On December 22, 2016, the United States Tax Court (the “Court”) issued 15 West 17th Street LLC v. Commissioner, 147 T.C. No. 19 (2016) and addressed, a question related to the statutory construction of section 170(f)(8), which governs the substantiation requirements for certain charitable contributions. The Court held that the taxpayer was not entitled to a charitable contribution deduction for its donation of a historic preservation deed of easement to a non-profit organization on the ground that the rulemaking authority delegated in subparagraph (D) is not self-executing in the absence of regulations. Therefore, the general rule set forth in subparagraph (A) requiring a contemporaneous written acknowledgment applied to the gift at issue. Continue reading
The Pennsylvania Department of Revenue has announced the details of its new tax amnesty program. The program will run from April 21 to June 19,2017. All taxes administered by the Department are eligible for amnesty. Significant penalty and interest relief is available to all who participate, and taxpayers not known to the Department can avoid all taxes, penalties and interest for periods before 2010. Continue reading
A new Pennsylvania tax amnesty program is coming. It was enacted as part of the state’s 2016–2017 budget process. Taxpayers with unfiled state tax returns or returns that need to be amended will be able to pay the tax and half of the interest they owe, with the balance of the interest and all penalties being forgiven. Depending on individual circumstances, there may be only a five-year look back with all prior year tax liabilities forgiven. The effective date has not yet been announced, but when it is there will be a 60-day window to take advantage of the program.
The Amnesty Program
Any tax administered by the Department of Revenue that is delinquent as of December 31, 2015, will be eligible for the tax amnesty program, which will go into effect for 60 consecutive days beginning on a date to be established by the Governor. Under the amnesty program, one-half of all interest and 100 percent of all penalties on eligible taxes that are delinquent as of December 31, 2015, will be waived for taxpayers who file tax amnesty returns and pay delinquent taxes and one-half the interest that is due within the amnesty period.
A taxpayer with “unknown” liabilities who participates in the program and complies with all of its requirements will not be liable for any taxes of the same type that were due prior to January 1, 2011. “Unknown” means that either no return has been filed, no payment has been made, and the taxpayer has not been contacted by the Revenue Department concerning the unfiled returns or unpaid tax, or if a return has been filed, the tax was underreported and the taxpayer has not been contacted by the Revenue Department concerning the underreported tax.
A taxpayer with liabilities known to the Revenue Department may participate in the amnesty program and get the benefit of the waiver of all penalties and half the interest, but must file or amend all unfiled or deficient tax returns.
A taxpayer under criminal investigation or that is the subject of a criminal complaint or a pending criminal action for an alleged violation of any law imposing an eligible tax may not participate. A taxpayer who participates in the program is not eligible to participate in any future amnesty program. Additionally, if within two years after the end of the program a taxpayer that is granted amnesty becomes delinquent for certain periods in payment of any taxes that are due or in the filing of any required returns, the Department of Revenue may assess and collect all penalties and interest waived through the amnesty program.
The Department of Revenue is expected to publish guidance on participation in the amnesty program by no later than mid-September. Until then, many of the details of the program will not be available. For more information please click here.
On June 2, 2016, the United States Tax Court issued Guralnik v. Commissioner denying a Motion to Dismiss for Lack of Jurisdiction the Internal Revenue Service (IRS) filed on the ground that the taxpayer’s petition was not timely filed. As these motions are typically granted or denied by the court through a simple order, it seemed strange that the court would issue a division opinion, which is generally reserved for cases involving an issue of first impression or an important legal issue or principle. The court, however, used this case as a means to change precedent related to the date on which a petition must be filed in Tax Court to be considered timely. Continue reading
On July 21, 2016, the Ninth Circuit in United States v. Hom, No. 14-16214 D.C. No. 3:13-cv-03721-WHA (9th Cir. 2016), determined that a taxpayer who held an online poker account with PokerStars and PartyPoker was not required to report those accounts on a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR). The taxpayer, however, was required to report his FirePay account on an FBAR.
The Ninth Circuit overturned the decision of the United States District Court for the Northern District of California, in part, which had held that all these three accounts were reportable on an FBAR.
The key issue was whether either PokerStars, PartyPoker or FirePay was a financial institution.
The Ninth Circuit stated that:
“[F]inancial institution” is in turn defined to include a number of specific types of businesses, including “a commercial bank,” “a private banker,” and “a licensed sender of money or any other person who engages as a business in the transmission of funds.” 31 U.S.C. § 5312(a)(2).
Hom’s FirePay account fits within the definition of a financial institution for purposes of FBAR filing requirements because FirePay is a money transmitter. See 31 U.S.C. § 5312(a)(2)(R); 31 C.F.R. § 103.11(uu)(5) (2006). FirePay acted as an intermediary between Hom’s Wells Fargo account and the online poker sites. Hom could carry a balance in his FirePay account, and he could transfer his FirePay funds to either his Wells Fargo account or his online poker accounts. It also appears that FirePay charged fees to transfer funds. As such, FirePay acted as “a licensed sender of money or any other person who engages as a business in the transmission of funds” under 31 U.S.C. § 5312(a)(2)(R) and therefore qualifies as a “financial institution.” See 31 C.F.R. § 103.11(uu)(5) (2006). Hom’s FirePay account is also “in a foreign country” because FirePay is located in and regulated by the United Kingdom.See IRS, FBAR Reference Guide, https://www.irs.gov/pub/irs-utl/irsfbarreferenceguide.pdf (last visited July 19, 2016) (“Typically, a financial account that is maintained with a financial institution located outside of the United States is a foreign financial account.”).
In contrast, Hom’s PokerStars and PartyPoker accounts do not fall within the definition of a “bank, securities, or other financial account.” PartyPoker and PokerStars primarily facilitate online gambling. Hom could carry a balance on his PokerStars account, and indeed he needed a certain balance in order to “sit” down to a poker game. But the funds were used to play poker and there is no evidence that PokerStars served any other financial purpose for Hom. Hom’s PartyPoker account functioned in essentially same manner.
This afternoon, President Obama signed into law a five-year, $305 billion highway funding bill that includes several controversial tax measures designed to help fund the legislation. One provision in the legislation authorizes the State Department to revoke U.S. passports of taxpayers who owe the U.S. Treasury more than $50,000 in tax liabilities. Another provision authorizes the Internal Revenue Service to use private debt collectors. In this blog post, we address the passport revocation provision, which now provides the IRS with a powerful tool to force tax compliance.
The law adds a new provision to the Internal Revenue Code (section 7345) which authorizes the Treasury Secretary to certify, to the Secretary of State, that a taxpayer has a “seriously delinquent tax debt.” A “seriously delinquent tax debt” is defined as a federal tax liability which been assessed and is greater than $50,000, and for which the IRS has either filed a lien or levy. (This dollar amount will be adjusted for inflation after 2016.)
Upon receipt of such certification, the Secretary of State is authorized to take action with respect to denial, revocation, or limitation of such taxpayer’s U.S. passport. The law prohibits the Secretary of State from issuing a passport to any individual who has a “seriously delinquent tax debt,” with exceptions provided for emergency circumstances or humanitarian reasons. The law authorizes the Secretary of State to revoke a passport previously issued to an individual with a “seriously delinquent tax debt.” If the Secretary of State decides to revoke a passport under these circumstances, he or she is authorized to limit such passport to return travel to the United States only. The Secretary of State may also deny any passport application submitted without a Social Security number.
Taxpayers who have entered into installment agreements or offers-in-compromise, or have requested collection due process hearings or innocent spouse relief, are exempt from this new law. If the Treasury Secretary has already certified a taxpayer to the Secretary of State, such certification must be revoked within 30 days of the taxpayer making full payment and obtaining release of lien; requesting for innocent spouse relief; entering into an installment agreement; or making an offer-in-compromise which is accepted. In the event that the Treasury Secretary issues an erroneous certification, such certification must be revoked as soon as practicable.
The law does includes certain provisions to safeguard taxpayer rights. Taxpayers who are certified to the Secretary of State as having a “seriously delinquent tax debt,” or whose certifications are subsequently revoked, are entitled to prompt written notice. Such notice must specify that the taxpayer is entitled to file a lawsuit in the U.S. Tax Court or a federal district court to challenge the certification. The court may determine that the certification was erroneous and, if so, order the Treasury Secretary to so notify the Secretary of State. Taxpayers who are serving in a combat zone are granted relief from the law’s provisions.
In addition, the new law amends existing Internal Revenue Code provisions to ensure that taxpayers are warned in advance that they could be subject to U.S. passport denial, revocation, or limitation. For example, notices of federal tax lien and notices of intent to levy must now include language advising the taxpayer that they may be certified to the Secretary of State as having a “seriously delinquent tax debt” with attendant passport consequences.
Finally, the law amends the Internal Revenue Code provision addressing confidentiality of tax returns and return information in order to permit the sharing of such information with the Secretary of State. In particular, for each taxpayer certified as having a “seriously delinquent tax debt,” the law authorizes the Treasury Secretary to share information regarding the taxpayer’s identity and the amount of the tax debt.
by Matthew D. Lee and Jed Silversmith
The Legal Intelligencer
Few rights are more sacrosanct than the constitutional privilege against self-incrimination. This right extends beyond making statements to police or testifying in court, but also to the act of producing records. This means that if an individual is subpoenaed to produce records, he does not need to do so if he can establish that the act of production would be an implicit representation that would incriminate himself. In short, it is not simply an individual’s words that can be used to incriminate himself, but also the mere possession of documents.
In the last four years, the federal courts of appeal have begun to peel back this inviolable privilege in the realm of foreign bank account reporting. The U.S. Court of Appeals for the Third Circuit has now joined six other circuit courts to hold that an individual may not assert Fifth Amendment “act of production” immunity in response to a request for his or her foreign bank account records. In United States v. Chabot, No. 14-4465 (3d Cir. Jul. 15, 2015), the Third Circuit joined the unanimous chorus of circuit courts to hold that the production of foreign bank account records is not protected by the Fifth Amendment because federal law requires that a taxpayer maintain such account records.
In Chabot, the taxpayers received a civil summons from the IRS demanding production of bank account records for an account at HSBC Bank. The Chabots refused to produce records, citing their Fifth Amendment rights. In response, the IRS filed a civil action in federal district court seeking to enforce the summons. Affirming the district court’s decision enforcing the summons, the Third Circuit concluded that records of a foreign bank account were “required records” and therefore the Fifth Amendment did not apply.
Foreign bank account reporting is a hot area of civil and criminal tax enforcement for the IRS and the Department of Justice since 2009, as a result of the landmark deferred prosecution agreement the United States reached with Switzerland’s largest bank, UBS AG, that year. Under the federal Bank Secrecy Act, which was enacted in 1970, every “resident or citizen of the United States or a person in, and doing business in, the United States” is required to keep records and file reports about transactions with foreign financial institutions. U.S. taxpayers are required to file these reports on a FinCEN Form 114, commonly referred to as an “FBAR,” annually.
Failure to file the FBAR form carries draconian civil penalties: 50 percent of the highest balance in the unreported bank account each year. The IRS, the agency charged with enforcement, is permitted a six-year look-back period, meaning that it may impose a penalty equal to three times the balance of the account (in other words, 50 percent of the account for each of six years). This is not an idle threat. Last year, a jury upheld a three-year, 150 percent penalty against a Florida man who had failed to disclose his Swiss bank account worth about $1.5 million.
Individuals who willfully fail to file an FBAR can be prosecuted criminally as well, carrying a statutory maximum of five years’ incarceration for each year that a taxpayer did not file. In addition to the failure-to-file penalty, the federal individual income tax return (Form 1040) asks taxpayers if they have an overseas bank account on Schedule B. The DOJ, as part of its offshore initiative, has prosecuted a number of taxpayers who failed to check “yes” in response to this question. This misstatement, which has no impact on a taxpayer’s tax liability, is still a felony.
Given that the disclosure of foreign bank account information carries both significant civil penalties and the very real threat of criminal prosecution, production of these records in response to subpoenas or summonses is not an abstract concern. Other than the Third Circuit’s decision in Chabot, every other “required records” decision involved enforcement of a grand jury subpoena.
The courts of appeals that have ordered the production of these documents have relied on the “required records doctrine.” The courts note the Bank Secrecy Act requires that a taxpayer maintain bank account records for a period of five years. Therefore, it is a “required” record, and the taxpayer cannot avoid producing it.
The required records doctrine first appeared in Shapiro v. United States, 335 U.S. 1, 32–33 (1948), which involved a merchant who was engaged in improper sales in violation of the Price Control Act during the early 1940s. The Supreme Court held that Shapiro had to produce records pertaining to the sales because such records were public papers as they were required to be kept by the Price Control Act. At that time, “private papers” were entitled to Fifth Amendment protection based on their private status but public papers were not.
The U.S. Supreme Court subsequently fleshed out Shapiro‘s holding in Grosso v. United States, 390 U.S. 62, 67–68 (1968), in 1968. In Grosso, the court set out three elements of the “required records” exception: (1) the reporting or recordkeeping scheme must have an essentially regulatory purpose; (2) a person must customarily keep the records that the scheme requires him to keep; and (3) the records must have “public aspects.”
In recent years, Shapiro has been applied sparingly. Baltimore City Department of Social Services v. Bouknight, 493 U.S. 549, 555–56 (1990), a 1990 decision, involved a mother who was suspected of child abuse but was given custody of her injured child with extensive conditions imposed by a protective order. The mother violated those conditions, and a court ordered her to produce the child in order to verify that the child was alive and well. When she refused, the court held her in contempt and rejected her contention that the Fifth Amendment protected her from having to produce him. The court, citing the required record doctrine, found that the mother did not have a legitimate Fifth Amendment concern. In California v. Byers, 402 U.S. 424 (1971), the court upheld California’s hit and run statute, reasoning that in certain instances “organized society imposes many burdens on its constituents.” The Byers court cited a host of decisions including Shapiro to reach its decision. Ordering a parent to produce her child in the face of previously documented allegations of child abuse or requiring that a motorist identify himself before he leaves the scene of an accident does not seem to implicate the same Fifth Amendment protections as the production of foreign bank records. The recent spate of appellate court decisions involving foreign bank accounts takes the required records doctrine much further. The Third Circuit, in applying this doctrine, justified its decision because these foreign tax records “serve legitimate noncriminal purposes, because government agencies use this data for tax collection, development of monetary policy, and conducting intelligence activities.”
The government has a significant interest in aggregating large amounts of data to fulfill a wide range of public policy applications. Therefore, the same could be said for almost any other record that a citizen may wish not to produce.
The Third Circuit’s decision is significant for two reasons. First, for individuals who have foreign bank accounts, if confronted with an IRS summons or a grand jury subpoena, they will be required to produce records—even if the production is incriminating or will yield a substantial civil penalty. Second, the decision is a clear erosion of constitutional protection. As Justice Felix Frankfurter pointed out in his dissent in Shapiro, “If Congress by the easy device of requiring a man to keep the private papers that he has customarily kept can render such papers ‘public’ and nonprivileged, there is little left to either the right of privacy or the constitutional privilege.” These court of appeals decisions are precisely what Frankfurter feared.
“‘Required Records’ Decision Erodes Taxpayers’ Fifth Amendment Rights,” by Matthew D. Lee and Jed Silversmith, was published in The Legal Intelligencer on August 18, 2015. To read the article online, please click here.
Reprinted with permission from the August 18, 2015, edition of The Legal Intelligencer © 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, email@example.com or visit www.almreprints.com.