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New Law Sets Jan. 31 W-2 Filing Deadline; Some Refunds Delayed Until Feb. 15


A new federal law moves up the W-2 filing deadline for employers and small businesses to Jan. 31. The new law makes it easier for the IRS to find and stop refund fraud. It also delays some taxpayer refunds. Those taxpayers claiming the Earned Income Tax Credit or the Additional Child Tax Credit won’t see refunds until Feb.15, at the earliest.


Here are some key points to keep in mind:

·      Protecting Americans from Tax Hikes (PATH) Act. Enacted last December, the new law means employers need to file their copies of Forms W-2  by Jan. 31. These forms also go to the Social Security Administration. The new deadline also applies to certain Forms 1099. Those reporting nonemployee compensation such as payments to independent contractors submitted to the IRS are due Jan. 31. Employers have long faced a Jan. 31 deadline in providing copies of these forms to their employees. That date won’t change.

·      Different from past deadline. Employers normally had until the end of February, if filing on paper, or the end of March, if filing electronically, to send in copies of these forms. The IRS is working with the payroll community and other partners to spread the word.  

·      Helps stop fraud or errors. The new Jan. 31 deadline will help the IRS to spot errors on returns filed by taxpayers. Having these W-2s and 1099s sooner will make it easier for the IRS to verify legitimate tax returns and get refunds to taxpayers eligible to receive them. The changes will allow the IRS to send some tax refunds faster.

·      Some refunds delayed. Certain taxpayers will get their refunds a bit later. By law, the IRS must hold refunds for any tax return claiming either the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) until Feb. 15. This means the whole refund, not just the part related to the EITC or ACTC.

·      File tax returns normally. Taxpayers should file their returns as they normally do. The IRS issues more than nine out of 10 refunds in less than 21 days. However, some returns may need further review. Whether or not claiming EITC or ACTC, the IRS cautions taxpayers not to count on getting a refund by a certain date. Consider this fact when making major purchases or paying debts.

·      Use online tools. Starting Feb. 15, the best way to check the status of a refund is with the Where's My Refund? tool on or the IRS2Go Mobile App.


Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers may need their Adjusted Gross Income amount from a prior tax return to verify their identity. They can get a transcript of their return at



Donating Appreciated Stock Offers Tax Advantages


When many people think about charitable giving, they picture writing a check or dropping off a cardboard box of nonperishable food items at a designated location. But giving to charity can take many different forms. One that you may not be aware of is a gift of appreciated stock. Yes, donating part of your portfolio is not only possible, but it also can be a great way to boost the tax benefits of your charitable giving.


No pain from gains

Many charitable organizations are more than happy to receive appreciated stock as a gift. It’s not unusual for these entities to maintain stock portfolios, and they’re also free to sell donated stock.


As a donor, contributing appreciated stock can entitle you to a tax deduction equal to the securities’ fair market value — just as if you had sold the stock and contributed the cash. But neither you nor the charity receiving the stock will owe capital gains tax on the appreciation. So you not only get the deduction, but also avoid a capital gains hit.


The key word here is “appreciated”. The strategy doesn’t work with stock that’s declined in value. If you have securities that have taken a loss, you’ll be better off selling the stock and donating the proceeds. This way, you can take two deductions (up to applicable limits): one for the capital loss and one for the charitable donation.


Inevitable restrictions

Inevitably, there are restrictions on deductions for donating appreciated stock. Annually you may deduct appreciated stock contributions to public charities only up to 30% of your adjusted gross income (AGI). For donations to nonoperating private foundations, the limit is 20% of AGI. Any excess can be carried forward up to five years.


So, for example, if you contribute $50,000 of appreciated stock to a public charity and have an AGI of $100,000, you can deduct just $30,000 this year. You can carry forward the unused $20,000 to next year. Whatever amount (if any) you can’t use next year can be carried forward until used up or you hit the five-year mark, whichever occurs first.


Moreover, you must have owned the security for at least one year to deduct the fair market value. Otherwise, the deduction is limited to your tax basis (generally what you paid for the stock). Also, the charity must be a 501(c)(3) organization.

Last, these rules apply only to appreciated stock. If you donate a different form of appreciated property, such as artwork or jewelry, different requirements apply.


Intriguing option

A donation of appreciated stock may not be the simplest way to give to charity. But, for the savvy investor looking to make a positive difference and manage capital gains tax liability, it can be a powerful strategy. Please contact our firm for help deciding whether it’s right for you and, if so, how to properly execute the donation.





Is The Sales Tax Deduction Right For You?


As the year winds down, many people begin to wonder whether they should put off until next year purchases they were considering for this year. One interesting wrinkle to consider from a tax perspective is the sales tax deduction.


Making the choice

This tax break allows taxpayers to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. It was permanently extended by the Protecting Americans from Tax Hikes Act of 2015.


The deduction is obviously valuable to those who reside in states with no or low income tax. But it can also substantially benefit taxpayers in other states who buy a major item, such as a car or boat.


Considering the break

Because the break is now permanent, there’s no urgency to make a large purchase this year to take advantage of it. Nonetheless, the tax impact of the deduction is worth considering.


For example, let’s say you buy a new car in 2016, your state and local income tax liability for the year is $3,000, and the sales tax on the car is also $3,000. This may sound like a wash, but bear in mind that, if you elect to deduct sales tax, you can deduct all of the sales tax you’ve paid during the year — not just the tax on the car purchase.


Picking an approach

To claim the deduction, you need not keep receipts and track all of the sales tax you’ve paid this year. You can simply use an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale, plus the tax you actually pay on certain major purchases.


Then again, if you retain documentation for your purchases, you might enjoy a larger deduction. The “actual receipt” approach could result in a sizable deduction if you’ve made a number of notable purchases in the past year that don’t qualify to be added on to the sales tax calculator amount. Examples include furnishing a new home, investing in high-value electronics or software, or purchasing expensive jewelry (such as engagement and wedding rings).


Saving while buying

The sales tax deduction offers an opportunity to save tax dollars while buying the items you want or need. Let us help you determine whether it’s right for you.




Employers Face New W-2 Deadline; Some Refunds Delayed



Employers and small businesses have a new January filing deadline for W-2s, the Internal Revenue Service warned, adding that it must also hold some refunds until Feb. 15.


A new federal law accelerates the W-2 filing deadline for employers to Jan. 31. The new law also requires the IRS to hold refunds involving two key refundable tax credits until at least Feb. 15.


Last December’s PATH Act enacted the new requirement that employers file their copies of the W-2 submitted to the Social Security Administration, by Jan. 31. The new deadline also applies to certain 1099-MISCs.


Previously, employers typically had until the end of February if filing on paper or until the end of March if e-filing to submit their copies of these forms.


In addition, there are changes in requesting an extension to file the W-2: Only one 30-day extension to file a W-2 is available; this extension is not automatic. If an extension is necessary, a Form 8809 must be filed as soon as possible, but no later than Jan. 31.


The Jan. 31 deadline has long applied to employers furnishing copies of these forms to their employees; that date remains unchanged.


Due to the PATH Act change, the new law requires the IRS to hold the refund for any return claiming either the Earned Income Tax Credit or the Additional Child Tax Credit until Feb. 15. By law, the IRS must hold the entire refund, not just the portion related to the EITC or ACTC.




IRS Targets 'Micro-Captive Transactions'



The Internal Revenue Service is warning against the use of so-called “micro-captive transactions” and similar transactions as potentially abusive.


In such transactions, taxpayers try to reduce their aggregate taxable income using insurance contracts and captive insurance companies. Each entity that the parties treat as an insured entity under the contracts claims deductions for insurance premiums. The related company that is treated as a captive insurance company elects under Section 831(b) of the Tax Code to be taxed only on investment income and therefore excludes the payments it directly or indirectly received under the contracts from its taxable income. The IRS said the manner in which the contracts are interpreted, administered and applied is inconsistent with arm’s length transactions and sound business practices.


In Notice 2016-66, the Treasury Department and the IRS said they believe such transactions have a potential for tax avoidance or evasion. However, they admitted they lack sufficient information to identify which Section 831(b) arrangements should be identified specifically as tax avoidance transactions and they may lack enough information to define the characteristics that distinguish the tax avoidance transactions from other Section 831(b) related-party transactions.


The notice identifies the transaction and substantially similar transactions as transactions of interest for purposes of the Income Tax Regulations and the Tax Code. The notice also alerts people who are involved in such transactions about the responsibilities and potential penalties they could face from their involvement with such transactions.




The Definition of Insanity: IRS Private Debt Collectors



We have all heard that the definition of insanity is to repeatedly do the same thing expecting different results. Using that definition, the U.S. Congress can now be considered officially insane. Seven years after it proved to be a disaster, the use of outside debt collectors has again been approved by Congress for use by the IRS. You may be asking yourself, “Haven’t we been here before?” Sadly, you would be right.


In September of 2006, the IRS decided to use private debt collection agencies to collect on its inventory of past due accounts. I was an opponent of this practice and I was not alone. Our opposition rallied around the fact that the IRS would be handing over personal information to debt collection agencies who were being paid a percentage of what they collected, about 25 percent.


Our concern at the time was that these agencies would use their infamous tactics of collecting debt by intimidation and other methods because the amount that they could potentially receive would be astronomical. At the time, IRS spokesman Terry Lemons responded to our claims saying the new system "is a sound, balanced program that respects taxpayers' rights and taxpayer privacy."


The practice of using private debt collectors was a complete catastrophe and, in 2009, the IRS ended it entirely, and instead beefed up its own collections staff.


In December 2015, the President signed into law the FAST Act. The bill was known as the Highway Bill but embedded inside it was a requirement for the IRS to use private agencies to collect tax debts. The Commissioner of the IRS has put off this change for as long as possible, but beginning in the spring of 2017, the IRS will begin using private debt collectors for the second time.

According to last month's announcement:


“As a condition of receiving a contract, these agencies must respect taxpayer rights including, among other things, abiding by the consumer protection provisions of the Fair Debt Collection Practices Act.


“These private collection agencies will work on accounts where taxpayers owe money, but the IRS is no longer actively working them. Several factors contribute to the IRS assigning these accounts to private collection agencies, including older, overdue tax accounts or lack of resources preventing the IRS from working the cases.


“The IRS will give taxpayers and their representative written notice that the accounts are being transferred to the private collection agencies. The agencies will send a second, separate letter to the taxpayer and their representative confirming this transfer.”


The IRS has selected these four collection agencies to carry out its debt collection:

·      Conserve, Fairport, New York

·      Pioneer, Horseheads, New York

·      Performant, Livermore, California

·      CBE Group, Cedar Falls, Iowa


Per the announcement, the IRS will not use debt collectors to collect from the following individuals:

·      Deceased

·      Under the age of 18

·      In designated combat zones

·      Victims of tax-related identity theft

·      Currently under examination, litigation, criminal investigation or levy

·      Subject to pending or active offers in compromise

·      Subject to an installment agreement

·      Subject to a right of appeal

·      Classified as innocent spouse cases

·      In presidentially declared disaster areas and requesting relief from collection


The problem that I see with the use of collection agencies is the number of brazen scammers who are already calling taxpayers, making up amounts of taxes owed and fleecing innocent people.


This is an issue that has grown in scale since the first time the IRS outsourced debt collection (although recent arrests in India and the U.S. of dozens of call center scammers appear to be curbing reports of this crime in the last few weeks). We are on the front lines of this because our clients see us as trusted advisors. If they receive a suspicious call, we are able to at least inform them of the telltale signs that it’s a scammer on the other end of the phone.


For starters, the IRS doesn’t usually call taxpayers out of the blue. The debt collectors will. Secondly, they will state they are a contractor for the IRS. Finally, they will be demanding payment with their aggressive schemes. How are we supposed to discern if these calls are legitimate or not? If we are reading this announcement, I can assure you that the scammers are reading it as well and may even be devising new scams as a result.


The IRS has included a provision requiring that taxpayers and their listed representatives be notified by official letter that an outside collector will be contacting them to collect debt. However, given the antiquity of the collection inventory, it’s highly doubtful that all address changes will be up to date. While this is a step in the right direction, it by no means provides an accurate way to protect taxpayers from scammers.


We haven’t yet discussed that the taxpayer has rights. Will the collection companies be aware of those rights? In 1997, taxpayers testified before Congress about the aggressive nature of IRS debt collectors. Out of that came the Taxpayer Bill of Rights and the “kinder, gentler” IRS. Now we are doing a complete 360-degree turn and allowing these collection agencies with their notorious tactics to take over these accounts. Will the Taxpayer Advocate be able to stop these companies when they are out of line like they do with the IRS?


We were told in high school that we studied history because “those that don’t know history are doomed to repeat it.” Here we are doing the same thing that we did once before and expecting it to go differently. Last time this was just a policy of the IRS so it could easily be reined in. Now, it will literally take an act of Congress to reverse this lunacy.


Craig W. Smalley, MST, EA, has been admitted to practice before the Internal Revenue Service. He has a Masters in Taxation from UCLA, and is the founder and CEO of CWSEAPA, LLP, and Tax Crisis Center, LLC, with locations in Florida, Delaware, and Nevada. He has been in practice for 22 years.




IRS and Tax Companies Plan Extra Security to Deter Identity Thieves



The Internal Revenue Service convened a meeting of its Security Summit partners in the tax preparation industry and state tax authorities Thursday to discuss additional steps they can take to safeguard tax refunds from identity theft next filing season.


The measures include new data elements that will be transmitted by the tax industry with each tax return. Altogether, 37 new data elements will be added next year to provide more information to strengthen authentication to ensure tax returns are being filed by the real taxpayers. The tax industry also plans to share with the IRS and states 32 data elements from business tax returns to extend more identity theft protections to business filers along with individual taxpayers.


“Other steps we’re taking won’t be visible to taxpayers, but they will help the IRS and state tax administrators improve their ability to stop refund fraud,” said IRS Commissioner John Koskinen. “One example involves the data components that Security Summit partners collect and share when a return is filed. These act as an early warning system for potentially fraudulent individual returns. We’ve come up with 37 new data components that we will be receiving and monitoring during the next filing season. We also expect this to help with the quicker release of refunds for those returns we are able to verify, so the real taxpayers will be less likely to face delays in their refunds.”


More than 20 state tax authorities are now working with the financial services industry to create their own version of a program that enables the industry to flag suspicious tax refunds before they are deposited in taxpayer accounts. The IRS's partners in the private sector are also beefing up their efforts to identify the “ultimate bank account” to make sure tax refunds go into the true taxpayers’ accounts instead of fraudsters' accounts.


A Form W-2 Verification Code initiative that the IRS began last year will now expand to 50 million forms next year from 2 million in 2016. When tax professionals or taxpayers fill out a tax return in their tax software, the 16-digit verification code should be entered when prompted to validate the information on the Form W-2. The IRS expects to expand the verification code in future years for all W-2 forms.


Tax Software Changes
The software industry also plans to continue to enhance its software password requirements for individuals and tax professional users to provide additional safety before filing tax returns.


“Protecting taxpayers and strengthening the integrity of the U.S. tax system is a team effort, and the progress we’ve made together over the past 18 months demonstrates our shared commitment to fight fraud,” said CeCe Morken, executive vice president of Intuit’s ProConnect Group, in a statement. “There’s still much work to do. Intuit is committed to doing our part to actively promote a set of best practices and standards for reporting suspicious behavior to the IRS and state revenue agencies to help them improve their ability to identify tax fraud.”


Intuit said that all individual users within a firm who login and access its Intuit ProConnect desktop professional tax software will need to create and use a unique username and password. After 30 minutes of inactivity, re-authorization will be required. Passwords must also now be at least eight characters long and include a combination of uppercase and lowercase letters, numbers and special characters. Passwords will expire after 90 days. Intuit's tax software will also use “Captcha” technology to help ensure a person who is signing in is not a robot and is authorized to use Intuit's online products.


As part of the expanded effort, the IRS's Security Summit partners will open a new Identity Theft Tax Refund Fraud Information Sharing and Analysis Center, or ISAC. The project's initial stages will begin next year. The ISAC will eventually provide an improved early warning system to spot emerging identity theft schemes and share the information among the partners in the Security Summit so they can quickly put safeguards in place.


“While we will likely not have all state signatories to the ISAC finalized by the start of tax season 2017, the capability will largely be in place,” said H&R Block president and CEO Bill Cobb. “Our momentum is irreversible and the ISAC will do much to synthesize and share information among all the players.”


Early Successes
The IRS pointed to some success already in battling stolen identity refund fraud as a result of the Security Summit's efforts. The number of people who filed affidavits with the IRS claiming they were ID theft victims fell 50 percent during the first nine months of this year compared to 2015. The number of new affidavits filed declined to 237,750 compared to 512,278 for the first nine months of 2015.


IRS statistics point to a close to 50 percent drop in the number of fraudulent returns that found their way into government tax-processing systems. Through September 2016, the IRS stopped 787,000 confirmed identity theft returns, totaling more than $4 billion. For the same nine-month period last year, the IRS stopped 1.2 million confirmed identity theft returns, totaling approximately $7.2 billion.


The number of bank partners in the security program increased to 620 financial institutions from 514 institutions last year, allowing internal processes to continue improving. The total number of suspicious tax refunds stopped by banks and returned to the IRS fell more than 50 percent, to 108,539 in 2016 compared to 243,361 in 2015. The dollar amount of suspect refunds dropped to $239 million in 2016 from $829 million in 2015.


The IRS's partners in the tax prep industry and state tax authorities provided information that helped the IRS improve its fraud filters and stop more bad tax returns, including 57,000 that would have otherwise bypassed the IRS's processing filters. Several new data elements that have already been shared on tax returns from the IRS's Security Summit partners enabled the agency to stop over 74,000 suspicious returns, representing over $372 million in refunds that the IRS prevented from being paid.


Koskinen is calling on tax professionals, taxpayers and the tax industry to follow up on this success. “We also need to continue our work to make sure taxpayers and tax return preparers are doing everything they can to protect themselves against identity theft. I can’t stress enough how important this is,” he said. “Stolen identity refund fraud touches nearly everyone, and we all have a part to play in stopping it. So in 2017 the Security Summit Group will continue its public awareness campaign aimed at getting taxpayers to take more data security precautions. We’re also encouraging everyone to learn how to recognize and avoid scammers who try to trick people into disclosing personal financial data such as Social Security numbers or credit card numbers—either over the phone or by email. That’s critical to keeping this very sensitive information from falling into the wrong hands.”




Credit Suisse Said to Hold Accounts for Latest U.S. Tax Felon



An emeritus professor of business administration in Rochester, New York, pleaded guilty to hiding $200 million in assets from the Internal Revenue Service by using offshore accounts at a bank that people familiar with the matter identified as Credit Suisse Group AG.


Dan Horsky, 71, entered the plea Friday in federal court in Alexandria, Virginia, where he admitted that a Zurich-based bank helped him conceal assets from the IRS, according to the Justice Department. That bank was Credit Suisse, according to three people familiar with the case who asked not to be named because they weren’t authorized to discuss the bank.


“Despite his extraordinary wealth, Mr. Horsky concealed funds offshore, failed to report substantial income, conspired to submit false repatriation documents to cover up his fraudulent scheme, and evaded paying his fair share of tax,” Caroline Ciraolo, a principal deputy assistant attorney general at the Justice Department, said in a statement.


Credit Suisse spokeswoman Karina Byrne didn’t immediately respond to requests for comment. Mark Matthews and Seth Kossman, two attorneys for Horsky, said in a statement: “Mr. Horsky deeply regrets what he did and accepts responsibility for his conduct.”


Horsky signed a plea agreement on June 29, 2015, in which he said he’d cooperate with prosecutors and provide all information he has “regarding any criminal activity requested by the government.”


Horsky is scheduled to be sentenced Feb. 10. He faces as long as five years in prison. If prosecutors are satisfied with his cooperation they will ask the sentencing judge for a reduced term, according to the plea agreement.

Startup Investments

Horsky admitted that he began investing in startup businesses in 1995 through financial accounts at various offshore banks, including the one in Zurich, according to the Justice Department. In 2008, he put money into a company that was bought by another for $1.8 billion. While he received $80 million in net proceeds, he disclosed a gain of only $7 million to the IRS, the Justice Department said.


Horsky then invested those proceeds using funds from the Zurich-based bank, and his investments, combined with other unreported offshore assets, grew to $200 million by 2013, according to the statement.


Bank representatives regularly communicated with bank employees, and it was “readily apparent” that he was a U.S. resident, according to the statement. Horsky is a citizen of the U.S., United Kingdom and Israel, the Justice Department said.

In 2011, Horsky gave signature authority over the accounts to another individual. That helped him hide the assets from the IRS, the government said.


Horsky filed false tax returns from 2008 to 2014, failing to disclose his income from the Zurich bank’s accounts, resulting in a tax loss of at least $10 million, the U.S. said. He also failed to file Reports of Foreign Bank and Financial Accounts, or FBARs, until 2011, and false ones in 2012 and 2013, according to the Justice Department.


Horsky paid an FBAR penalty of $100 million, which is separate from any other restitution he may face, the department said.


The case is U.S. v. Horsky, 16-cr-224, U.S. District Court, Eastern District of Virginia (Alexandria).




Rick Ross Owes the IRS $5.7 Million in Unpaid Tax, Blames an Incorrect Filing



Rick Ross is in deep trouble with the taxman.


The "Hustlin'" rapper owes the Internal Revenue Service some $5.7 million in back taxes, though his team is confident the matter will be settled shortly.


According to TMZ, which broke the story, Ross (aka William "Rick Ross" Roberts II) paid $5.7 million less than he should have from 2012 to 2014, a sum which breaks down to $4.6 million for 2012 and just over half a million in 2013 and 2014, respectively.


Ross has blamed an "incorrect filing" by a "prior accountant" for the multi-million dollar sum he owes.


The rapper's reps shared the below statement, "I've been fortunate enough to experience financial success on a large scale through both my music career and my many business ventures. With this type of financial success comes financial responsibility. As artists we are blessed to be able to make money, but on the same note, are held accountable for our federal tax obligations just like everyone else. I am fully aware of my current dealings with the IRS. This issue arose from an incorrect filing by a prior accountant for the 2012 tax year."


He added, "My new team of accountants have corrected the prior filing, and as anyone who has dealt with the IRS understands, it is a process. We have already satisfied a large portion of these issues and I can assure you that we are working very closely with the IRS to bring a full resolution shortly and will continue moving forward in a positive direction."

The feds have issued a tax lien, according to the report, and the rapper faces jail time if he doesn't pay up.



IRS Makes It Easier to Look Up Disciplinary Records of Tax Practitioners



The Internal Revenue Service’s Office of Professional Responsibility has created a new online lookup table that allows the public to find out more easily if they have hired a rogue tax practitioner.


The new disciplinary look-up tool is basically just a Microsoft Excel file, but it includes searchable information about practitioners who have been censured for Circular 230 misconduct or received suspensions or disbarment from practicing before the IRS for the past 25 years.


“Currently, members of the public can only learn that a practitioner was sanctioned by reviewing each of the announcements of discipline published in the Internal Revenue Bulletin on, or by using a commercial subscription service (such as Tax Notes Today) that reports instances of Circular 230 discipline,” said the Office of Professional Responsibility in an email Wednesday. “The OPR’s solution is to compile the information into a searchable Excel document file.”


The list includes basic information from the past 25 years on more than 3,000 censures, suspensions, disbarments and other restrictions on practitioners. Examples include permanent injunctions and denials of limited practice to unenrolled tax return preparers due to misconduct.


The IRS’s OPR plans to keep the document up to date with any new entries whenever a disciplinary announcement is published in the Internal Revenue Bulletin. The OPR will also update the information to reflect when a tax preparer has been reinstated to practice before the IRS after the end of a practitioner’s suspension or disbarment, and to remove any data related to a disciplinary sanction once the date it was imposed passes the 25-year mark for the OPR’s record retention requirement.


The list includes the last name, first name, and middle initial (if applicable) of tax practitioners, along with the city, state, designation, disciplinary sanction, effective date, and ending date (when the practitioner is now in good standing and may represent taxpayers before the Service). The spreadsheet can be searched using the “Sort & Filter” and “Find & Select” features.




IRS Seeks Information on Bitcoin Users from Coinbase



The Internal Revenue Service is looking for information on bitcoin users from Coinbase, one of the largest bitcoin exchanges in the U.S., as part of its efforts to uncover possible tax evasion.


The IRS sent a broad request known as a John Doe summons to Coinbase last week seeking information on all of the San Francisco-based service’s users, according to The New York Times. The request follows on the heels of a report earlier this month from the Treasury Inspector General for Tax Administration that found the IRS should be doing more to ensure taxpayers aren’t using virtual currencies like bitcoin to avoid taxes (see IRS Warned to Safeguard Against Illegal Use of Virtual Currency).


The IRS did not immediately respond to a request for comment. However, the IRS filed an affidavit with the court last Thursday explaining its request, according to the technology website Ars Technica.


 “The information and experience of the IRS suggests that many unknown US taxpayers engage in virtual currency transactions or structures... Because the IRS does not know the identity of the individuals within the ‘John Doe’ class, the IRS cannot yet examine the income tax returns filed by those US taxpayers to determine whether they have properly reported any income attributable to virtual currencies.”


The company plans to challenge the IRS’s request for information on its customers. Coinbase spokesman David Farmer directed Accounting Today to a comment posted on its blog last Friday about the IRS request.


“Our customers may be aware that the U.S. government filed a civil petition yesterday in federal court seeking disclosure of all Coinbase U.S. customers' records over a three year period. The government has not alleged any wrongdoing on the part of Coinbase and its petition is predicated on sweeping statements that taxpayers may use virtual currency to evade taxes. Although Coinbase's general practice is to cooperate with properly targeted law enforcement inquiries, we are extremely concerned with the indiscriminate breadth of the government's request. Our customers’ privacy rights are important to us and our legal team is in the process of examining the government's petition. In its current form, we will oppose the government’s petition in court. We will continue to keep our customers informed on developments in this matter.”




Eight tips for talking money with adult kids

Parents and young adults can benefit from being more frank about finances. Here’s how to do it.


Are you uncomfortable having “the talk” with your kids? No, not that talk. The money talk. You may not be alone. More than one-third (34%) of millennial young adults admit they find it difficult to start conversations with their parents about saving and investing, according to the Fidelity Investments® Millennial Money Study.1


“Parents and their young adult children may not be communicating as well as they could be about money,” says Ann Dowd, CFP®, vice president at Fidelity. “That’s a big concern for both. The kids are missing out on important lessons learned by their parents, while the parents are risking potential confusion over family wealth and elder-care issues that arise as they age.”


Money talks can be casual conversations or formal family meetings regarding specific situations. And they should address the parents’ financial situation as well as the kids’—from things like budgeting and investing to discussions about the parents’ net worth and estate planning.


The time, place, and subject for these financial talks will vary depending on your family circumstances and temperament, but here are some pointers for talking about money with your adult children.



Keep your advice brief.

It can be difficult for newly independent young adults to acknowledge that they can still learn something from their parents. To break through that reluctance, try to keep your advice from sounding like a lecture. Stay brief and to the point, then follow up by suggesting resources for more information.

Try this: You might, for example, point out that credit card debt is expensive and finance charges can pile up quickly. Then send your child a link to an article about managing credit cards wisely, such as this Viewpoints: “Seven credit card tips.”



Share your experiences.

Let your kids know what went right—and wrong—in your financial decision making. And be specific. You’ll establish credibility with your kids by owning up to your mistakes and showing them that your advice is based on helping them avoid those same mistakes.

Try this: Maybe you realize that you should have started saving earlier for retirement, or that you could have put yourself on solid financial footing sooner if you had been smarter about paying off various types of debt, such as credit cards or college or car loans. More than two-thirds of those surveyed agreed that their parents learned from their past financial mistakes. So tell your story, then suggest this Viewpoints article: “How to pay off debt—and save too.”



Keep your expectations in check.

If you expect your adult child to follow all your advice, you’re going to be disappointed.

Try this: The way to avoid frustration—and allowing it to spill over into other aspects of your relationship—is to accept that your child is going to make mistakes despite your efforts to help him or her avoid them. Showing that you can hear bad news without being judgmental, your child may be more inclined to share information with you before the negatives multiply.



Set rules when lending money.

When asked, nearly half of young adults (47%) have received some kind of financial assistance from their parents at some point since leaving home. Topping the list are cell phone bills, car insurance, and groceries. And 25% said that at one point they did have to move back with their parents for financial reasons after they had been on their own.

When it comes to lending money to your children, you may want to have some sort of agreement. It doesn’t have to be a formal contract, but it would probably be better if you set some specific rules, whether your help is in the form of cash or a loan.

Try this: Let your kids know that giving or lending them money doesn’t entitle you to manage their finances. At the same time, you can—and should—establish conditions that are appropriate to the support you’re providing. For example, if you agree to help out with their college loan payment, you might require that they contribute something every pay period to their 401(k). Similarly, if your child is moving to a high-cost-of-living city for a new job, you might offer temporary help with the rent, but be clear about exactly how much help you’ll provide and for how long.



Discuss investing strategies.

In general, the investing approach of young adults is going to be different from that of their middle-aged parents. Still, it’s helpful for your kids to hear how you decide where to invest your money. It will help them understand the need to be strategic in their decisions and make choices that are appropriate for their situation.

Try this: Talk with your kids about basic concepts such as diversification, and show them how you have incorporated these principles into your investment portfolio. Suggest they read the Viewpoints article: “Three reasons to invest in stocks.” This article explains that if you're young and saving for a far-off goal, not investing in stocks may be risky.



Set a good example—and let it show.

One of the findings in our survey is that 65% of young adults felt that their parents provided a good example of how to have a successful financial future. Keep it up.

Try this: Who doesn’t need some reinforcement on the principles of sound financial planning? Try setting an example. So when offering advice to your adult child, you might try adding, “This is something that could help me, too, and I’m going to start saving more, borrowing less, etc.”



Don’t avoid the inheritance topic.

One reason cited by parents for holding back on discussing their net worth is that they don’t want to inflate their kids’ expectations of an inheritance. It’s a legitimate concern, especially in families with significant wealth. Parents are fearful of creating a disincentive for their children to put forth their best efforts in pursuing a career and achieving financial independence.

Try this: Openness and honesty are the best policy. Tell your children your concern. Explain that it isn’t because you doubt their character but because you have been around long enough to see that wealth can be a burden as well as a benefit. You want to be sure that your family’s money doesn’t hold them back from building their own legacy. Then go ahead and talk.



Discuss your finances with your kids at least once a year.

Setting aside an hour on a holiday when everyone is together can be the perfect way to bring everybody up to speed on family finances. You can provide updates on your retirement plans, your charitable contributions, or any changes to your estate plan. The kids can offer their thoughts and share information about their own financial concerns and progress. Be careful not to pry. Allow your kids to share as much as they’re comfortable disclosing, and remember that the more open you are, the more they will be, too.

Try this: It’s important to tell your children about your retirement plans to ease their concerns about your future. Our survey found that the biggest areas of disconnect between parents and their millennial kids was about the importance of having frank conversations about parents’ ability to cover living expenses in retirement, their health, and issues surrounding long-term care and elder care. Interestingly, kids thought those topics were much more important than their parents did.


Why it matters

There are many reasons why discussing financial matters with your adult children is important. Perhaps the most compelling is that it will help build trust and increase their comfort level in seeking financial advice. In our survey, only 22% of young adults (age 25 to 35) said their parents were their most trusted source of financial advice, and one-third said they don’t trust anyone on money matters.

Financial conversations aren’t always easy, but they’re a great long-term investment.




Five Social Security myths debunked

Focus on the facts before you claim this valuable retirement income benefit.

Getting your arms around Social Security can be pretty complicated. Misinformation, partially informed opinions, and complex benefits formulas can easily lead one down an incorrect—and costly—path.

Before you make your decision about claiming this valuable benefit, let’s clear up five of the most common myths and misperceptions.

Myth #1:

You must claim your Social Security benefit at age 62.

Many people are adamant that Social Security benefits must begin at age 62. This is a myth: 62 is the earliest age you can claim your benefit, but, it’s not the only age.

Your benefit is calculated based on your “Full Retirement Age,” or FRA. The year you were born determines your FRA. Your base benefit is calculated assuming you’ll claim your benefit at FRA.

·      Tip: You’ll find your FRA at Social Security’s website, SSA.govOpens in a new window., or on a paper statement mailed to you by the Social Security Administration. For those born between 1943 and 1954, your FRA is 66. Those born later have an FRA of 66 and some months or 67.

If you claim any time before your FRA, you lock in a permanent reduction in monthly income. Claiming at 62 translates to a reduced income of 25% to 30%, depending on your FRA. That means you may receive a lot less monthly retirement income, every year, for potentially several decades. You might think you are not going to live a long life, but many people do: 25% of men will live until 93; 25% of women will live to 961. A key consideration is maximizing your income for a retirement that could last longer than 30 years.

Wait until age 70 and lock in a “bonus”:

·      Waiting to claim Social Security until after your FRA comes with a hefty bonus: 8% per year if you wait until your FRA rather than claiming at 62.

·      If your FRA is 66, your monthly income would increase by 32% by waiting.

·      If your FRA is 67, your monthly income would increase by 24% by waiting.

Read Viewpoints: “Longevity and your retirement


Myth #2:

You can claim early, then get a “bump up” once you reach Full Retirement Age.

Many believe there is a “bump up” or “added income” once they reach their full retirement age. They’ve heard they can claim early at 62, then when they reach 66 or older, their checks will increase to the amount that corresponds to their full retirement age benefit. That’s a big misperception.

There is no bumping up of income once you’ve claimed your Social Security retirement benefit. You have made an irrevocable decision.2 You get an annual cost of living adjustment, but there is no increase when you reach FRA. There is, however, one case where you could get a “top up” benefit at FRA, but you still need to wait until your FRA to claim your Social Security benefit. 

Case Study: Lower-income spouses may get a “top up” or “auxiliary” benefit.

In this hypothetical example, Sally earned less during her career than her husband Brad. Her benefit is $700 per month; his is $2,000. As a spouse, she’s entitled to 50% of Brad’s benefit if she claims at her FRA. She would receive a “top up” of $300 to bring her benefit up to the $1,000 (half of Brad’s benefit) to which she is entitled. Social Security will calculate her options and pay out the higher benefit to which she is entitled.


Myth #3:

Your monthly Social Security benefit could be reduced or denied if your ex-spouse claims Social Security in a certain way.

In a recent survey,3 Fidelity asked more than 1,000 people if an ex-spouse could influence their Social Security benefits . Fifty-two percent of them said yes, this is true.

The real answer: False.

There are a lot of things an ex-spouse might do to complicate your life, but Social Security is off limits. Your ex has no influence over your benefits. If you have an ex-spouse, you may be entitled to spousal benefits as if you had remained married. If you were married for 10 consecutive years and have not remarried, you are entitled to either your own benefit—or 50% of your ex’s Social Security benefit, whichever is higher—once you reach your FRA.

If you wish to claim on your ex-spouse’s benefit, you simply make an appointment with your local SSA office and bring documents that prove the marriage and divorce. They will calculate your benefit options and when you submit your claim, you’ll receive the higher benefit.

·      Tip: There’s no need to discuss this with your ex-spouse, and your claim does not reduce or affect your ex’s benefit in any way. It’s your benefit, even if you’ve been divorced for many years. And, it may be larger than your own individual benefit.


Myth #4:

Your benefits are only based on wages that you’ve earned before age 65.

True or False?

How your Social Security benefit is calculated can seem mysterious. However, it’s important to know a few essential facts to aid your claiming strategy. You can use the tools on SSA.govOpens in a new window. to do the calculations.

·      Your benefit is calculated based on your highest 35 years of earnings; they do not have to be consecutive years or before age 65.

·      If you work past age 65, those earnings years will be included, so long as they are high enough to be part of your highest 35 years.

·      Even working part-time after turning 65 may be part of your highest 35 years of earnings.

·      If you don’t have 35 years with earnings, zeros will be included in the calculation.

Read Viewpoints: “Social Security tips for working retirees


Myth #5:

You’ll never get back all the money you put into the program.

Although 70% of the respondents from our survey5 thought they might not get back all they money they put in, many will. Everyone’s situation is different. Simply put, if you live a long time, you may collect more than you contributed to the system.

Due to the complexity of claiming strategies and number of variables involved, the Social Security Administration no longer offers a break-even calculator on its website. Social Security is designed to provide a safety net of income for the retired, the disabled, and survivors. The contributions you and your employers make during your working years provide:

1.    Current retirees and other Social Security recipients with payments

2.    A guaranteed income benefit when you reach retirement

While the government does not have a specific account set aside just for you with your FICA contributions (the taxes for Social Security and Medicare paid by you and your employer), one of the most powerful features of Social Security is that it provides an inflation-protected guaranteed income stream in retirement, ensuring against the risk you will outlive your savings. Even if you live to 100 or more, you continue to receive income every month. And, if you predecease your spouse, he or she also receives survivor benefits until his or her death.


Social Security: Your contributions vs. potential benefits

Let’s look at a hypothetical case of an American worker, Steve, who reaches his FRA in 2016. He’s retiring in December and will begin collecting his Social Security benefit in January, 2017 at his FRA. In Steve’s case, if he lives past age 74, he will receive a larger benefit than he contributed to the system. There is no standard break-even point, but let’s look at Steve’s situation in more detail.

Steve’s situation:

Steve’s situation

Hypothetical case assumes a final year of wages in 2016 to be $102,000. Using the Quick Calculator on, a rough estimate of benefits was calculated at FRA in today’s dollars. For an estimate using your personal earnings history, go to

Checklist for your Social Security claiming strategy

·      Know your numbers. Your FRA, earnings history, and estimated benefits.

·      Stay current. Sign up for your most current statements on SSA.govOpens in a new window..

·      Do the math. Use calculators on SSA.govOpens in a new window. to check out your monthly benefit options.

·      Get the facts. Don’t succumb to myths; use primary resources such as SSA.govOpens in a new window..

·      Start planning early. Claiming Social Security is an important part of your retirement income plan, but it takes some time to understand the options—and the implications to your savings. It’s a good idea to develop your retirement income plan early with your financial advisor, and look at all your options.

For many, Social Security benefits are the foundation of their income in retirement. Social Security benefits provide guaranteed income that will last as long as you live. Know your numbers, do the math, and develop a plan for a claiming strategy that supports your overall retirement income strategy.




IRS Extends Obamacare Reporting Deadline



The Internal Revenue Service is extending the due dates for some information reporting requirements under the Affordable Care Act.


Notice 2016-70 extends the deadline for certain information reporting requirements for 2016 imposed by the Patient Protection and Affordable Care Act under sections 6055 and 6056 of the Tax Code. 


The notice specifically extends the due date for furnishing the 2016 Form 1095-B, Health Coverage, along with the 2016 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage to individuals, from Jan. 31, 2017, to March 2, 2017. 


The notice also includes transitional good-faith relief from the penalties imposed by sections 6721 and 6722 of the Tax Code relating to the 2016 information reporting requirements under sections 6055 and 6056.


Greatland, a company that specializes in W-2 and 1099 information reporting, is advising employers to take note of the extensions, but to continue their preparations as if the deadline had not been extended, so they can ensure compliance and avoid penalties from the IRS.


“While we expect this deadline change to have minimal impact to the far majority of our customers, we still are encouraging businesses to not wait until the last minute, which can lead to mistakes or missing the deadline, event with the extension,” said Greatland CEO Bob Nault in a statement. “Failure to file 1095 forms for the 2016 tax year could be very costly for businesses.”


This is the second year in a row that the IRS has decided to keep the good faith transition relief in place to give filers additional leniency to file properly. The 30-day extension gives employers and issuers an extra month to provide individuals with forms reporting on offers of health coverage and the coverage that is provided.


The due dates for 1095-B and 1095-C deadlines are Feb 28, 2017 for paper 1095 forms with the IRS; March 2, 2017 for 1095 copies to be sent to recipients and employees; and March 31, 2017 to e-file 1095 forms to the IRS.

ACA reporting is still required for 2016, though the good faith transition relief from 2015 has been extended for 2016, Greatland noted. The ACA reporting requirements for 2016 have not changed, but there is a little more time now to fulfill the requirements.




Credit Suisse Said to Face Tax Probe over Undeclared Accounts



When Credit Suisse AG pleaded guilty in 2014 to helping Americans cheat on their taxes, it promised to help the U.S. root out suspicious accounts. Now, U.S. investigators want to know why the Swiss bank neglected to tell them about $200 million in undeclared assets owned by an American client, according to people familiar with the matter.


The client, Dan Horsky, a citizen of the U.S., U.K. and Israel, pleaded guilty Nov. 4 to conspiring to defraud the Internal Revenue Service. He has been cooperating for more than a year with investigators examining whether the bank helped clients with ties to Israel evade U.S. taxes, said five people who weren’t authorized to discuss the case publicly.


The Horsky accounts were considered "toxic” on the bank’s Israel desk because they were hidden from the IRS using methods like those that led to Credit Suisse’s guilty plea, the people said. The U.S. learned about Horsky’s accounts independent of Credit Suisse and after the bank had entered its guilty plea, they said. Credit Suisse could face a new civil or criminal case based on the Horsky probe, the people said.


“If they didn’t provide information about this account when they had it in their files, there was either gross negligence or more likely some kind of conspiracy at the bank to avoid disclosing this account,” said Larry Campagna, a Houston tax attorney, when told by Bloomberg News about the new Credit Suisse inquiry.


Anna Sexton, a spokeswoman for Credit Suisse Group AG, the parent of the unit that pleaded guilty, declined to comment when asked about the U.S. investigation into the bank’s handling of Horsky’s accounts. The bank has set aside more than 2 billion Swiss francs ($2 billion) in general litigation reserves. Horsky’s lawyers declined to comment.


Prosecutors, the U.S. Securities and Exchange Commission and the IRS are probing whether the bank’s failure to reveal Horsky’s accounts—before its guilty plea—was a lapse in internal controls or a crime involving bankers who acted with approval of managers, the people said. The bank, which wasn’t identified in Horsky’s guilty plea, is Credit Suisse, the people said.


In February 2014, a U.S. Senate committee found that Credit Suisse helped American customers hide as much as $10 billion in assets from the IRS. At the time, Credit Suisse executives told skeptical lawmakers that only a small group of bankers helped U.S. clients cheat on their taxes.

Credit Suisse AG pleaded guilty that May, saying hundreds of employees handled American accounts, both declared and undeclared to the IRS. Its $2.6 billion fine was a record among 85 Swiss banks that admitted helping Americans evade taxes. In its plea agreement, Credit Suisse pledged to help flush out U.S. accounts not declared to the IRS.


Credit Suisse is separately in settlement talks with the Justice Department and U.S. states over abuses in residential mortgage-backed securities. The bank is also under the scrutiny of a monitor appointed by the New York Department of Financial Services after the 2014 tax plea. The monitor, Neil Barofsky, declined to comment on the new investigation.


Horsky, 71, went to great lengths to shield his money, according to plea papers in federal court in Alexandria, Virginia, and interviews with three people familiar with the matter.

He worked from 1989 to 2015 as a business professor at the University of Rochester in upstate New York, specializing in marketing and game theory.


Bad Bets

In 1995, Horsky bought shares in startup businesses through Credit Suisse accounts. He joined two other game-theory experts in investing, the people said.


Horsky invested in as many as 18 companies, but most were bad bets, according to court papers. He ran up more than $350,000 in credit-card debt, forcing him to take a second mortgage.


He finally struck it rich in 2008, when a company identified in court papers as Company A was bought for $1.8 billion. Horsky had invested in the firm using his money, funds from his father and sister, and margin loans from his bank.


He reaped $80 million in net proceeds, but only reported a gain of $7 million to the IRS, he said. He also admitted filing false returns from 2009 to 2015.


After his windfall, Horsky bought stock in a second company, identified as Company B, which had acquired Company A. His assets rose to $200 million by 2013.


‘Toxic’ Accounts

His holdings were among undisclosed accounts serviced by Credit Suisse bankers in Zurich who helped people with Israeli citizenship, according to three people familiar with the matter.


Horsky’s accounts were considered “toxic” on Credit Suisse’s Israel desk as Swiss banks came under increasing pressure after 2009 to jettison undeclared U.S. assets, the people said. That year, UBS Group AG, Switzerland’s largest bank, admitted that it helped Americans evade taxes.


Horsky used various accounts at Credit Suisse, including one under the name of Horsky Holdings, according to court papers. He put assets in the names of others to hide them from the IRS even as bank employees sent him e-mails denoting his U.S. residence, according to court papers.


In 2011, he gave signatory authority over accounts to a person identified in court papers as Individual A. At the suggestion of Credit Suisse bankers, Individual A agreed in 2012 to replace Horsky as a director of several offshore shell entities even as Horsky retained control, court papers said.


In 2013, Individual A renounced his U.S. citizenship and moved abroad, in part to ensure that Horsky’s control of accounts wouldn’t be reported to the IRS, Horsky said as part of his guilty plea. Individual A also filed a false expatriation statement with the IRS that failed to disclose his net worth and ownership of foreign assets, according to court papers.


“Despite his extraordinary wealth, Mr. Horsky concealed funds offshore, failed to report substantial income, conspired to submit false expatriation documents to cover up his fraudulent scheme, and evaded paying his fair share of tax,” Caroline Ciraolo, the prosecutor who oversees the Justice Department’s tax division, said in a statement when he pleaded guilty.


In his plea, Horsky admitted that he failed to file Reports of Foreign Bank and Financial Accounts, known as FBARs, until 2011, and that he filed false reports in 2012 and 2013. He will pay a FBAR penalty of $100 million, which is the largest in a publicly filed case.

The Simon Business School at University of Rochester said Horsky retired last December. He resigned his honorary title of professor emeritus on Nov. 7, three days after his guilty plea.




Trump Foundation Says It Engaged in 'Self-Dealing' in IRS Filing



Donald Trump’s charitable foundation said on an Internal Revenue Service filing that it violated rules preventing leaders of nonprofit organizations from using a charity’s money to benefit themselves or other “disqualified” people.


The president-elect’s charity acknowledged it engaged in so-called “self-dealing” on an IRS form for 2015 that was posted to Guidestar, a charity tracking organization. “Such admissions are relatively unusual, although they do happen on occasion,” said Lloyd Mayer, a law professor at the University of Notre Dame who specializes in nonprofit law.


The charity’s admission comes after a series of reports in the Washington Post found Trump had used foundation money to pay for legal settlements, including a dispute over an oversized flagpole at his Mar-a-Lago Club in Palm Beach, Florida.

The president-elect also used his foundation’s money to purchase portraits of himself at charity auctions, as well as memorabilia such as a football helmet signed by former NFL quarterback Tim Tebow.


The foundation said in the tax documents it had transferred “income or assets to a disqualified person” and again checked “yes” when asked if the charity had done so in previous years. That’s a discrepancy from previous filings signed by the president-elect that said the group had not transferred money to an ineligible person or entity.


‘Self-Dealing Tax’

Trump’s transition team didn’t immediately respond to an e-mailed request for comment. WeiserMazars LLP, which handles tax matters for the foundation, declined to comment.


The IRS could levy a 10 percent “self-dealing tax” on any money that was improperly transferred to an ineligible recipient, including Trump or his businesses, and require restitution of those sums to the charity, Mayer said. The agency could also require the charity’s leaders, possibly including Trump, to pay a 5 percent manager’s tax on the funds that went to ineligible recipients, he said. And the Donald J. Trump Foundation would also have to develop and adopt procedures to prevent future violations.


While it’s possible that the IRS could revoke the foundation’s tax-exempt status, Mayer said that’s unlikely. “Many more grants were made to legitimate charities,” he said.


The documents don’t say who benefited from the self-dealing practices or explain what instances ran afoul of the charity’s legal obligations.


In the final presidential debate, Trump said that money from the foundation “goes 100 percent” to different charitable causes.


“I don’t get anything,” he said. “I don’t buy boats. I don’t buy planes.”


New York Attorney General Eric Schneiderman ordered the Trump Foundation to cease soliciting charitable donations in October, after the state’s charity bureau determined the group had been fundraising even though it wasn’t registered to do so.


Representative Elijah Cummings, the top Democrat on the House Committee on Oversight and Government Reform, released a letter that he sent to tax lawyers who have worked with Trump, seeking additional information on the filing. He asked for documents related to the payments in question and identifying their recipients, documents showing whether the foundation had paid any penalties or additional taxes in connection with those payments, among other things.


A spokeswoman for Morgan, Lewis & Bockius LLP, the firm contacted by Cummings, said its lawyers don’t comment on client affairs.


Ukrainian’s Donation

The foundation’s IRS filing also shows that two of Trump’s companies were the largest donors to the charity in 2015, combining to give $616,000. The London branch of Ukrainian oligarch Victor Pinchuk’s foundation contributed $150,000. Pinchuk’s foundation was also a major donor to the Clinton Foundation, giving between $10 million and $25 million. Critics contended the donations were made for access to Hillary Clinton when she was secretary of state, a charge that both Clinton and Pinchuk denied. 


Trump’s foundation divided $896,000 among more than 50 charities in 2015, with the biggest chunks of money going to groups dedicated to curing cancer or supporting veterans and law enforcement officers and their families.


It also gave grants to a handful of conservative organizations, including $50,000 to the American Conservative Union Foundation and a $10,000 grant to Project Veritas, which in 2016 made undercover recordings of Democratic Party operatives taking credit for sponsoring protests at Trump’s campaign rallies.




Nexpanding: The Ever-Evolving Shape of Nexus Rules



Nexus — the minimum amount of contact between a taxpayer and a state that allows the state to tax the business on its activities — is under attack by the states as they seek to broaden its reach in order to increase their taxing revenue.


States are challenging the traditional physical-presence standard as a basis for collecting tax from companies doing business in the state. While they previously collected taxes from companies having a physical presence in their state, they are now adopting a broader economic-nexus standard requiring businesses to pay taxes when they have earned revenue within a state above a certain sales dollar threshold.


At the heart of the issue are general nexus concepts, as different taxes have different nexus rules, and the different states have their own nexus rules.




“As a result of states attempting to expand their tax rolls to out-of-state vendors, state legislatures have created a patchwork of economic nexus standards that are a compliance nightmare for companies of all sizes and industries,” explained Patrick Duffany, a partner at Top 100 Firm CohnReznick who also leads the firm’s state and local tax practice. “States want more revenue and they want taxpayers in their states to pay less tax. To the extent that states can export the tax, meaning the more revenue they can realize from out-of-state taxpayers, it makes it more attractive for businesses to locate into that particular jurisdiction.”


“The consequences of such vastly different standards is that there are significant risks to companies, especially those in service and IT industries and those that are growing quickly,” Duffany noted. “Executives and advisors are forced to approach their tax filings on a state-by-state basis, an approach that takes considerable time and effort.”


In 1992, the Supreme Court established a physical presence test for sales tax nexus in the Quill case, but left unanswered the question as to its application for income tax nexus. Public Law 86-272 limits states’ power to impose income tax by prohibiting taxing businesses whose only activity in the state is the solicitation of orders, so long as the orders are accepted at and delivered from a point outside the state. Confusion has come subsequent to the Quill decision, primarily on the sales tax side, according to Rocky Cummings, partner and national director of state and local taxes at Top 10 Firm BDO. The “click-through” or Amazon laws seek to ascribe nexus through the agency theory. “Click-through nexus says, ‘OK, seller, if an agent in another state is directing traffic to your Web site, we’ll get nexus that way.’”


“There has been confusion as to whether Quill extends to income tax,” Cummings said. “Many think so. After all, the Commerce Clause should apply equally to sales and income. However, the Supreme Court declined to review two cases in 2005 which treated income tax differently, so a lot take the position that you don’t need physical presence for income tax nexus. As a result, states started enacting factor presence rules, requiring that if a company has a certain amount of sales, it is deemed to have nexus.”


“P.L. 86-272 only deals with companies sending solicitors into a state to solicit sales,” he said. “If the sale is consummated outside the state and shipped back into the state, P.L. 86-272 preempts corporate income taxation by the state. It only applies to income tax —it does not apply to business activity or net worth taxes.”




There’s not that much difference between pure economic nexus and factor-based nexus, according to Joe Pizzimenti, tax director at Top 100 Firm Margolin, Winer & Evens LLP. “If a company does not have P.L. 86-272 protection in order to determine the requisite presence, instead of looking for physical presence or other form of agency presence, you look to an objective test. If you have, say, $1 million of sales in the state, or some other number they determine legislatively, you are deemed to have economic nexus in the state.”


In a factor-based test, payroll, property and sales in the state are considered. “Factor-based nexus looks at all three of these,” said Pizzimenti. “Economic and factor nexus are two forms of objective nexus standards, generally for net income-based corporate taxes. They haven’t generally been adopted for sales and use tax nexus, though a couple of states either have or are proposing this.”


The reason for the dichotomy is that until recently most states determined corporate income tax nexus based on net income, according to Pizzimenti. “However, some states have adopted a gross margins or gross receipts test. For those types of taxes, P.L. does not apply to offer protection from a state asserting nexus.”


When a company derives its revenue from the sale of services, there is an issue of how to source the revenue for nexus purposes, Pizzimenti observed. A number of states have now adopted market-based sourcing, which sources the revenue to the state where the service is received. “When you combine market-based sourcing and economic or factor-based nexus, there is the potential that nexus exists where it is unexpected.”


Regarding sales tax nexus, Pizzimenti has a word of caution: “In almost every jurisdiction, sales tax is a fiduciary tax. Once it is determined that an entity has enough presence to require registration as a sales tax vendor, all of its responsible persons become personally liable for taxes that should have been collected on transactions.”




Because of the revenue that is at stake, many states are finding ways to challenge the Quill physical presence test. These include passing “click-through” and affiliate nexus provisions, and use tax notification requirements. Ohio has asserted a “cookie” nexus concept that would create taxable presence every time a retailer’s Web site is accessed by a customer in the state. And Colorado has filed a cross-petition asking the Supreme Court to determine if the case of Direct Marketing Association v. Brohl (upholding Colorado’s requirement that retailers notify any Colorado customers of the state’s tax requirement and to report tax-related information to the state’s Department of Revenue) is compelling enough to overturn Quill.


“This case represents the continued struggle by states and businesses with the definition of nexus as defined by Quill,” said Clark Calhoun, a partner in law firm Alston & Bird’s State & Local Tax Group. “Although the original ruling sets a precedent for other states that might consider adding a similar reporting requirement, the current case fails to refocus on the issue of physical presence.”


“We expect that other states will attempt to impose obligations similar to Colorado’s on out-of-state retailers, as well as other Web-based companies, that do not collect state sales and use taxes,” said Andy Yates, an attorney in Alston & Bird’s SALT Group. “The Tenth Circuit’s decision in Direct Marketing to uphold Colorado’s reporting requirements undermines the cross-petition and affirms that Quill does not impair states from implementing these reporting regimes.”




IRS Casts Unusually Wide Net for Bitcoin User Data



A request by the Internal Revenue Service for user data from a bitcoin exchange highlights simmering tensions between compliance and customer privacy for financial institutions and will test how those demands are balanced in the young field of cryptocurrency.


Under a procedure called a John Doe summons, the IRS this month asked a federal court in California to approve its request for Coinbase to turn over records on any user who had made digital currency transactions between 2013 and 2015.


At issue is the indiscriminate nature of the request. Coinbase has accumulated nearly 5 million users, according to its website—which could mean the company might be forced to turn over financial records on millions of U.S. taxpayers.


In the past, the IRS had targeted a number of banks with John Doe summonses. The requests were broad, but did not ask financial institutions to turn over information on every single one of their accountholders as the IRS is now demanding Coinbase do, industry lawyers said.

"It's much broader in scope than anything that's been issued to the banks," said Carol Van Cleef, a partner at the law firm of BakerHostetler.


Digital currency supporters are concerned that in addition to any genuine tax cheats, the IRS could hoover up the transaction data of a wide swath of innocent Coinbase users.


"If you're using bitcoin to buy politically incorrect books, the government's going to have a history of all your transactions," said Jerry Brito, the executive director of the cryptocurrency think tank Coin Center.


To support his case, IRS agent David Utzke argued in the filing that all bitcoin users are by nature suspect, because cryptocurrency transactions do not require third parties—including companies like Coinbase—to report them to the government.


"Tax noncompliance increases in the absence of third-party information reporting," said Utzke. "This experience is a reasonable basis to believe that members of the 'John Doe' class [the Coinbase users] may have failed to comply with the internal revenue laws of the United States."


Coinbase—a company whose know-your-customer and transaction monitoring practices have chafed hardcore bitcoin users—said it would appeal the summons if it gets approved in court.


"Our general tack is to work with law enforcement's reasonably targeted and lawful requests for information," said Juan Suarez, the counsel at Coinbase. "This is a very, very broad request for all information on customers over a three-year period."


Though the John Doe summons procedure can allow the agency to go after unnamed tax evaders, it cannot be used toward an investigation of "specific taxpayers," according to the IRS's own Internal Revenue Manual.


In 2015, for instance, the IRS asked Bank of America and Citibank to turn over records on customers who held accounts at BBIL, a correspondent bank in Belize the agency suspected of facilitating tax evasion schemes.


"A John Doe summons cannot be used to conduct a 'fishing expedition,'" said P. Faisal Islam, a compliance and anti-money-laundering consultant for fintech companies, citing the IRS's own language.

Here, Islam added, "it would seem like a fishing expedition because [the IRS] hasn't established, A, that Coinbase has users that engage in tax avoidance; or, B, that Coinbase has primarily engaged in bitcoin transactions for the purpose of tax evasion."


But some argue that the IRS is on solid ground to ask for the records of bitcoin users, because it needs to get a better sense of how prevalent the use of the digital currency for tax avoidance purposes is.

The IRS has "two different things in mind," said D.E. Wilson, a partner at the law firm Venable. "One is to try to gain a sense of the size of the market, and the other is get a sense of what percentage of that market is filing tax returns, disclosing their digital currency transactions."


Wilson added: "That's not fishing. That's trying to get a handle on the market."


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The IRS is under pressure to crack down on bitcoin tax evasion. In a September report, the Treasury's Office of Inspector General had criticized the agency for not committing enough resources to fighting tax evasion schemes committed through the use of a digital currency.


"IRS management needs to develop an overall strategy to address taxpayer use of digital currencies as property and as currency," the watchdog urged.


In 2014, the IRS announced that it considered bitcoin a form of property for tax reporting purposes. This means that every time someone sells (or spends) bitcoin at a profit, they are liable for a capital gains tax on that transaction, which needs to be reported.


As a result, digital currency watchers are questioning whether the IRS's request might be an attempt to go after both people using bitcoin as a tax-evasion tool, and those who have—inadvertently or not—failed to comply with the complicated reporting requirements related to bitcoin's classification as property.


"The IRS has a habit of spreading out its compliance activities across all levels of income," said Wilson. "If you applied that theory to what's going on here, you're likely to see the small trader as well as the large trader be caught somewhere along this system."


But others hope the IRS will not focus its attention on those types of penny ante tax-reporting violations.


"If in the course of their investigations they turn up that somebody bought $5 worth of bitcoin and they cashed it in for $10," said Brito, "I would be very surprised if the IRS [brought] in this person."


Coinbase may face an uphill battle fighting the summons. According to an annual report to Congress by the IRS's Taxpayer Advocate Service branch, in the year that ended in May 2015, 96 percent of lawsuits appealing summons enforcements were successfully fought off by the agency.


"Taxpayers and third parties rarely succeed in contesting IRS summonses due to the significant burden of proof and strict procedural requirements," the 2015 report said.


This request could therefore drive bitcoin users—many of whom are attracted to the digital currency's privacy features—away from companies like Coinbase, a licensed money transmitter in 35 states that offers currency conversion and storage services.


"They may not want to use a third-party service to conduct transactions," said Brito. "They might use a service like Coinbase to acquire bitcoin—but not as a wallet."


Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.


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