The IRS is vigorously litigating cases involving conservation easements they believe are abusive. One such case was Plateau Holdings, LLC v. Comm’r, T.C. Memo 2020-93 (Plateau I). In that case the Tax Court denied the entire deduction claimed based on a determination that the $25,449,000 value claimed was actually $2,691,200. A 40 percent penalty applied to the overvaluation amount (i.e. $22,757,800). In a subsequent action, Plateau Holdings, LLC v. Comm’r, T.C. Memo 2021-133 (Plateau II), the IRS also sought a 20 percent penalty for negligence on the lower valuation amount denied because the easement deed failed to protect the conservation purpose in perpetuity. However, the taxpayer wasn’t required to pay the 20 percent penalty because the Tax Court concluded they were entitled to a defense against that penalty for acting with reasonable cause and in good faith.
Continue Reading Recent Tax Court Case Outlines Factors Taxpayers can use to Avoid Negligence Penalties
Non-Willful FBAR Penalties Will be Much Higher in the Fifth Circuit
On November 30, 2021, the Fifth Circuit parted ways with the taxpayer friendly decision of the Ninth Circuit that non-willful penalties are capped at $10,000 per FBAR filing instead of the $10,000 per unreported bank account argued by the government. District courts in New Jersey, Connecticut, and Texas had all ruled in the taxpayer’s favor that non-willful penalties were capped at $10,000 per form. In United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), the Ninth circuit reversed the district court’s per-account determination and made the per-form cap the law within the 9th Circuit. United States v. Bittner, No. 20-40597 (5th Circuit), was on appeal from a taxpayer friendly decision reducing the $2.7 Million dollar penalty to $50,000 based on a $10,000 per form cap on non-willful FBAR penalties. Although not guaranteed, it appeared that the momentum was in the taxpayer’s favor for an affirmance of the reduction. However, the Fifth Circuit reversed the favorable district court decision and held that the “$10,000 penalty cap therefore applies on a per-account, not a per-form basis.”
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The Dangers of Improper Mailing to the IRS
Deadlines are important in legal matters, especially when it relates to tax issues. There are estimated tax deadlines, tax return filing deadlines, and a host of deadlines if a return is audited and any adjustments are challenged. Once you get to court in a tax dispute – more deadlines. Anytime a taxpayer misses a deadline they usually lose some portion, if not all, of the rights associated with that deadline. Imagine, however, that a taxpayer attempts to meet the deadline by mailing a document that the IRS claims they never received.
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Understanding IRS Rules on Passive Activity Losses
Several abusive tax shelters in the 1970s and 1980s caused Congress to enact rules to prevent taxpayers from deducting losses when a taxpayer doesn’t materially participate in the activity. These passive loss rules apply to individuals (including partners and S Corp shareholders), trusts, estates, personal service corporations and sometimes closely held corporations. In short, these rules are a wide net that catches a lot of businesses and can impact a lot of taxpayers. If an activity is determined to be a passive activity it may not only effect the losses claimed but could trigger a 3.8 percent increase from the net investment income tax. Knowing the passive activity rules, and how they apply, can help avoid a dispute or streamline arguments if the IRS questions business activities.
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The Tax Benefits of Research and Development Expenses (IRC Section 41)
“No problem can withstand the assault of sustained thinking.”
— Voltaire
Businesses are started with good ideas and a lot of hard work. Companies are sustained by applying that same hard work to the challenges and problems they face along the way. The Internal Revenue Code benefits businesses for dedicating funds to the pursuit of new and improved business components. Section 41 of the Internal Revenue Code provides a tax credit of 20 percent of a taxpayer’s Qualified Research Expenses (QREs) over a base amount related to previous research expenses. Essentially, it rewards taxpayers for increasing the amount of money they spend on research and development to improve of develop new business components that will benefit the economy and their customers. However, as with any tax benefit, there are strings attached. In order to qualify, taxpayers must meet a four part test and certain identified expenses don’t count. Also, the IRS has scrutinized these credit claims regularly during audit and, if necessary, forced taxpayers into court to defend their claims. Preparation and documentation is key to surviving IRS scrutiny and, if necessary, prevailing in any subsequent litigation.
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Joshua Smeltzer Quoted by Law360 on Cryptocurrency Enforcements
Joshua Smeltzer was recently quoted by Law360 in an article on cryptocurrency enforcements:
“The John Doe summons is probably one of the most powerful tools the government has,” Joshua Smeltzer, counsel at Gray Reed, told Law360.
“Every time the IRS gets information from John Doe summonses, or from audits, or from the threatening letters that
IRS Summons Ruling Isn’t A Total Loss For Investors
One of the most powerful tools in the Internal Revenue Service arsenal is the John Doe summons. However, as we all learned from Spider-Man, with great power comes great responsibility.
Although it ultimately approved an IRS request to serve a summons for information on the popular cryptocurrency exchange Kraken Inc., the U.S. District Court for
How to Handle IRS Notices and Tax Bills
The multiple rounds of stimulus checks as part of the COVID-19 relief legislation may have people believing that mail from the IRS is not always bad news. However, aside from isolated situations, most people still flinch at the sight of a letter from the IRS. If the IRS sends you a tax bill, the process and timing of the response is very important. Here are some tips for how to handle an IRS notice or tax bill.
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The IRS is Hunting for Cryptocurrency Investors with John Doe Summonses
The IRS has several tools in its arsenal to encourage compliance and audit and enforce those it believes are failing to comply. One of the most powerful tools is the John Doe summons. A regular IRS summons seeks information on a specific taxpayer. However, a John Doe summons, as the name implies, involves a group of taxpayers that the IRS cannot identify by name – yet. Judicial approval is required, but the approval is ex parte (i.e. opposing parties are not notified or can respond before the court rules). The IRS has used this tool to find tax shelter participants by summonsing the promoters, and most famously foreign banks like UBS, for foreign bank account holders. The next target, cryptocurrency investors.
The IRS already successfully received thousands of names of account holders from the Coinbase cryptocurrency exchange. Many taxpayers, who received letters from Coinbase about the disclosure, came forward and disclosed assets in their accounts.
The IRS has now secured permission to issue a John Doe summons for cryptocurrency records on payments using a technology company called Circle and another popular cryptocurrency exchange – Kraken. This is all part of what the IRS has called, in public speeches, a “treasure hunt” for unreported cryptocurrency. If you have unreported cryptocurrency transactions, here’s what you should know.
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IRS Commissioner and President Biden Draw Battle Lines
The battle outside ragin’
Will soon shake your windows
And rattle your walls
For the times they are a-changin’
-Bob Dylan
A change in presidential administrations brings with it the uncertainty of what the political, legal and tax landscape will look like in the future. Statements from the Commissioner of the Internal Revenue Service and the President of the United States are starting to provide clarity of what things will look like going forward. Here’s what we know and what you, as a taxpayer, should be thinking about as you adjust your financial planning.
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