Over the past 6 months, several major changes have had a significant impact on the tax industry.
- First, the Tax Cuts and Jobs Act of 2017 (TCJA) was passed in late December 2017. TCJA ushered in a new era of domestic and international corporate taxation that affects all U.S. taxpayers—individuals and businesses alike. Many provisions in the law were not fully fleshed out, so, as practitioners, we are still waiting for substantial clarification and guidance in certain areas.
- Second, on March 13, 2018, the IRS announced the end of the Offshore Voluntary Disclosure Program (OVDP), the full-scale amnesty program for U.S. taxpayers with unreported foreign income and/or assets. Taxpayers who still want to use the program effectively have until July 15, 2018, to start the process if they want to timely submit all information by the deadline of September 28, 2018.
- Third, several court rulings and international campaign announcements signaled potential changes and developments in IRS priorities.
In this article, we will attempt to gaze into the IRS crystal ball to make predictions on a few ways these changes may affect taxpayers in 2018 and beyond.
- Cryptocurrency Voluntary Disclosure Program
On May 30, 2018, the American Institute of CPAs (AICPA) issued a 23-page letter to the IRS asking for guidance on the taxation of virtual currencies, such as Bitcoin.
U.S. taxpayers have been on the hook for accurate reporting of virtual currencies since 2014, when the IRS issued its first guidance on the subject.
However, in the past few years, the taxation of virtual currency has expanded and become significantly complicated, with questions surrounding acceptable valuations, computation of gains/losses, and treatment of currency events, such as chain splits, airdrops, giveaways, token swaps, staking, mining, like-kind exchanges, installment sales, and wash sales, just to name a few.
At the same time, tax practitioners have noticed a significant increase in clients who report having virtual currency income and assets.
Furthermore, we know that the IRS is already targeting virtual currency reporting. It recently won a legal battle to compel Coinbase to release information on owners of virtual currencies, which it plans to use to assess taxpayer compliance.
Our prediction: Because very few exchanges even produce Forms 1099 to report gains and losses from virtual currency transactions (let alone provide other documentation), the current situation reminds us of the early days of the 2009 and 2011 OVDP programs where tax firms were forced to expend significant resources to recreate financial histories to calculate untracked gains/losses from Swiss bank accounts.
There are potentially hundreds of thousands of individuals who may have virtual currency income and information reporting issues with the IRS.
Consequently, we believe that the IRS will create concrete guidance (or at least better guidance than issued in 2014) for the taxation of virtual currency and will simultaneously create a voluntary disclosure program for taxpayers who have non-compliance issues. We expect this program to be very similar to Streamlined Filing.
- Foreign Bank and Financial Accounts Report (FBAR) Penalty Limits
In May, a U.S. District Court ruling limited the civil penalties the IRS could levy against a taxpayer for FBAR delinquencies (non-filing or misfiling) to a maximum of $100,000.
This case will likely be appealed, but if it stands, it is a big win for taxpayers who have previously settled FBAR violations for amounts above $100,000, and it may trigger a wave of refund requests.
Our prediction: Taxpayers who previously settled their FBAR issues through the OVDP will likely have a tough time breaking the terms of their closing agreements to request a refund, but it is worth seeking legal counsel to determine whether an audit reconsideration and refund request are viable. Taxpayers who still have pending OVDP submissions will likely use the “Opt-Out” program to negotiate the penalty to $100,000 or less.
- Foreign Trust Campaign
On May 21, 2018, the IRS announced a campaign to improve compliance with foreign trust reporting, specifically the U.S. information reporting requirements related to the ownership of, and transactions with, foreign trusts. The campaign will focus on the timely and accurate filing of Forms 3520 and 3520-A.
Because of the potential for abuse, the IRS heavily scrutinizes the ownership of foreign grantor trusts. The IRS has spent recent years gathering information through OVDP submissions, whistleblowers, document leaks, and other sources that outline how wealthy taxpayers have used foreign trusts and other entities to evade taxes around the globe.
In addition, since 2010, the IRS has used its Global High-Wealth Industry Group, or the “Wealth Squad,” to examine the “complete financial picture of high wealth individuals and the enterprises they control.” The Wealth Squad is a highly trained team of examiners who review the tax returns and other filings of high-net-worth individuals and the domestic and foreign entities in which they have an interest. While the IRS audited only about 0.5% of all tax returns filed in the calendar year 2016, the IRS audited almost 15% of the tax returns filed by the wealthiest taxpayers.
Our prediction: It is common practice to report certain foreign pensions on Forms 3520 and 3520-A as they are akin to foreign grantor trusts. However, we do not believe the IRS will scrutinize these types of filings, but rather it will focus this campaign on “actual” foreign grantor trusts, such as those commonly used in Australia, New Zealand, and Canada. This campaign may overlap with the IRS Wealth Squad initiatives. Taxpayers who find themselves a target of this campaign should immediately seek qualified representation.
- OVDP Declines and Withdrawals Campaign
In 2017, the IRS announced an international campaign to target individuals who previously took steps to enter the OVDP (e.g., via a “pre-clearance letter”) but either were declined entry or withdrew from OVDP without completing the program.
The IRS has built a list of the “decline and withdrawal” taxpayers, and it will now review this list to determine if those taxpayers have resolved their “non-compliance” issues. For example, the IRS may check the taxpayer’s IRS account to see if they have made a Streamlined Filing or Delinquent International Informational Reporting filing. Failure to do so could render the taxpayer a target for further scrutiny.
Our prediction: When OVDP closes on September 28, the IRS will issue non-compliance “soft” letters and audit/examination letters shortly thereafter to individuals on this list who have been identified as non-compliant. In addition, we predict that right before the October extension deadline for 2017 tax returns, the IRS will combine the Streamlined Domestic and Foreign programs into one new streamlined program with a 10% penalty.
- Repatriation Tax Voluntary Disclosure Program
As part of the TCJA, the “Transition Tax” or “Repatriation Tax” was introduced. This tax has had a massive impact on individuals who own controlled foreign corporations. The only reprieve is an eight-year payment plan at no interest. However, this payment plan has stringent payment due dates. For individuals living inside the U.S., the first payment date was April 17, 2018. For individuals living outside the U.S., the first payment date was June 15, 2018. The tax was required to be reported on the 2017 tax return.
Our prediction:Many individual expatriates own closely held corporations in foreign jurisdictions, and huge numbers of these individuals will either miss the first payment date, fail to report the Repatriation Tax, or improperly report the Repatriation Tax. Therefore, we predict that the IRS will have to create a voluntary disclosure program, like the Streamlined Filing program, to allow these taxpayers to voluntarily correct their 2017 tax return and gain access to the beneficial payment plan.
Indeed, on June 4, 2018, the IRS already took steps in this direction, announcing that, subject to certain conditions, it will waive late payment penalties and allow late installment payment elections for the Repatriation Tax.
- Appointment of OVDP Expert as IRS Commissioner
In February, President Trump nominated Charles “Chuck” Rettig as Commissioner of the IRS. Rettig has been serving as acting Commissioner since November 2017, and at the time of this writing, his appointment is expected to be confirmed at the Senate Finance Committee’s hearing on June 28, 2018.
Our prediction: Rettig was one of the original OVDP practitioners, and we predict that he will use his knowledge as a private practitioner to drive international campaigns and go after taxpayers with non-compliance issues.
If you have questions about how these recent developments affect your situation, contact us at email@example.com to schedule an appointment with International Tax Director Mishkin Santa.