A recent Tax Court case (Kunkle v. C.I.R.) reiterates the need for cash businesses to maintain proper books and records.
In what is becoming an increasingly used attack vehicle, the Department of Justice (DoJ) is using the "required records doctrine" to compel taxpayer's to produce what may be incriminating evidence of ownership or control of foreign financial accounts. The DoJ process involves the issuance of a Grand Jury subpoena for records and then compelled testimony. A case now on petition to the U.S. Supreme Court is illustrative of the governments' position.
The U.S. Department of Justice is considering actions against taxpayers who wrongfully used the Streamlined Procedures to assert non-willful conduct. As quoted in Tax Notes Today:
"Speaking at the Federal Bar Association Section on Taxation annual tax law conference in Washington, Caroline Ciraolo, acting assistant attorney general in the Tax Division, said, "We are taking particular interest if we find evidence of an account holder claiming non-willful conduct in a streamlined compliance filing or delinquent submission only to find that evidence produced by the Category 2 banks suggests otherwise. We are using information gleaned from the program to open new investigations, pursue new targets around the globe, and we will continue to do so as the information is developed"
The use of Bitcoin has both legal and potentially illegal applications. Bitcoin is just a contemporary version of the Informal Value Transfer System, ("IVTS") which in some countries is known as the Hawala. The IVTS has been used for international money transfers according to the Financial Crimes Enforcement Network (FinCen) for the following reasons:
"IVTS-type networks operate in parallel with formal financial institutions or as a substitute or alternative for them. United States citizens, persons (legally or illegally) residing in this country from foreign countries, and individuals living in other nations may prefer or need to use IVTS in lieu of formal financial institutions for various reasons as described below:
What happens when a taxpayer operates a cash based business and lacks adequate books and records according to the IRS? The IRS can use any reasonable method to reconstruct the taxpayers income and expenses. (See, Estate of Rodrigo F. Fenta, et al. v. Commissioner, TC Summary Opinion 2015-4 )
In the opinion the court states the applicable rule:
"Taxpayers are required to maintain such "permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information." Sec. 1.6001-1(a), Income Tax Regs"
According to Tax Notes Today (January 23, 2015) Boris Johnson the Mayor of London has settled tax claims of the IRS. The claim arose because Johnson who holds U.S and U.K. citizenship sold his residence at a gain and failed to report the gain for U.S. income tax purposes. Johnson, who apparently travels to the U.S. and had pending travel plans must have feared that the IRS/DOJ would detain Johnson on entry into the U.S. under Internal Revenue Code Section 7402. As stated in Tax Notes Today,
"Section 7402 provides U.S. district courts with jurisdiction to enforce orders, processes, judgments, and summonses related to revenue laws. If a taxpayer visited the United States, a federal court "could issue a writ ne exeat republica at the behest of the DOJ's Tax Division and keep the taxpayer in the U.S.,"
Voluntary Disclosures take two forms, Offshore and Domestic. There has been a great deal of attention paid to Offshore Voluntary Disclosure Programs, but little attention has been paid to the Domestic program.
The Internal Revenue Manual provides U.S. taxpayers with the opportunity to come forward and possibly avoid prosecution if the following criteria are met:
In a series of Frequently Asked Questions releases December 31, 2014, The Congressional Research Service provides some guidance on when non-U.S. citizens may be subject to U.S. income taxes.
The report states as follows:
"Non-citizens who may be subject to U.S. income taxes include
legal permanent residents who are authorized to live and work in the United States permanently;
aliens who are authorized to stay in the United States temporarily, and may or may not be authorized to work;
aliens who are not authorized to be in the United States; and
foreigners who are outside the United States but have U.S. tax obligations."
The future for offshore tax planning, also known as "aggressive tax planning" is likely to be limited to if not curtailed by the global exchange of information agreement signed in October, 2014 by 51 countries and growing. The link below is to a video summary of the predicted consequences of the new agreement.
The just passed budget deal known as Consolidated and Further Continuing Appropriations Act, 2015 contains a reduction in funding for the IRS. The Bill provides a reduction in total IRS funding of $346 million less than last fiscal year.
"Internal Revenue Service (IRS): Failing to collect what taxpayers owe leaves the federal budget short about $345 billion per year, primarily due to underreported income. The IRS needs resources to provide timely responses to millions of taxpayers who seek assistance, acquire better tools to identify unreported income, pursue tax cheats, execute ever-expanding responsibilities under the tax code and improve collection rates to narrow the tax gap. The agreement provides $10.945 billion, $346 million less than fiscal year 2014 funding, for the IRS."