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Bitcoin Offshore Abusive Tax Scheme | FATCA International Tax Lawyer

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Bitcoin Offshore Abusive Tax scheme is now at the center of the new war against offshore tax noncompliance. The IRS started this war on November 17, 2016, with the John Doe Summons petition against Coinbase, Inc., the largest US bitcoin exchanger. In this petition, the IRS Revenue Agent David Utzke details one variation of the Bitcoin Offshore Abusive Tax scheme that seems to be the main target of the IRS battle against Coinbase. Let’s discuss it in more detail.

Traditional Offshore Abusive Tax Scheme

In the petition, the IRS first provided a description of a common traditional offshore abusive tax scheme based on a real-life example of “Taxpayer 1″. In this scheme, Taxpayer 1 retained the services of a foreign promoter who set up a controlled foreign corporation which was merely a shell corporation. The corporation first diverted the taxpayer’s income to a foreign brokerage account and, then, to a foreign bank account. After the funds were transferred to a foreign bank account, Taxpayer 1 was able to repatriate the funds as cash (US dollars) through an ATM machine.

Obviously, this scheme had a number of disadvantages. First, it was not cheap: Taxpayer 1 had to retain foreign attorneys and engage in various other regulatory expenses.

Second and most importantly, the entire scheme was done in US dollars and, hence, ran a relatively high risk of the IRS detection. If the IRS discovered the scheme, it would not be difficult to trace it directly to Taxpayer 1. The weakest point of the scheme was the repatriation in US dollars of the hidden income.

Bitcoin Offshore Abusive Tax Scheme

When Taxpayer 1 discovered bitcoins, he adopted a new model which I will call a Bitcoin Offshore Abusive Tax Scheme. The first two steps (i.e. the diversion of income) were the same – a controlled foreign shell corporation was set up and the funds were diverted to a foreign account.

The difference between the schemes was really in the repatriation process. Under the Bitcoin Offshore Abusive Tax Scheme, the funds from a foreign account were moved to a bank which worked with a virtual currency exchanger (such as Coinbase), converted to bitcoins and placed in a virtual currency account. Then, the taxpayer used the bitcoins to anonymously purchase goods and services without ever converting the hidden income into US dollars. Under this process, Taxpayer 1 had hoped to avoid the IRS detection of the repatriation of funds.

Bitcoin Offshore Abusive Tax Scheme Protects the Taxpayer From IRS Detection During the Repatriation Process

The biggest advantage of the Bitcoin Offshore Abusive Tax Scheme is its ability to protect a taxpayer from the IRS detection when he tries to repatriate the undisclosed income back to the United States. Since bitcoin ownership and purchases are done anonymously and without conversion to US dollars, the IRS may never be able to detect tax noncompliance.

Revenue Agent Utzke himself states in the petition that “because there is no third-party reporting of virtual currency transactions for tax purposes, the risk/reward ratio for a taxpayer in the virtual currency environment is extremely low, and the likelihood of underreporting is significant”.

Indeed, it appears that Taxpayer 1 was highly successful in his Bitcoin Offshore Abusive Tax Scheme. The discovery of that scheme was only made possible due to the voluntary disclosure of Taxpayer 1 to the IRS (most likely Taxpayer 1 prudently decided to enter the OVDP).

Bitcoin Offshore Abusive Tax Scheme Begins to Dominate Offshore Tax Noncompliance

These advantages of the Bitcoin Offshore Abusive Tax Scheme led to its increasing popularity among noncompliant US taxpayers. In fact, it appears that the Bitcoin Offshore Abusive Tax Scheme now dominates this market. Even Agent Utzke admitted that virtual currencies have now largely replaced “traditional abusive tax arrangements as the preferred method for tax evaders”. The John Doe Summons Against Coinbase is Aimed at the Bitcoin Offshore Abusive Tax Scheme.

Given this fact, it is little surprise that the IRS decided to begin a war against abusive tax schemes involving virtual currencies and, especially, bitcoins. The John Doe Summons Petition against Coinbase is the first battle of this war against the Bitcoin Offshore Abusive Tax Scheme.

Given the IRS victory in its battle against Swiss banks, it is very likely that, in one form or another, the IRS will prevail against Coinbase and the virtual currency industry in general. This victory will result in the exposure of noncompliant US taxpayers who will then face a litany of draconian IRS penalties, including possibly criminal penalties and jail time.

Noncompliant US Taxpayer Engaged in a Bitcoin Offshore Abusive Tax Scheme Should Consider Voluntary Disclosure

Given this precarious legal environment and the significant risk of the IRS detection, noncompliant US taxpayers should consider doing a voluntary disclosure while they have the ability to do so. Once the IRS identifies noncompliant taxpayers and commences investigations against them, these taxpayers may lose forever the ability to do a voluntary disclosure to avoid criminal penalties and reduce civil penalties.

This is why these taxpayers urgently need to contact an international tax lawyer to consider their voluntary disclosure options.

Contact Sherayzen Law Office for Legal Help with Bitcoin Tax Noncompliance

If you are a US taxpayer who has engaged in a Bitcoin Offshore Abusive Tax Scheme or any other tax noncompliance involving bitcoins, contact Sherayzen Law Office for professional help as soon as possible. Our legal and accounting team has helped hundreds of US taxpayers with their voluntary disclosures and we can help You!

Contact Us Today to Schedule Your Confidential Consultation!

First Quarter 2017 Underpayment and Overpayment Interest Rates

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On December 5, 2016, the IRS announced that the First Quarter 2017 underpayment and overpayment interest rates will remain the same from the Fourth Quarter of 2016.

This means that, the First Quarter 2017 underpayment and overpayment interest rates will be as follows:

four (4) percent for overpayments (two (3) percent in the case of a corporation);
four (4) percent for underpayments;
six (6) percent for large corporate underpayments; and
one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is 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 First Quarter 2017 underpayment rates are relevant not only for simple amended tax returns (with amounts due), but also for a number of other different reasons. Here, I would like to emphasize two particular reasons for the importance of the first quarter 2017 underpayment rates. First, it is used to calculate interest for the US taxpayers who participate in the OVDP or the Streamlined Domestic Offshore Procedures.

Second, the first quarter 2017 underpayment rates will be relevant to future PFIC interest calculation on any excess distributions (for default Section 1291 PFICs).

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.

Contact Us Today to Schedule Your Confidential Consultation!

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.

Russian Taxation of Gifts to Nonresidents: Recent Changes

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The Russian Ministry of Finance (“MOF”) recently issued Guidance Letter 03-04-06/64102 (dated October 31) regarding the taxation of gifts from Russian legal entities to nonresidents (i.e. the Russian taxation of gifts to nonresidents). This Letter will have a direct impact on the tax planning for Russians who are tax residents of the United States.

Russian Taxation of Gifts to Nonresidents: Russian-Source Gifts are Taxable

In the letter, the MOF stated that, under the Russian Tax Code Article 209, Section 2, the Russian-source income of individuals who are not tax residents of the Russian Federation is subject to the Russian income tax (the Russian tax residents are taxed on their worldwide income – i.e Russian-source and foreign-source income).

Furthermore, the MOF determined that gifts received by nonresidents from a Russian legal entity are considered to be Russian-source income. This means that these gifts are taxable beyond the exemption amount. According to Tax Code Article 217, section 28, the exemption amount is 4,000 Russian roubles per tax year. Hence, a gift from a Russian legal entity to a non-resident of Russia will be subject to the Russian individual income tax if it exceeds 4,000 rubles.

Russian Taxation of Gifts to Nonresidents: the Place of Gift Does Not Matter

It is important to emphasize that, in this situation, the sourcing of the gift is determined by the giftor – i.e. if the giftor is a Russian legal entity, the gift is considered as Russian-source income irrespective of the actual location of the place where the gift took place. For example, if a Russian legal entity gifts 10,000 rubles in Switzerland, the gift is still considered to be Russian-source income.

Russian Taxation of Gifts to Nonresidents: Tax Withholding Rules

The general rule is that the Russian legal entity who makes the gift to a nonresident is considered to be the withholding agent who is required to withhold from the gift and remit to the MOF the individual income tax due. However, the MOF specified that, if a gift is a non-monetary one or of such a nature that a tax cannot be withheld, then the entity must notify the Russian Federal Tax Service that it could not and did not withhold the tax (with the amount of the tax due). The nonresident would be responsible for the payment of the tax due in this case.

Impact of the Changes in the Russian Taxable of Gifts to Nonresidents on US Tax Residents

The Guidance Letter 03-04-06/64102 will have an important impact on the Russian tax and estate planning strategies with respect to US tax residents. One of the most common strategies for business succession and estate planning in Russia has been gifting of assets to children who were non-residents of Russia and US tax residents. The guidance letter directly impacts this strategy forcing the re-evaluation of the desirability of this entire course of action.