A question appears at the bottom of Schedule B (Interest and Dividend Income) of the Form 1040 (U.S. Individual Income Tax Return) that asks individual taxpayers if during the taxable year they had any interest in or signature or other authority over a bank, securities, or other financial account in a foreign country during the tax year. Based upon a review of historical tax forms, the question first appeared on the 1976 Schedule B. The historic Form 1040 instructions for 1976 and 1977 indicate that the FBAR was originally a designated a Form 4683 for 1976 and subsequently revised and renumbered as the Form 90-22.1 in 1977.
Consistent with its ongoing employment tax enforcement efforts, the Justice Department recently announced developments in two cases involving the failure to properly withhold and remit federal employment taxes from employee wages.
On April 25, the Justice Department announced that Kae Wook Lee, the sole owner and CEO of Mona Lisa 7 Corporation, was sentenced to twelve months and one day in prison for failing to collect and remit federal employment taxes related to his operation of a karaoke bar in Queens, New York. The Justice Department’s press release states that Lee manipulated receipts from operations and paid employees in cash without collecting, accounting for, or remitting employment taxes to the IRS. The press release also states that he concealed the cash payroll from his accountant and executed false tax returns underreporting wages and the amount of employment taxes owed. In addition to the prison sentence, Lee was ordered to serve two years of supervised release and pay $612,500 in restitution.
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.