Prose by Tax Pros - Another Article by Hale E. Sheppard

Litigation over unreported foreign account is unpredictable. Many rejoiced in 2017 when a District Court determined in Bedrosian v. United States that the taxpayer was not “willful” in failing to declare a large Swiss account. They were down, though, when the same District Court, on remand, reluctantly held that the taxpayer acted “recklessly,” which sufficed. Less than one month later, the government agreed to settle willful FBAR penalty case at the last minute in Jones v. United States. Details of the settlement are confidential, but logic dictates that the government, after a string of FBAR victories and a win in Bedrosian, would not concede anything, unless it had real concerns about losing and setting precedent favorable to taxpayers. The enclosed article describes the applicable law, the two notable FBAR decisions, and where things stand with respect to willfulness.

In fighting the battle against offshore tax avoidance, the U.S. government has raised some creative arguments to establish that a taxpayer “willfully” failed to disclose foreign accounts by filing FBARs. These include the concept of “constructive knowledge,” whereby the U.S. government contends that any FBAR violation must be “willful” and thus subject to the highest possible penalty. 

This notion sounded absurd to many in the tax community at the outset, but it has been embraced by several courts. Not all courts have accepted the position, though, giving hope to taxpayers that merely signing a Form 1040 will not be considered tantamount to a willful FBAR violation and the large penalties that come with it. This article examines the major cases that have analyzed the “constructive knowledge” position and what they mean to taxpayers.

Only two cases have addressed whether partnerships subject to the special proceedings created by the Tax Equity and Fiscal Responsibility Act (“TEFRA”) are able to make a qualified offer. Just one of these cases yielded a decision with precedential value, and it explained that TEFRA partnerships are entitled to file qualified offers. Nevertheless, the IRS seems entrenched in its traditional position, arguing as recently as September 2020, in a pending Tax Court case, that TEFRA partnerships are ineligible to file qualified overs, period.

This article describes the rules related to qualified offers, the two cases addressing the TEFRA partnerships issue, the current stance of the IRS, and the likely result of this standoff, now and in the future.

A long list of cases over the past decade have centered on the proper definition of “willfulness” in the context of penalties for an unfiled, incomplete, or inaccurate FinCEN Form 114. However, those cases did not address some key issues, including (i) whether the Internal Revenue Service, with help from the Department of Justice, can assess and/or collect penalties after the taxpayer who committed the FBAR violation dies, and (ii) if so, against whom can the IRS and DOJ take action, the deceased individual, a surviving spouse, the executor of the estate, beneficiaries of the estate, transferees, others?

This article analyzes a series of recent cases centered on post-death actions by the IRS and DOJ, giving special attention to the question of the survivability of FBAR penalties.

The IRS has been riding high recently because of several Tax Court victories on “technical” issues in conservation easement disputes. However, several signs exist that the tide might be turning. One of these is the recent decision by the Eleventh Circuit Court of Appeals in Pine Mountain Preserve, LLLP. This article explains the general rules related to conservation easement donations, critical facts from the case, analysis by the Tax Court, overlooked aspects of the initial decision, recent rulings by the Court of Appeals, issues that the Tax Court must now decide on remand, and the positive aspects of the case thus far for taxpayers making charitable donations.

The IRS is sending mixed messages when it comes to potential resolution of disputes involving partnerships that engaged in a so-called syndicated conservation easement transaction (SCET). On one hand, the IRS has taken several enforcement actions recently, which make it procedurally  impossible for an individual partner to voluntarily resolve matters with the IRS and remain penalty-free by submitting a qualified amended return (QAR). On the other hand, the IRS commissioner issued two news releases in November and December, warning taxpayers of increased  enforcement activities and “encouraging” them to file QARs. This apparent inconsistency has many in the tax community confused and unable to properly advise partners, partnerships, and others. The good news is that the regulations seem to grant the commissioner authority to modify the QAR rules as necessary. This article reviews SCET issues; explains ongoing enforcement tools; summarizes recent IRS announcements urging taxpayers to file QARs; describes the stringent QAR standards; and identifies the issues for which the tax community is seeking clarification from the IRS.

The IRS takes the stance that any error or omission in connection with Form 8283, regardless of how minor, merits a deduction of $0. The IRS has recently added new layers to this argument. It now contends that some partnerships are not properly accounting for “syndication expenses,” which  leads to unwarranted deductions and/or inaccurate basis information on Form 8283, which impairs the IRS’s ability to detect non-compliance, which justifies complete disallowance of charitable deductions. This article analyzes issues relevant to this expanded position by the IRS.

Attention has been focused recently on conservation easement donations, micro-captive insurance, virtual currency, and other “hot” topics. Although not dominating the news cycle any longer, plenty of taxpayers continue hiding foreign assets, and the Internal Revenue Service (“IRS”), with help from the Department of Justice (“DOJ”), still aggressively pursues them. What is remarkable about these international actions is that they sometimes trigger three interrelated disputes, occurring in three different venues, and generating three potentially large liabilities.

Uplifted by some recent Tax Court victories on “technical” issues in conservation easement disputes, and cognizant of the enormous amount of additional cases headed its way in the coming years, the IRS announced a settlement initiative in June. The agency first described the terms of the settlement initiative through two means: a public release and private offer letters to eligible partnerships. Not surprisingly, that initial guidance had several holes. The IRS tried to plug them in October 2020 by publishing a chief counsel notice, along with a second release. This article analyzes all the information provided thus far about the settlement initiative, identifying key issues that remain unaddressed by the IRS, whether strategically or inadvertently.

This article analyzes the general rules about #iling deadlines and justifications for penalty abatement, the major cases establishing the limits of the reasonable-reliance-on-a-tax-professional defense during the paper-filing era, the new cases applying the original rules to modern times, and other aspects of tax where the rules about the extent of reliance are more flexible.