penalties assessed: $27 billion
• Civil penalties abated: $11.2 billion
79
Statute of Limitations
Civil Statute for Audit
• Generally, 3 years
• Extended until Form
8938 filed
• Substantial
Understatement (3
additional years)
• Badge of Fraud
(indefinite)
Criminal Statute
• Generally, 6 years
• Delayed up to 6 months
due to IRS foreign record
requests
• Tolled when taxpayer is
overseas
80
Review Questions for Self Study CPE:
Now’s the time to answer the review questions 4-6.
Click here:
http://www.proprofs.com/quiz-school/story.php?title=ODEwMTYx5CQ0
*Once all questions are complete please submit and close quiz
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81
Questions?
Matthew D. Lee
Blank Rome LLP
One Logan Square
Philadelphia, PA 19103
Lee-M@BlankRome.com
www.taxcontroversywatch.com
82
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confirmation.
You must complete this survey and the quiz or final exam (for the
recorded version) to qualify to receive CPE credit.
National Society of Accountants
1010 North Fairfax Street
Alexandria, VA 22314-1574
Phone: (800) 966-6679
members@nsacct.org
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