taxation law services

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.

Form 872 Refund Claims | Foreign Accounts International Tax Lawyer

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The subject of this article is the discussion of the Form 872 Refund Claims, particularly whether filing Form 872 can extend the time for the taxpayer to claim a refund for the relevant years. Stated broadly, the key question that this article seeks to explore is whether an extension of time for assessment of tax can effect the taxpayer’s ability to file a refund claim for the extended years.

Form 872 Refund Claims – Form 872 and Offshore Voluntary Disclosures

Form 872 is a form used by the IRS to obtain the consent from the taxpayer to extend the time to assess tax. This consent can be obtained for income tax, self-employment tax of FICA tax on tips.

The form is used in a great variety of cases, but, in the US international tax context, it is mostly known for its use in the IRS Offshore Voluntary Disclosure Program (OVDP) now closed. Form 872 is in fact obligatory in the OVDP due to the fact that the OVDP voluntary disclosure period is eight years whereas the standard statute of limitations is only three years (even with 25% gross income, there are still at least two years that cannot be opened by the IRS without claiming fraud). Moreover, Form 872 is also used to prevent the statute of limitations from expiring for the rest of the years while the OVDP case is pending.

Form 872 Refund Claims: Form 872 Extends the Statute of Limitations for Refund Claims

According to IRC §6511(c), if the taxpayer and the IRS agree to extend the time within which the IRS can assess a tax, the taxpayer receives a corresponding extension of the time within which he may file a credit or refund claim. Form 872 itself states in paragraph 4 that:

Without otherwise limiting the applicability of this agreement, this agreement also extends the period of limitations for assessing any tax (including penalties, additions to tax and interest) attributable to any partnership items (see section 6231 (a)(3)), affected items (see section 6231(a)(5)), computational adjustments (see section 6231(a)(6)), and partnership items converted to nonpartnership items (see section 6231(b)). Additionally, this agreement extends the period of limitations for assessing any tax (including penalties, additions to tax, and interest) relating to any amounts carried over from the taxable year specified in paragraph (1) to any other taxable year(s). This agreement extends the period for filing a petition for adjustment under section 6228(b) but only if a timely request for administrative adjustment is filed under section 6227. For partnership items which have converted to nonpartnership items, this agreement extends the period for filing a suit for refund or credit under section 6532, but only if a timely claim for refund is filed for such items.

Limitations on Form 872 Refund Claims

There is an important limitation on Form 872 Refund Claims. Form 872 Refund Claims will only be accepted if the extension agreement is entered into before the expiration of the claim period. See IRC §6511(c)(1). This means that, if Form 872 is entered into by the parties by the time that the statute of limitations had already expired, the taxpayer is unlikely to succeed in his Form 872 Refund Claims.

The Form 872 agreement becomes effective when signed by the taxpayer and the District Director or an Assistant Regional Commissioner (See Treas. Reg. § 301.6511(c)-1).

Let’s look at a basic example to understand this limitation on Form 872 Refund Claims better.  Let’s suppose that a taxpayer X filed his 2003 US tax return on April 15, 2004. In March of 2007, the IRS decided to audit X’s 2003 US tax return and Form 872 was entered into by both parties at that time. In this case, without an agreement (and absent other special circumstances such as foreign tax credit issues, 25% under-reporting of income, et cetera), the presumed expiration of the assessment period would be on April 15, 2007; similarly, X’s refund claim period would have expired on April 15, 2007. Since Form 872 was entered into by both parties in March of 2007 (i.e. prior to the expiration of the normal refund claim period), however, X can file his Form 872 refund claims during the period that covers the duration of the extension plus six months thereafter.

Time to File Form 872 Refund Claims

As it was hinted in the example above, the period within which a taxpayer may file a credit or refund claim arising from the tax liability covered by Form 872 is extended for the period of the extension plus an additional six months. See IRC §6511(c)(1).

What Can Be Claimed on Form 872 Refund Claims

With respect to timely Form 872 Refund Claims, the taxpayer can claim an amount limited to the amount that would have been allowable under the normal limitation rules if the claim had been filed on the date the agreement was executed AND any tax paid after the execution of the agreement but before the filing of the claim. IRC §6511(c)(2).

What is the amount allowable under the normal limitation rules? It varies widely based on for what the refund is claimed (i.e. the type of the claim) and what is the filing period. For example, if Form 872 Refund Claims are filed within the three-year filing period, the amount of the refund or credit is limited to the tax paid on the liability at issue within the three years immediately preceding the filing of the claim plus the period of any extension of time for filing the return. IRC §6511(b)(2)(A). On the other hand, Form 872 Refund Claims based on a foreign tax credit adjustment can be granted many years back because the statute of limitations is ten years.

Form 872 Cannot Reduce the Claim Period for Form 872 Refund Claims

One final point that should be mentioned is that Form 872 and any other agreement to extend the assessment period cannot reduce the refund and credit claim period. The law clearly states that, when an extension agreement is executed, the taxpayer’s claim period shall not expire before the expiration of the additional assessment period plus six months.

Contact Sherayzen Law Office for Help With Your Form 872 Refund Claims

If you entered into a Form 872 agreement to extend the time to assess tax (whether as a result of OVDP, opt-out OVDP audit, FBAR Audit or regular audit) or any other type of agreement to extend the assessment period, contact Sherayzen Law Office for help with filing your Form 872 refund claims.

Totalization Agreement with Romania Progresses | Minnesota Tax Lawyer

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On October 26, 2016, the Totalization Agreement with Romania entered a new stage – the government of Romania approved for signature a draft social security (also known as “Totalization”) agreement with the United States.

The Totalization Agreements are authorized by Section 233 of the Social Security Act. The United States currently has Totalization Agreements with 26 countries – Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary (the most recent addition), Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, South Korea, Spain, Sweden, Switzerland and the United Kingdom

The purpose of a Totalization Agreement is to eliminate the burden of dual social security taxes. Such situation arise usually in the context of workers from one country working in another country while they are covered by the social security systems in both countries. In such cases, the Totalization Agreement protects the workers from paying social security taxes in both countries on the same earnings.

The Totalization Agreement with Romania is intended to benefit the Romanian workers who work in the United States and US workers who work in Romania. This is why any advance in the progress of the Totalization Agreement with Romania is of high interest to workers and businesses who work in both countries, United States and Romania.

Obviously, there is still a very long road to go for the Totalization Agreement with Romania. First, the Totalization Agreement with Romania has to be finalized (and it seems that this stage has been reached), then signed by both countries and, finally, ratified by both countries. This process, especially ratification, can take years especially if the US Congress and the new President do not see “eye to eye” on this issue. However, the obvious benefits of the Totalization Agreement with Romania should eventually pave the way to its ratification in both countries.