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tax enforcement

Update on IRS Enforcement Efforts

by Kevin Spencer and McDermott Will & Emery | Nov 16, 2022 | IRS Audits, IRS Guidance, Tax Reform, Transfer Pricing Resource

We frequently post about the Internal Revenue Service’s (IRS) tax enforcement trends and announcements. Prior examples from this year include the release of a five-year strategic plan emphasizing enforcement, the plan to hire up to 200 additional attorneys to assist with litigation efforts, the implementation of the Large Partnership Compliance (LPC) Pilot Program, a focus on tax compliance of non-US citizens and residents, and the creation of a new Joint Strategic Emerging Issues Team to identify emerging “abusive transactions.” Over the past several weeks, the IRS has provided additional updates on its enforcement efforts and future plans, including the following:

The IRS is considering raising the economic substance doctrine more frequently in transfer pricing examinations—even those where taxpayers have transfer pricing documentation—and asserting penalties more often in transfer pricing cases. This follows the announcement last April that executive approval is no longer needed before asserting the codified economic substance doctrine under Internal Revenue Code Section 7701(o).

The IRS plans to grow the LPC program and envisions it functioning similar to corporate examinations conducted by the Large Business & International Division.

The IRS’s Criminal Investigation (CI) Division is highly focused on criminal digital asset cases and intends to make many of these cases public. This follows the recent release of the CI Division’s annual report.

The IRS intends to expend more resources on examinations of high-income/high-net-worth taxpayers.

The IRS has proposed to require the disclosure of more information regarding corporate taxpayers’ uncertain tax positions, including citations to contrary authorities, which, if finalized, will likely lead to more examinations and challenges to tax reporting positions.

Practice Point: Tax enforcement has been down over the past several years, including a slowdown in audit operations during the COVID-19 pandemic. With increased funding from the Inflation Reduction Act of 2022 and proposed restrictions on access to IRS Appeals for certain matters, we expect more examinations and tax disputes in the near future. Taxpayers and their advisors should prepare. Consider working with your tax controversy advisor to discuss your more vulnerable return positions to see how to better defend against the impending tax enforcement wave!

Weekly IRS Roundup July 18 – July 22, 2022

by McDermott Will & Emery | Jul 25, 2022 | IRS Guidance, Tax Reform, Tax Refunds

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of July 18, 2022 – July 22, 2022. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

July 18, 2022: The IRS issued Tax Tip 2022-108, reminding people that they can get the latest IRS news through the agency’s verified social media accounts and by subscribing to e-news services.

July 18, 2022: The Treasury Inspector General for Tax Administration (TIGTA) released its Fiscal Year 2022 IRS Federal Information Security Modernization Act Evaluation report. In the report, TIGTA determined that the Cybersecurity Program was not effective in 17 out of 20 metrics. (TIGTA does not make recommendations as part of its evaluation.)

July 19, 2022: The IRS announced that the Security Summit partners are encouraging tax professionals to inform clients about the IRS Identity Protection PIN Opt-In Program to help protect people against tax-related identity theft. This announcement came during the first of the five-part summer series to highlight the critical steps tax professionals can take to protect client data and their businesses.

July 19, 2022: The IRS reminded 2021 tax extension filers not to wait until October to file their returns. (The IRS estimated that 19 million taxpayers requested an extension to file their 2021 tax return.) The announcement urges taxpayers to file their returns as soon as they have all the necessary information and to avoid the October 17 deadline and last-minute rush.

July 19, 2022: The IRS issued Tax Tip 2022-110, which contains information on reporting independent contractor compensation of $600 or more. This is completed using Form 1099-NEC, Nonemployee Compensation.

July 20, 2022: The IRS announced a new five-year strategic plan that outlines its goals to improve taxpayer service and tax administration. The IRS Strategic Plan FY 2022-2026 will serve as a roadmap to help guide the agency’s programs and operations and to meet the changing needs of taxpayers and members of the tax community. The plan also focuses on four goals to improve customer service: (1) Service; (2) Enforcement; (3) People and (4) Transformation. We will be posting more information about the plan on the blog in the coming days.

July 20, 2022: The IRS issued Tax Tip 2022-110, reminding taxpayers of the Taxpayer Advocate Service (TAS), an independent organization within the IRS that helps to protect taxpayer rights. The tax tip also includes information on the Taxpayer Bill of Rights (TBOR). We previously wrote an article explaining what TAS does and how it can be utilized by all types of taxpayers, as well as a post about how taxpayers can utilize the TBOR.

July 20, 2022: The IRS issued a notice and request for comments for [...]

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Key Takeaways | Cryptocurrency Global Tax Enforcement: What Investors and Companies in the Industry Need to Know NOW

by Simon Airey, Kevin Spencer and Katharine Suominen | Jul 27, 2021 | IRS Guidance, Tax Reform

During a recent program discussing the latest government enforcement efforts related to cryptocurrency, we spoke with Gary Alford, one of the leading Internal Revenue Service (IRS) agents in their crypto enforcement efforts, Perry Carbone, Chief of the White Plains Office (US Attorney’s Office – SDNY) and Andy Cole, former Director of Specialist Investigations at HM Revenue & Customs in the United Kingdom, about how investors and companies in the virtual currency industry should address enforcement actions. Below are key takeaways from the conversation.

ENHANCED ENFORCEMENT – UNITED STATES

The time to act is now. The IRS and the US Department of Justice (DOJ) are collecting virtual currency data at a rapid pace while simultaneously moving forward with tax enforcement cases. The IRS Criminal Investigation (IRS-CI) revamped its operations to “do more with less” using new technology that will move investigations at a faster pace.
The IRS joined its civil and criminal units through Operation Hidden Treasure and is also working with outside experts in the field—along with specially-trained IRS agents—to pursue tax enforcement and asset seizure. This is a key agenda item for the US Department of the Treasury and is not going away any time soon.
The IRS and the DOJ expect taxpayers to comply voluntarily with all tax obligations. Despite these recent developments, US taxpayers have limited guidance from the IRS. Engaging with professionals in the space to evaluate the options available to taxpayers is crucial to assessing and ensuring compliance with cryptocurrency taxation.

INTERNATIONAL EFFORTS

Global collaboration is nothing new, but it is now on the rise. Agencies around the world are enhancing their cross-border information and resource sharing to investigate tax crimes efficiently and effectively. The J5, an important component of this global collaboration, is prepared to pool some of the world’s most sophisticated data analytical tools so that intelligence can be screened, searched and/or identified.
The Organisation for Economic Co-operation and Development (OECD) and its governing body will likely start requiring cryptocurrency exchanges to collect customer due diligence information. The window of anonymity around cryptocurrency transactions has closed rapidly in recent years.
The global Common Reporting Standard (CRS) has been in force since 2017. Under the CRS, tax authorities of over 100 countries (including most of the traditional “tax havens”) automatically exchange tax, account and payment information with each other in order to assist in tax collection and enforcement action.

FOR INDIVIDUALS

Moving forward, the “knowledge and willfulness” element needed for criminal cases will be much easier for the DOJ to prove because the “virtual currency question” is now at the top of Form 1040. The prominent location of this question is “a game changer” for criminal tax prosecutions.
Cryptocurrency tax crimes are no longer “add on” charges to other criminal prosecutions, such as narcotics or fraud crimes. The DOJ expects to bring independent cryptocurrency criminal tax cases and take these prosecutions to “the next level,” including prosecutions of more routine tax matters.
Individuals serving as board members on behalf [...]

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Cryptocurrency Global Tax Enforcement: What Investors and Companies in the Industry Need to Know NOW

by Kevin Spencer, Simon Airey and McDermott Will & Emery | Jun 30, 2021 | IRS Guidance, Tax Reform

On June 28, 2021, McDermott held a webinar presentation titled “Cryptocurrency Global Tax Enforcement: What Investors and Companies in the Industry Need to Know NOW.”

Topics during this webinar included:

How to address the tax consequences of past virtual currency transactions, including potential voluntary disclosure considerations.
How to protect your business from a US Department of Justice (DOJ) or UK investigation, including compliance updates to address this risk.
Law enforcement perspectives and updates from the IRS, DOJ and a former high-level director at HM Revenue & Customs.
How to respond to an IRS letter, including potential civil resolutions.
How to respond to a DOJ or a UK Serious Fraud Office (SFO) inquiry, summons, subpoena, search warrant or a whistleblower complaint.

A link to the webinar is available here. A link to the webinar’s slides is available here.

Biden Administration Proposals Will Greatly Enhance IRS’ Ability to Identify Cryptocurrency Transactions

by Julian André, Kevin Spencer and Katharine Suominen | May 26, 2021 | IRS Guidance, Tax Reform

The Biden Administration and the Internal Revenue Service (IRS) continue to focus heavily on cryptocurrency tax enforcement issues. On May 20, 2021, the US Department of the Treasury (Treasury) released the American Families Plan Tax Compliance Agenda, a 22-page report detailing tax compliance measures that are to be included as part of US President Joe Biden’s American Families Plan. The report sets forth a number of initiatives designed to “close the tax gap,” identify the underreporting of tax liabilities and detect tax evasion. These measures, which are part of an $80 billion proposal for the IRS, would significantly enhance the agencies’ ability to address the challenges involved with finding taxes that result from virtual currency transactions.

The Treasury’s report notes that “[c]ryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion.” To address this issue, the Biden Administration is proposing “additional resources for the IRS to address the growth of cryptoassets.”

Most notably, the Biden Administration is proposing enhanced reporting requirements for domestic and foreign financial accounts that specifically address cryptocurrency. Financial institutions, including “cryptoasset exchange accounts and payment service accounts that accept cryptocurrencies” would be required to submit third-party annual reports of all “gross inflows and outflows” from business and personal accounts to the IRS using a form similar to the IRS 1099-INT. Additionally, “businesses that receive cryptoassets with a fair market value of more than $10,000 would be reported on” in a manner similar to how cash transactions are reported on Currency Transaction Reports. These new reporting requirements would dramatically increase the IRS’ ability to identify and detect unreported cryptocurrency transactions.

The report also reemphasizes the need to devote additional funding to the IRS. The Biden Administration is seeking $80 billion in additional funding so that the Treasury and IRS can, among other things, hire “new specialized enforcement staff” and “revitalize[e] the IRS’s examination of large corporations, partnerships, and global high-wealth and high-income individuals.”

Additionally, the Biden Administration plans to overhaul the IRS’ IT systems and capabilities. These IT enhancements are designed to “help support a staff capable of deploying new analytical techniques” and “developing machine learning capabilities [that] will enable the IRS to leverage the information it collects to better identify tax returns for compliance review.” Given the inherent difficulties in identifying cryptocurrency users who have failed to comply with the internal revenue laws, increased data collection and analytics capabilities would be invaluable for the IRS.

The IRS has already been ramping up its cryptocurrency tax enforcement efforts by issuing John Doe summons to various cryptocurrency exchanges, working with industry experts and foreign law enforcement. If implemented, the American Families Plan Tax Compliance Agenda would provide the IRS with extensive new tools and resources for these ongoing enforcement activities.

Practice Point: If you have engaged in cryptocurrency transactions, now is the time to analyze whether you have any civil or criminal exposure and prepare for a government inquiry by gathering all of your transaction records. For [...]

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