IRS seeks Bitcoin Accountholder Data from Largest US Bitcoin Exchanger

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On November 17, 2016, the IRS and the US Department of Justice (the “DOJ”) opened a new front against offshore tax evasion – bitcoin accountholder data. On that day, the DOJ filed a petition (accompanied by the IRS memorandum) in the U.S. District Court for the Northern District of California seeking permission to serve a John Doe Summons on bitcoin exchanger, Coinbase Inc. (“Coinbase”), in order to obtain bitcoin transaction records and bitcoin accountholder identities. Coinbase already indicated in its blog post that it will oppose the petition for the bitcoin account holder data in court based on the issues related to its customers’ privacy.

Bitcoin Background Information

Bitcoin is a cryptocurrency and a payment system; its unique nature is in the fact that it is the first decentralized cryptocurrency. It is also the largest virtual currency on the market and the one that has been recognized by users and merchants in many countries (though others have banned it).

The Anonymity of the Bitcoin Accountholder Data Poses a Problem for the IRS

The IRS sees a big problem with bitcoins. While all of the bitcoin transactions are publicly recorded, the actual identity of a bitcoin owner is completely anonymous. The IRS memorandum in support of the John Doe Summons petition is expressly stating the IRS concerns regarding US taxpayers who do not report taxable income from bitcoin transactions and bitcoin trading. Additionally, the IRS (in its aforementioned memorandum) pointed out that bitcoins can be used for creation of non-existing deductions to reduce taxable income.

Offshore Tax Compliance is at the Heart of the IRS Attack on the Bitcoin Accountholder Data

Furthermore, it is no accident that the IRS memorandum that accompanied the DOJ petition was written by Mr. David Utzke, a senior revenue agent with the IRS’s offshore compliance initiatives program. This demonstrates that the IRS views the anonymity of the bitcoin accountholder data not merely a domestic, but also an offshore tax compliance issue. Mr. Utzke expressly states his concerns that bitcoin transactions now replace the more traditional abusive offshore tax schemes.

We also should remember that, in its Notice 2014-21, the IRS treats convertible virtual currency as property for federal tax purposes. This first means that a taxpayer must report any capital gains and losses on his tax returns even if the bitcoin sales occur overseas.

Moreover, this potentially means (though the IRS has not yet expressly stated so) that bitcoins purchased overseas are reportable foreign assets subject to potentially FATCA and FBAR requirements (depending on how they are held – bitcoin wallets can potentially be treated as foreign accounts). The other side of this conclusion is that a bitcoin held overseas may draw FBAR and Form 8938 penalties if it is not timely and properly disclosed. This is indirectly confirmed by Notice 2014-21 which specifically singles out penalties associated with the failure to file an information return under IRC Sections 6721 and 6722.

Sherayzen Law Office Can Help You With Your Bitcoin US Tax Compliance Issues

If you own bitcoins overseas and you have unreported bitcoin income, contact Sherayzen Law Office to help you with your US tax compliance as soon as possible. Time is of the essence; if your identity is disclosed to the IRS and the IRS commences an investigation, you may be precluded from conducting a voluntary disclosure with respect to your bitcoins. In this case, the IRS may impose its draconian tax penalties on unreported income and assets.

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IRS AI Software to Analyze Tax Data | IRS Tax Lawyer Minneapolis

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On November 18, 2016, Mr. Benjamin Herndon, the current IRS director for research and analytics, confirmed the recent rumors that the IRS AI Software is being tested to help IRS agents find patterns of tax noncompliance.

The idea is to supplement human analysis of data with the IRS AI software that would analyze any piece of data not only by itself, but also in conjunction with the other data available to the IRS. This way, the IRS AI Software is expected to analyze a very large amount of various data to identify tax noncompliance patterns.

This means that the IRS currently plans to use artificial intelligence for pattern recognition and visualization of data that would help IRS revenue agents uncover tax noncompliance. It is possible that the IRS AI software will even analyze a particular taxpayer’s characteristics in the context of a taxpayer’s behavior to uncover any discrepancies and potential tax noncompliance.

I believe that this is just the first step that the conservative agency is making. In the near future, one can foresee that the IRS AI software will start taking on more and more tasks such as conducting correspondence audits, certain automatized communications with taxpayers, analysis of data during a field audit (the IRS AI Software can be used most effectively during the audits of large corporations which have huge amounts of data), IRS customer support, international tax compliance (particularly analysis of data collected through FATCA and FBARs) and other vital IRS functions. Most likely, the decisions associated with penalty imposition and the negotiation of offer in compromise will rest with human IRS agents for now.

Finally, the biggest immediate impact of the IRS AI software is likely to be felt in the ability of the IRS to more effectively implement US tax laws and conduct more audits due to the fact that the IRS revenue agents will now be able to devote less time to audit analysis and more time to enforcement of tax laws.

In sum, the US taxpayers should be ready for the impending improved ability of the IRS to identify tax noncompliance and conduct more audits due to increased efficiency which will be introduced by the IRS AI Software.

EU Automatic Exchange of Banking and Beneficial Ownership Data Approved

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On November 22, 2016, the European Parliament approved the automatic exchange of banking and beneficial ownership data across the European Union. The directive received an overwhelming support from the Parliament: 590 members voted “yes”, 32 – “no”, and 64 did not vote.

Since the original proposal was already approved by the EU Council on November 8, 2016, the only issue left before the directive will come into force will be the final adoption of the directive by EU Council. Once the directive on the automatic exchange of banking and beneficial ownership data is adopted by the Council, the member states will have until December 31, 2017, to implement it.

The directive represents a major undertaking with respect to the automatic exchange of banking and beneficial ownership data. Once it is adopted, the directive will allow tax authorities of every EU member state to automatically share the banking information such as account balances, interest income and dividends. Moreover, the directive also requires the EU member states to create registers recording the beneficial ownership of companies and trusts. This means that the tax authorities of all EU member states will finally acquire access to the information regarding the true beneficiaries of foreign trusts and opaque corporate structures.

The idea behind the new legislation on the automatic exchanges of banking and beneficial ownership data is to provide the EU member states with tools to fight cross-border fraud and tax evasion, preserving the integrity of their domestic tax systems.

However, it appears that there are still serious implementation issues with respect to the new directive. The most serious problem is that the directive merely allows the automatic exchange of banking and beneficial ownership date in the EU, but it does not obligate the member states to do so. Furthermore, the banking industry’s role in the facilitation of tax evasion is not addressed at all by the legislature.

After the directive on the automatic exchange of banking and beneficial ownership date is adopted, the European Parliament is going to take up the legislation to provide for a cross-border method for accessing the shared information.

An interesting question for US taxpayers is whether any of the information acquired through the EU sharing mechanism will be shared with the IRS through FATCA. The likelihood of this scenario is fairly strong and may further expose noncompliant US taxpayers to IRS detection.

What to do if the IRS Audits Your Quiet Disclosure | FBAR Lawyer Madison

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This essay is concerned with a situation where the IRS audits your quiet disclosure of foreign assets and foreign income. The IRS audit can be an absolute nightmare in this case. Not only will the audit examine the accuracy of the disclosure, but the IRS may actually raise the issue of willful and non-willful FBAR penalties as well as the potential income tax fraud penalty.

So, is everything lost if the IRS audits your quiet disclosure? The answer is “no”. While the situation may undoubtedly be dire, it is not hopeless if the case is handled properly. While it is not possible to discuss in this article the whole spectrum of strategies available to taxpayers in such a situation, this article attempts to line out the three most important steps that you should do if the IRS audits your quiet disclosure.

1. If the IRS Audits Your Quiet Disclosure, You Should Not Panic

An IRS audit is always a stressful event. The stress increases exponentially if the audit involves a quiet disclosure of foreign assets and foreign income.

While your situation may be difficult, you should try to resist the panic. Panic is an emotional condition where a person starts acting irrationally and may follow a course of action that may worsen the already difficult situation.

2. If the IRS Audits Your Quiet Disclosure, Do Not Try to Handle the Audit by Yourself

Do NOT attempt to solve the IRS audit of your quiet disclosure by yourself, even if you believe that you were non-willful in your original noncompliance. This is extremely dangerous and may result in imposition of non-willful or even willful penalties. US international tax law is so complex that you may easily get yourself in trouble even if you believe that you are doing well.

There is a myth that the IRS is somehow gracious when a taxpayer represents himself and will be willing to reduce the penalties – this is completely false, especially in a situation involving a quiet disclosure. The IRS agents follow procedures and they will follow them ruthlessly until they run into a legal defense built by a lawyer. Without such a defense, there is nothing to stop the IRS from imposing penalties to the extent an agent believes is justified by the facts of the case.

3. If the IRS Audits Your Quiet Disclosure, You Should Immediately Find and Retain an International Tax Lawyer

Get yourself an international tax lawyer to help you with an IRS audit of your quiet disclosure. This can be a highly complex situation and you should have a professional by your side to guide you throughout the process. This is the best way to assure that your case will be handled properly.

In this case, a professional must be an international tax lawyer, not an accountant. I am always suspicious of cases where accountants start to go beyond their professional capacity and take on the legal defense of their clients’ cases. While it may be tolerable in simple domestic cases (though still not recommended), it may result in a horrific outcome where the IRS audits a quiet disclosure.

Sherayzen Law Office Can Be Your International Tax Lawyer if the IRS Audits Your Quiet Disclosure

If the IRS audits your quiet disclosure, consider retaining Sherayzen Law Office, Ltd. as your international tax lawyer to represent you during the IRS audit. Sherayzen Law Office is an international tax firm which focuses on helping its clients with their voluntary disclosures and the audits of these voluntary disclosures. The firm is not only a leader in the field, but it has also extensive experience in combating and reducing the IRS penalties associated with prior tax noncompliance.

Ukrainian FATCA Agreement Authorized for Signature

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On November 9, 2016, the Ukrainian government authorized the Ukrainian FATCA Agreement for signature. Let’s explore this new development in more depth.

Ukrainian FATCA Agreement and FATCA Background

The Ukrainian FATCA Agreement is one of the many bilateral FATCA implementation agreements signed by the great majority of jurisdictions around the world. The Foreign Account Tax Compliance Act (FATCA) was enacted into law in 2010 and quickly became the new standard for international tax information exchange.

FATCA is extremely complex, but its core purpose is very clear – increased US international tax compliance (with higher revenue collection) by imposing new reporting requirements on US taxpayers and especially foreign financial institutions (FFIs). Since FFIs are not US taxpayers, the United States has been working with foreign governments to enforce FATCA through negotiation and implementation of FATCA treaties. The Ukrainian FATCA Agreement is just one more example of these bilateral treaties.

Ukrainian FATCA Agreement is a Model 1 FATCA Agreement

There are two types of FATCA treaties – Model 1 and Model 2. Model 2 FATCA treaty requires FFIs to individually enter into a FFI Agreement with the IRS to report the required FATCA information directly to the IRS (for example, Switzerland signed a Model 2 treaty).

On the other hand, Model 1 treaty requires FFIs in the “partner country” (i.e. the country that signed a Model 1 FATCA agreement) to report the required FATCA information regarding US accounts to the local tax authorities. Then, the tax authorities of the partner country share this information with the IRS.

The Ukrainian FATCA Agreement is a Model 1 FATCA Agreement.

When will the Ukrainian FATCA Agreement Enter into Force?

The Ukrainian FATCA Agreement will enter into force once Ukraine notifies the US government that it has completed all of the necessary internal procedures for the ratification of the Agreement.

What is the Impact of Ukranian FATCA Agreement on Noncompliant US Taxpayers?

The implementation of the Ukrainian FATCA Agreement will mean that the Ukrainian government will force its FFIs to identify all of the FATCA information regarding their US accountholders and share this information with US government.

This further means that any US taxpayers who are currently noncompliant with the US tax reporting requirements (such as FBAR, Form 8938, foreign income reporting, et cetera) are now at an ever increasing risk of detection by the IRS and the imposition of draconian IRS penalties.

Contact Sherayzen Law Office for Help With US Tax Compliance in light of the Ukrainian FATCA Agreement

If you have undisclosed Ukrainian assets (including Ukrainian bank accounts) and Ukrainian foreign income, contact Sherayzen Law Office for help as soon as possible. We have helped hundreds of US taxpayers around the globe (including Ukrainians) to bring their US tax affairs in order and we can help you!