IRS Lawyers

IRS Acquires Phone-Hacking Software | IRS Lawyer News

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It seems that the IRS audit powers are increasing more and more at the expense of taxpayers’ privacy rights. In June of 2019, the IRS posted a procurement notice on its website to award a contract to a company Cellebrite, an Israeli company that specializes in smartphone decryption software and equipment. In other words, the IRS is about to acquire phone-hacking software from this company.

IRS Phone-Hacking Software: Primary Targets

What exactly does the IRS want to be able to hack? It appears pretty much everything that is used by taxpayers on a daily basis. Cellebrite software is capable to hacking both Android and Apple phones. Moreover, it can extract data from programs such as WhatsApp, Instagram and Facebook. This data-extraction ability covers encrypted messages.

According to Cellebrite’s website, its software would allow the IRS to “go beyond texts, call logs and photos with a comprehensive toolset that effectively accesses data from the widest variety of digital sources.” Furthermore, “advanced capabilities help you bypass passwords, overcome locks and encryption challenges to extract and decode complete data from the most devices, operating systems and applications. You can also extract and preserve public and private data from social media and other cloud-based sources, providing an unparalleled amount of forensically sound digital evidence.”

IRS Phone-Hacking Software: IRS Is Not the Only Federal Agency to Use It

The IRS is not alone in its usage of phone-hacking software. US Secret Service, US Immigration and Customs Enforcement, Federal Bureau of Investigation and other government agencies have acquired phone-hacking abilities, including from Cellebrite. One of the most famous examples of a government agency using phone-hacking software occurred with respect to a mass shooter’s iPhone. After Apple refused to cooperate with the FBI, the Bureau reportedly used an “outside party” to unlock the iPhone used by the San Bernardino shooter (the FBI has denied it, but it appears that the rumors are true).

Also, this is not the first time that the IRS used Cellebrite software. It appears the IRS has had contracts with the firm all the way back to 2009. In those instances, the IRS simply paid Cellebrite for its services to unlock a specific phone. This time, however, the IRS wants the software license, equipment and maintenance support.

IRS Phone-Hacking Software: Privacy Invasion Concerns

The fact that the IRS will acquire the capability to directly hack into taxpayers’ phones raises all kinds of privacy concerns. When will the IRS use it – only in criminal investigations or also in civil ones? Will there be a judicial review of the IRS usage of this software? Who will authorize the hacking and under what circumstances? How will the privacy rights of innocent taxpayers be protected? Will the information obtained by the IRS be shared with other federal agencies? What about state agencies? What kind of safeguards are in place to prevent the usage of the discovered data (especially when it is not relevant to tax compliance) for political vendetta purposes?

All of these questions are highly-important concerns in our world of rapidly-disappearing privacy rights. This is a concern that should be shared by all members of our society.

Sherayzen Law Office will continue to follow these recent developments with respect to expanding IRS capabilities to investigate US taxpayers.

IRS Appeals Video Conference | IRS Tax Lawyer & Attorney

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In May of 2019, Mr. Andrew Keyso, a deputy chief of the IRS Office of Appeals, stated that the Appeals Office is in the early stages of rolling out the technology to conduct video conferences as an option for Appeals conferences. This is great news for tax practitioners – an IRS Appeals video conference is a very convenient option for doing business with the IRS.

IRS Appeals Video Conference: WebEx Platform and Early Testing

The IRS Appeals video conference option will be based on WebEx video conferencing software developed by Cisco. It is secure and convenient, but some training is necessary to use it efficiently.

The IRS has already successfully tested WebEx software for appeals video conferences in early 2018. In October of 2018, IRS made the software more broadly available to its employees so that they can offer video conferences.

IRS Appeals Video Conference: IRS Wants Employees to Use It More

Unfortunately, not all IRS employees at the Appeals Office offer video conferences. Neither do many taxpayers seek them (undoubtedly due to lack of knowledge about them). Those who do so, however, find this option very attractive.

The IRS definitely wants its employees to use the IRS Appeals video conference option more. Speaking at the American Bar Association Section of Taxation conference in May of 2019, Diane Ogawa, an IRS appeals officer in Honolulu, stated: “We are trying to get more appeals officers training and on board with WebEx”. Sherayzen Law Office believes that, as more Appeals employees, taxpayers and tax practitioners become familiar with WebEx, the usage of the IRS Appeals video conference option should greatly increase.

IRS Appeals Video Conference: Positive Reaction from Tax Lawyers

The tax lawyers are generally in favor of using the IRS Appeals video conference option. They find it a convenient and effective way to conduct a hearing conference. There is also an additional benefit of reduced costs: there is no need to waste time and money on traveling to the IRS office.

IRS Appeals Video Conference: Potential Problems

This option, however, is not without potential problems. Besides the potential technical issues, the biggest problem is privacy. An unrepresented taxpayer may try to hold a video conference in a public place (like Starbucks) and the IRS will simply not agree to it. A represented taxpayer will not likely run into this problem, because his representative should know about these privacy issues.

The bigger privacy concern, though, comes from tax lawyers. They need to make sure that the prying eye of WebEx technology does not catch the other clients’ files, names and so on in the background of the WebEx video. Lawyers should strive to protect the attorney-client privileged information to the maximum extent possible.

Sherayzen Law Office Supports the IRS Video Conference Option and Hopes the IRS Expands It to Audit Interviews

As an international tax law firm, Sherayzen Law Office has clients throughout the United States and, indeed, the world. Flying to a meeting with an IRS agent is sometimes inconvenient for both, the taxpayer and the attorney; it is also expensive. Video conferencing is a perfect solution to this issue, and Sherayzen Law Office fully supports the current IRS video conferencing efforts.

Moreover, we encourage the IRS to apply video conferencing to other areas, such as IRS audit meetings.

May 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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On May 21, 2018, the IRS announced the creation of another six compliance campaigns. Let’s explore these May 2018 IRS Compliance Campaigns in more detail.

May 2018 IRS Compliance Campaigns: Background Information

After a long period of planning, the IRS Large Business and International division (“LB&I”) finalized its new restructuring plan in 2017. Under the new plan, LB&I decided to switch to issue-based examinations and IRS campaigns.

The idea behind the IRS compliance campaigns is to concentrate the LB&I limited resources where they are most needed – i.e. where there is the highest risk of noncompliance. The first campaigns were announced by the IRS on January 31, 2017. Then, the IRS introduced additional campaigns in November of 2017 and March of 2018. As of March 13, 2018, there were a total of twenty-nine campaigns outstanding.

Six New May 2018 IRS Compliance Campaigns

On May 21, 2018, the LB&I introduced the following new campaigns: Interest Capitalization for Self-Constructed Assets; Forms 3520/3520-A Non-Compliance and Campus Assessed Penalties; Forms 1042/1042-S Compliance; Nonresident Alien Tax Treaty Exemptions; Nonresident Alien Schedule A and Other Deductions; and NRA Tax Credits. Each of these campaigns was selected by the IRS through the analysis of the LB&I data as well as from suggestions made by IRS employees.

It is also important to point out that each of these campaigns as well as the twenty-nine previous campaigns were reviewed by the IRS in light of the 2017 Tax Reform (which was enacted on December 22, 2017).

May 2018 IRS Compliance Campaigns: Interest Capitalization for Self-Constructed Assets

The first campaign focused on the Internal Revenue Code (“IRC”) Section 263A. Under this provision if a taxpayer engaged in certain production activities with respect to “designated property”, he is required to capitalize the interest that he incurs or pays during the production period with respect to this property.

IRC Section 263A(f) defined “designated property” as: (a) any real property, or (b) tangible personal property that has: (i) a long useful life (depreciable class life of 20 years or more), or (ii) an estimated production period exceeding two years, or (iii) an estimated production period exceeding one year and an estimated cost exceeding $1,000,000.

The IRS created this campaign with the goal of ensuring taxpayer compliance by verifying that interest is properly capitalized for designated property and the computation to capitalize that interest is accurate. Construction companies are likely to be the most immediate target of this campaign. Given the fact that Section 263A is not well-known, the IRS adopted varous treatment streams for this campaign, including issue-based examinations, education soft letters, and educating taxpayers and practitioners to encourage voluntary compliance.

May 2018 IRS Compliance Campaigns: Form 3520/3520-A Non-Compliance and Campus Assessed Penalties

This campaign reflects the increasing attention of the IRS to foreign trusts. This is a highly complex area of law. In order to deal with this complexity, the IRS stated that it will adopt a multifaceted approach to improving Form 3520 and Form 3520-A compliance. The treatment streams will include (but not limited to) examinations and penalties assessed by the campus when the forms are received late or are incomplete. The IRS will also use Letter 6076 to inform the trusts about their potential Form 3520-A obligations.

May 2018 IRS Compliance Campaigns: Form 1042/1042-S Compliance

Taxpayers who make payments of certain US-source income to foreign persons must comply with the related withholding, deposit and reporting requirements. This campaign targets Withholding Agents who make such payments but do not meet all of their compliance duties. The IRS will address noncompliance and errors through a variety of treatment streams, including examination.

May 2018 IRS Compliance Campaigns: Nonresident Alien Tax Treaty Exemptions

This campaign is intended to increase compliance in nonresident alien (NRA) individual tax treaty exemption claims related to both effectively connected income and Fixed, Determinable, Annual Periodical (“FDAP”) income. Some NRA taxpayers may either misunderstand or misinterpret applicable treaty articles, provide incorrect or incomplete forms to the withholding agents or rely on incorrect information returns provided by US payors to improperly claim treaty benefits and exempt US-source income from taxation. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

May 2018 IRS Compliance Campaigns: Nonresident Alien Schedule A and Other Deductions

This is another campaign that targets NRAs. In this case, the IRS focuses on the Form 1040NR Schedule A itemized deductions. NRA taxpayers may either misunderstand or misinterpret the rules for allowable deductions under the previous and new IRC provisions, do not meet all the qualifications for claiming the deduction and/or do not maintain proper records to substantiate the expenses claimed. The campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

May 2018 IRS Compliance Campaigns: NRA Tax Credits

This is yet another (third) campaign that targets NRAs; this time it concerns tax credits claimed by the NRAs. The IRS here targets NRAs who erroneously claim a dependent tax credit and who either have no qualifying earned income, do not provide substantiation/proper documentation, or do not have qualifying dependents. Furthermore, the IRS also wants to target NRAs who claim education credits (which are only available to U.S. persons) by improperly filing Form 1040 tax returns. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, please contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

March 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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With this article, we begin a series of articles dedicated to the description of the IRS compliance campaigns initiated between March of 2018 and April of 2019. This article is dedicated to the March 2018 IRS Compliance Campaigns.

March 2018 IRS Compliance Campaigns: Background Information

On March 13, 2018, the IRS Large Business and International division (“LB&I”) has announced the creation of another five additional compliance campaigns. This news came after similar announcements on January 31, 2017 and November 3, 2017 about the selection of a total of twenty-four IRS compliance campaigns.

These campaigns came into existence as a result of a long and broad restructuring of the LB&I, which required a large investment of time and resources. Campaign development in particular required strategic planning and deployment of resources, training and tools, metrics and feedback.

The basic idea behind the IRS campaigns is to focus the limited resources of the IRS on the high-risk compliance issues in the most efficient way. These campaigns also go hand-in-hand with the recent IRS shift to issue-based audits.

Five March 2018 IRS Compliance Campaigns

On March 13, 2018, the IRS announced the creation of five additional campaigns: Costs that Facilitate an IRC Section 355 Transaction, SECA Tax, Partnership Stop Filer, Sale of Partnership Interest and Partial Disposition Election for Buildings.

Each of these campaigns was identified by the IRS through the LB&I data analysis as well as recommendations from IRS compliance employees.

March 2018 IRS Compliance Campaigns: Costs that Facilitate an IRC Section 355 Transaction

In general, costs to facilitate a tax-free corporate distribution under IRC Section 355, such as a spin-off or split-up, must be capitalized (i.e. they cannot be deducted). Nevertheless, some taxpayers may execute a corporate distribution and improperly deduct the costs that facilitated the transaction in the year the distribution was completed. The goal of this campaign is to ensure that taxpayers only capitalize the facilitative costs. The IRS intends to reach this goal through issue-based examinations.

March 2018 IRS Compliance Campaigns: SECA Tax

This campaign focuses on partners’ self-employment tax under the Self-Employment Contributions Act (“SECA”). Unless a partner qualifies as a “limited partner” for self-employment tax purposes, he must report his pass-through income from the partnership and pay the required self-employment tax under SECA.

The IRS, however, has realized that, with respect to service-based partnerships (particularly, law firms), some partners have improperly claimed that they qualified as limited partners. As part of this campaign, the IRS will focus on limited liability partnerships, limited partnerships and limited liability companies.

March 2018 IRS Compliance Campaigns: Partnership Stop Filer

This campaign focuses on a very common problem – a partnership ceases to file tax returns even though it continues to do business, fails to supply Schedules K-1 to its partners and the partners never report any of the pass-through income from the partnership.

Since there are various possible reasons that cause this problem to arise, the IRS decided to adopt a flexible approach to enforcement in this campaign. The treatment streams will vary from stakeholder outreach, soft letters (to encourage voluntary self-correction) to issue-based examinations.

March 2018 IRS Compliance Campaigns: Sale of Partnership Interest

A sale of a partnership interest usually results in a capital gain or loss. The taxation of such a gain varies from long-term capital gains tax rate of 15% (if the partnership interest was held for more than a year) and higher capital gains rates for appreciated collectibles to short-term capital gains and, in some cases, even ordinary income (for example, in situations where the a partnership has inventory items or unrealized receivables at the time of the sale or exchange).

This campaign intends to deal with two problems that arise with respect to a sale of a partnership interest. First, the IRS will target taxpayers who simply do not report the sale (there is a surprisingly large number of these individuals, especially in a small-business setting, like a restaurant).

Second, the IRS wants to improve compliance with respect to correct taxation of the gain from a disposition of a partnership interest. The incorrect reporting usually occurs where the entire such gain is taxed at long-term capital gain tax rates, rather than 25% or 28% capital gain rates.

The IRS realizes that there are a variety of reasons for errors concerning the proper reporting and taxation of a partnership disposition gain. For this reason, it will apply a variety of treatment streams to noncompliance taxpayers, including soft letters and examinations. Additional treatment streams include practitioner and taxpayer outreach, tax software vendor outreach, and tax form and publication change suggestions.

March 2018 IRS Compliance Campaigns: Partial Disposition Election for Buildings

In August of 2014, the IRS issued regulations concerning IRC Section 168. In particular, Treas. Reg. Section 1.168(i)-8 supply the rules concerning gain/loss recognition with respect to partial disposition of MACRS property. In order to comply with the Section168 disposition regulations and make a partial disposition election, a taxpayer must be able to substantiate that it:

disposed of a portion of a MACRS asset owned by the taxpayer;
identified the asset that was partially disposed;
determined the placed-in-service date of the partially disposed asset;
determined the adjusted basis of the disposed portion; and
reduced the adjusted basis of the asset by the disposed portion.

The goal of this campaign is to ensure taxpayers accurately recognize the gain or loss on the partial disposition of a building, including its structural components. The treatment stream for this campaign is issue-based examinations and potential changes to IRS forms and the supporting instructions and publications.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, you should contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

2019 First Quarter IRS Interest Rates Increase | Tax Lawyers MN

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On December 6, 2018, the IRS announced that the 2019 First Quarter IRS interest rates for the underpayment and overpayment purposes will increase again. The increase in the 2019 First Quarter IRS interest rates follows the recent increases in interest rates by the Federal Reserve.

After the new increase, the 2019 First Quarter IRS interest rates will be as follows:

six (6) percent for overpayments (five (5) percent in the case of a corporation);
six (6) percent for underpayments;
eight (8) percent for large corporate underpayments; and
three and one-half (3.5) percent for the portion of a corporate overpayment exceeding $10,000.

The Internal Revenue Code requires that the rate of interest be determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The 2019 First Quarter IRS interest rates were computed based on the federal short-term rate determined during October of 2018 to take effect on November 1, 2018, based on daily compounding.

The 2019 First Quarter IRS interest rates have widespread impact beyond just the calculation of the interest rates that the IRS will calculate on the underpayments and overpayments of federal tax liability, as determined on an amended tax return or as a result of an audit. These rates will be used to determine the total amount due for any additional tax return liability that arose as result of filing under Streamlined Domestic Offshore Procedures.

Moreover, the 2019 First Quarter IRS interest rates are directly relevant the calculation of PFIC (Passive Foreign Investment Company) tax liability. In particular, these rates are used to determine the PFIC interest on PFIC tax imposed on “excess distribution” under the default IRC Section 1291 PFIC calculation method.

Sherayzen Law Office continues to watch the increase in IRS interest rates to properly adjust its interest calculation spreadsheets.