On April 26, 2019, the IRS released PLR 201917002 concluding that an entity’s extension of credit, incidental to its sale of nonfinancial goods or performance of nonfinancial services, would not create an obligation under section 6050P to file a Form 1099-C if the entity subsequently discharged the indebtedness associated with the extension of credit.
For the last several years, LB&I has maintained compliance campaigns to address and improve various areas of tax compliance. On April 16, 2019, LB&I announced the addition of three new compliance campaigns, two of which involve reporting issues: the Offshore Private Banking Campaign and the Loose Filed Forms 5471 Campaign.
Offshore Private Banking Campaign
The Offshore Private Banking Campaign is under the Withholding & International Individual Compliance practice area. The purpose of the campaign is to improve federal income tax and information reporting compliance associated with offshore activities, which includes issues such as FBAR compliance and Form 8938 (Statement of Specified Foreign Financial Assets) compliance. The campaign description states that the IRS has amassed records that identify taxpayers with transactions or accounts at offshore private banks, which likely has been compiled from sources such as reporting under Chapter 4. The IRS plans to initially address noncompliance through examinations and correspondence. Additional compliance techniques may be developed based on feedback received throughout the campaign.
The Loose Filed Forms 5471 Campaign
The Loose Filed Forms 5471 Campaign is also under the Withholding & International Individual Compliance practice area. The purpose of the campaign is to ensure that U.S. persons file Forms 5471 in the correct manner. In general, Forms 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) must be filed by U.S. persons if they satisfy the criteria of any one of five categories of filers. The IRS has identified that some taxpayers incorrectly file Forms 5471 by sending the form to the IRS without attaching it to their federal income tax return. The taxpayers that have filed a loose Form 5471 should file an amended federal income tax return with their Form 5471 attached.
On April 11, 2019, the IRS announced the results of a national two-week education and enforcement campaign to combat employment tax crimes. Payroll taxes account for approximately 70% of all revenue collected by the U.S. Treasury. Given the significance of payroll tax collections to the federal government, IRS revenue officers across the country visited nearly 100 businesses during the two-week period to discuss suspected employment tax noncompliance by the businesses. These revenue officers informed the businesses about how to catch-up on previously owed payroll taxes, how to stay current in collecting and remitting payroll taxes, and the potential civil and criminal penalties that businesses and individuals face with respect to noncompliance.
On April 10, 2019, Reps. John B. Larson (D-CT) and Kenny Marchant (R-TX) introduced the Invest in America Act (H.R. 2210), which would repeal section 897, added by the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), and the corresponding Chapter 3 withholding provision under section 1445.
For the second time in the past year, the IRS Office of Chief Counsel issued a ruling addressing how transactions are counted for purposes of applying the de minimis threshold applicable to third party settlement organizations (“TPSOs”) under section 6050W. In recently released PLR 201907006, the IRS considered the facts related to a payment processing service provided by a taxpayer to online sellers. After considering the facts, the IRS ruled that the taxpayer was a TPSO. The IRS then turned to the second ruling request, namely, whether the number of transactions for purposes of the de minimis rules are determined based upon the number of payments processed on behalf of payers rather than the number of times the customer receives payments from the TPSO through the taxpayer’s platform. The IRS again determined that the number of transactions is determined by reference to the number of buy-sell transactions between buyers and sellers processed by the TPSO.
Dan Lauer, an IRS executive for SBSE, told an audience at the American Payroll Association’s Capital Summit on March 25 that the Service is launching a program in the summer of 2019 to pursue backup withholding failures. Backup withholding is required under section 3406, and the current backup withholding rate is 24%. Generally, backup withholding applies when a payor makes a reportable payment to non-corporate payees and does not possess the payee’s TIN.
The Justice Department has again demonstrated its willingness to prosecute corporate executives for failing to remit employment taxes. On March 22, 2019, the Department of Justice issued a press release to announce that the U.S. District Court for the Eastern District of North Carolina sentenced a North Carolina man to 30 months in prison, restitution of $1.686 million, and three years of supervised released following completion of his sentence. The executive served in various official capacities for OneCare, Inc., a mental health service provider, including as the corporation’s President. From 2010 to 2013, OneCare withheld, but failed to pay over, employment taxes in the amount of almost $1.7 million. On May 2, 2018, the executive was charged with, among other charges, one count of Willful Failure to Collect or Pay Over Tax. He ultimately entered into a plea agreement that required him to plead guilty to a single count of Willful Failure to Collect or Pay Over Tax.
On March 15, 2019, the IRS released a new practice unit entitled “Introduction to Traditional Automatic Exchange of Information.” The practice unit provides a summary of the procedures for the IRS Automatic Exchange of Information or AEOI Program, which administers the regular and automatic exchange of taxpayer information required by tax treaties and Tax Information Exchange Agreements or TIEAs between the United States and foreign governments. Such “traditional” exchanges can be contrasted with the exchange of information under newer programs like FATCA or the OECD’s BEPS project.
As explained on the IRS website, practice units provide a general discussion regarding concepts, processes, or transactions and serve as a means to collaborate and share information and knowledge for employees of the IRS. Practice units are not official guidance, are not official pronouncements of law or directives, and cannot be cited or relied upon as legal authority. They merely provide useful context and practical information for taxpayers, and taxpayers should independently confirm information provided in practice units with applicable legal authorities before relying on information found in the practice units.
On March 5, 2019, the U.S. District Court for the District of Maryland determined that an employee was potentially entitled to relief under section 7434(a) of the Internal Revenue Code when an employer purposefully reports a portion of their wages on Form 1099-MISC as income from self-employment rather than on the Form W-2. In Greenwald v. Regency Mgmt. Svcs., LLC, a memorandum opinion, the court allowed the case to proceed to discovery based on the plaintiffs allegations.
The plaintiffs in the case are former employees who were employed as commissioned sales associates. The plaintiffs did not allege that any hourly wages were reported or withheld upon improperly during the course of their employment, but instead alleged that the defendants failed to withhold on and reported post-termination commission payments on Forms 1099-MISC rather than Forms W-2, forcing the plaintiffs to pay SECA tax. The plaintiffs alleged that willfully reporting the post-termination commission payments on Form 1099-MISC entitled them to damages under section 7434(a), as well as other claims under state law.
The U.S. District Court for the District of Connecticut has joined a growing debate among lower courts regarding the appropriate civil penalty applicable to willful FBAR violations through its ruling in United States v. Garrity. The FBAR statute, regulations, instructions, and related guidance require that taxpayers annually report to the Treasury Department any financial interest in or signature authority over accounts outside the United States when the aggregate balance of such accounts exceeds $10,000 during the calendar year. Failure to make FBAR filings may result in civil penalties, with the amount of such penalty varying based on whether the accountholder’s FBAR delinquency was willful or non-willful.
The Government brought the case against the fiduciaries of the Estate of Paul G. Garrity, Sr., who passed away in 2008. Following a six-day jury trial, the jury found that Garrity willfully failed to make the required FBAR filing in 2005. The court entered judgment for the United States, but did not specify a civil penalty amount in its judgment order. Under the penalty statute, 31 U.S.C. § 5321(a)(5)(C)(i), willful violations of the FBAR requirements can result in civil penalties equal to the greater of $100,000 or 50% of the account balance at the time of the violation that should have been reported. In post-judgment motions, the Government sought to impose a penalty of $936,691 − an amount that represents 50% of the bank account balance in the year the FBAR violation occurred. The defendant, pointing to 31 C.F.R. § 1010.820(g), argued that notwithstanding the fact that the FBAR statute authorizes penalties in excess of $100,000, the Secretary of the Treasury had by regulation capped the penalty amount to $100,000.
The court rejected the defendant’s argument and upheld the $936,691 civil penalty, reasoning that because the Treasury Regulations had been promulgated under an earlier version of the FBAR statute (which imposed lower penalties), Congress effectively abrogated the Treasury Regulations when it passed the current version of the statute in which Congress increased the penalties for FBAR violations. Furthermore, the Secretary of the Treasury did not reaffirm the penalty cap following the amendment of the statute. Separately, the court ruled against the defendant’s Eighth Amendment argument that the larger penalty constitutes an excessive fine.
In ruling for the Government on the penalty amount issue, the District of Connecticut followed the position taken in 2018 by the District of Maryland in United States v. Horowitz and the Court of Federal Claims in Norman v. United States and Kimble v. United States. However, other courts in 2018 reached the opposite conclusion regarding the proper amount of civil penalties in cases involving willful FBAR violations. The District of Colorado in United States v. Wahdan, and the Western District of Texas in United States v. Colliot issued decisions consistent with the defendant’s position. At the time of this post, the two Court of Federal Claims cases are currently on appeal before the Court of Appeals for the Federal Circuit.
UPDATE: On April 25, 2019, the defendants filed an appeal in the U.S. Court of Appeals for the Second Circuit. Click here to read our post about the brewing circuit split on civil penalties for willful FBAR violations.