Fiscal '23 IRS Audits Resulted in $32B in Additional Taxes!

According to the 2023 IRS Data Book, the Internal Revenue Service closed nearly 583,000 tax return audits in fiscal year 2023, resulting in $31.9 billion of recommended additional tax after examination, the agency said in its annual data book. 

Of those closed examinations, nearly 13,500 taxpayers representing 2.3% of closed return audits and $19.5 billion in recommended additional tax disagreed with the IRS' assessment, according to the Data Book.

22.7 percent of exams were conducted in the field, yielding over $24.1 billion in additional recommended tax.

The remaining 77.3 percent of audits were conducted via correspondence, resulting in almost $7.8 billion of additional recommended tax.

Fiscal year 2023 was a transitional year for the agency because of the additional long-term funding it received under the Inflation Reduction Act, Internal Revenue Commissioner Danny Werfel said in the data book's introduction.

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IRS Releases Digital Asset Draft Form 1099-DA

Under the broker information reporting rules, brokers must report transactions in securities to both the IRS and the investor. These transactions must be reported on Form 1099-B. A federal tax law passed in 2021 made broker information reporting rules also apply to cryptocurrency exchanges, custodians, or platforms (e.g., Coinbase, Gemini, or Binance), and to digital assets such as cryptocurrency (e.g., Bitcoin, Ether, or Dogecoin), effective for 2024 and later years. However, the IRS delayed the effectiveness of these rules until it issued final regulatory guidance. Thus, the rules won't become mandatory for brokers until the IRS issues that final guidance. Some cryptocurrency exchanges already send out Forms 1099-B to investors.

The IRS intends to have the cryptocurrency reporting done on a new form, Form 1099-DA.The new 2025 Form 1099-DA is generally expected to be included on federal income tax returns by taxpayers who answer "yes" to the digital asset question that asks if they, at any time during the relevant tax year, received, sold, exchanged, or disposed of a digital asset or financial interest in a digital asset. Common examples of digital assets to be reported include cryptocurrencies, stablecoins, and non-fungible tokens.

Under a set of rules separate from the broker reporting rules, when a business receives $10,000 or more in cash in a transaction, that business must report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300.

The same federal tax law mentioned above required businesses to treat cryptocurrency and other digital assets like cash, effective after 2023. Thus, businesses accepting payments of $10,000 or more in cryptocurrency, or in combined crypto and other cash, would have had to report that to the IRS (on IRS Form 8300). But IRS also delayed the effectiveness of these rules until it issues final regulatory guidance. Thus, until the IRS issues that final guidance, the rule counting crypto as cash for the cash-reporting rules doesn't apply.

If you use a cryptocurrency exchange or platform, and it has not already collected a Form W-9 from you (seeking your taxpayer identification number), expect it to do so.

If they haven't already done so, cryptocurrency exchanges and platforms, in addition to collecting information from their customers, will need to begin tracking the holding period and the buy and sell prices of the digital assets in customers' accounts.

Be aware that the transactions subject to the new reporting rules will include not only the selling of cryptocurrencies for fiat currencies (government-issued currency such as the U.S. dollar), but also exchanges of cryptocurrencies for other cryptocurrencies.

Please keep in mind that the cryptocurrency exchanges or platforms will probably not have all the information they need to meet their reporting requirements under the new rules. This may make the first year of reporting for digital assets challenging for investors, as well as exchanges and platforms.

Finally, these rules on required reporting by brokers and by businesses do not affect the taxability of cryptocurrency transactions. Cryptocurrency is regarded as property, and transactions in it can result in taxable gain that must be reported by a taxpayer. The receipt of cryptocurrency as payment is also a taxable event.

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1st Tax Crypto Indictment is Proof That IRS is Coming After Undisclosed Crypto Income!

According to Law360, Federal prosecutors' first public indictment of an individual who underreported the capital gains from a nearly $4 million legal sale of bitcoin indicates that authorities have opened the floodgates for more criminal cases that deal purely with undisclosed gains on legitimate cryptocurrency transactions.

The criminal allegations against Frank Ahlgren III that federal prosecutors brought in a Texas federal court are novel in that unlike in previous cryptocurrency cases, the tax evasion allegations in Ahlgren's case did not stem from criminal activities such as money laundering, theft, human trafficking, illicit drugs, online black marketplaces, terrorism or defrauding investors.

Instead the indictment, which was made public Feb. 7, 2024, sought to go after taxes for unreported gains from legal transactions, such as an individual or business intentionally not reporting on their tax returns their substantial capital gains from selling stocks. 

The Case Confirms What Internal Revenue Service Criminal Investigation Chief Jim Lee Has Said For Months, The Unit
Has Seen A Surge Of Such Cases And Hundreds Of Them
Will Soon Be Made Public.

In the 10-page indictment, the U.S. Department of Justice accused Ahlgren of purposely failing to report the capital gains from bitcoin sales on his 2017, 2018 and 2019 tax returns, which, if true, would amount to false declarations under penalties of perjury.

Lee Has Repeatedly Said That Half Of IRS CI's Active
Crypto Caseload Now Involves Classic Tax Evasion,
Compared To Three Years Ago, When A Vast Majority Of The Digital Asset Transactions Were Tied To Money Laundering.

In unlike the previous cases McAfee, Elmaani, Zhong and other cryptocurrency cases, the four counts against Ahlgren do not link the tax evasion allegations to other criminal sources, such as money laundering, defrauding investors and theft.

Instead, the DOJ accused Ahlgren of splitting large sums of his earnings from bitcoin into individual bank deposit amounts of under $10,000 to avoid scrutiny from law enforcement. Such transactions — known as structuring are prohibited under Title 31, U.S. Code Section 5324(a) and can trigger investigations.

The indictment also said Ahlgren used $3.7 million in proceeds from selling approximately 640 bitcoins in 2017 to purchase a house in Park City, Utah. 

If the case ends up in trial, it will be interesting to see whether Ahlgren's defense attorneys can persuade the federal government that his conduct amounts to a civil or administrative infraction, rather than a crime. 

The IRS treats digital assets such as convertible virtual currency, cryptocurrency stablecoins and non-fungible tokens as property. The same general tax principles governing property are applied to taxable income from digital asset transactions.

Individuals and businesses must answer a digital asset question and report all income tied to the assets in several tax filings, including Forms 1040, Individual Income Tax Return; 1040-SR, U.S. Tax Return for Seniors; and 1040-NR, U.S. Nonresident Alien Income Tax Return. The question also appears on other forms, such as Form 1041, U.S. Income Tax Return for Estates and Trusts, and Form 1065, U.S. Return of Partnership Income.

The IRS has also been issuing John Doe summonses to cryptocurrency companies, such as Coinbase, and financial institutions to produce information on taxpayers who may have failed to report to the agency, and pay taxes on, digital asset transactions.

Many in the tax bar, including myself, believe that this Indictment will result in many amended Form 1040 tax returns being filed.

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OIC Mills Make IRS Dirty Dozen List Again!

In IR 2024 – 91 the IRS Includes again in its Dirty Dozen List to Beware of offer in compromise "mills" that falsely claim their services are necessary to resolve IRS debt.

As in past years, companies running OIC mills continue heavily advertising their promises to settle taxpayer debt at steep discounts for pennies on the dollar. While OIC is a legitimate IRS program, many taxpayers do not meet the technical requirements for the tax resolution program, often leaving them facing excessive fees from the promoters for information they could have easily obtained for free by using the IRS's Offer in Compromise Pre-Qualifier tool.

The OIC is a valuable IRS program to help taxpayers who cannot pay their federal tax debts, and some companies offer legitimate services. But the IRS encourages individuals to take a few minutes to assess the information available on IRS.gov to determine if they meet the eligibility criteria for the OIC program and to avoid hiring expensive promoters.

"Taxpayers need to be cautious with aggressive marketing around the Offer in Compromise program that can mislead taxpayers,” said IRS Commissioner Danny Werfel. 

“These Mills Try To Pull In Steep Fees While Raising False Expectations And Exploiting Vulnerable Individuals With Promises That Tax Debt Can Magically Disappear.”

“The program is legitimate, but it’s not for everyone,” Werfel added. “The IRS wants to help taxpayers who qualify for this program, but there are very specific requirements for people to qualify. A good first step is for taxpayers to take a few minutes and explore our free resources on IRS.gov. They can find out if they might qualify for this program – and at the same time avoid paying someone a hefty fee.”

OIC mills are the focus of the fifth news release in the Dirty Dozen series. Started in 2002, the IRS' annual Dirty Dozen campaign lists 12 scams and schemes that put taxpayers and the tax professional community at risk of losing money, personal information, data and more. While the Dirty Dozen is not a legal document or a formal listing of agency enforcement priorities, the education effort is designed to raise awareness and protect taxpayers and tax pros from common tax scams and schemes.

Beware of Offer in Compromise mills

An OIC is a legitimate IRS program that allows qualifying taxpayers to work with the IRS to settle a tax debt for less than the full amount owed. It is an option for those who may be unable to pay their full tax liability, or if doing so creates a financial hardship. In determining eligibility, the IRS considers the taxpayer’s unique situation. 

Taxpayers, however, should be cautious of OIC mills, which make exaggerated claims through radio and TV ads about settling tax debts inexpensively. In reality, these mills often charge excessive fees, and taxpayers end up paying for a service they could have obtained directly from the IRS with The help of a qualified Tax Attorney.

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Status of IRS Funding After The $20 Billion IRS Funding Claw Back in FY 2024

On January 29, 2024 we posted "$20 Billion in IRS Funding Cuts Now Clawed Back in FY 2024" where we discussed that under the latest agreement from the hill, the fiscal 2025 $10 billion would be accelerated, meaning all $20 billion would be clawed back in 2024. 

With government agency appropriations having settled through the remainder of the 2024 fiscal year, the IRS' original funding authorization of $80 billion over 10 years under the Inflation Reduction Act (PL 117-169) is now less than $60 billion, but President Biden hopes to recoup rescinded amounts.

On Saturday, March 23, 2024 President Biden signed into law a $1.2 trillion spending package to avert a government shutdown for the remaining six months of the fiscal year after a series of short-term Continuing Resolutions going back to October as congressional lawmakers grappled over the federal budget.

Of the $80 billion in mandatory funding through 2031, $45.6 was marked for enforcement and $25.3 billion for operations support. The remaining buckets went towards taxpayer services and business systems modernization.

Many Republican lawmakers have proposed clawing back either the entire $80 billion, or all or a portion of the enforcement and operational buckets. However, the IRS' annual funding levels were unchanged from the prior fiscal year at $12.3 billion ($2.8 billion for taxpayer services, $5.4 billion for enforcement, and $4.1 billion for operational support).

Despite just signing the recission into law, Biden's fiscal 2025 budget, also released in late March, calls for the full restoration of the $80 billion provided by the Inflation Reduction Act. Further, Biden is seeking "new funding over the long-term to maintain progress on service enhancements and deficit-reducing tax compliance initiatives." The proposal cites the need to close the tax gap, that is, the difference between taxes owed and taxes paid.

In February, Treasury projected a $20 billion recission would reduce revenues by more than $100 billion. Although the IRS will continue to pursue ramped-up enforcement on large corporations, complex partnerships, and wealthy individuals via targeted campaigns, the remaining $58.4 billion is expected to dry up in 2029, two years earlier than intended. "Extending and maintaining IRS investments" would, according to Treasury, result in collections of $851 billion over the period 2024-2034.

Publishing their own estimates, the Congressional Budget Office in February forecasted a $20 billion rescission would "reduce outlays in 2030 and 2031 and lower revenues from 2030 to 2034 by a total of $43.6 billion, adding a total of $23.6 billion to deficits over the 2024-2034 projection period."

"In addition, the indirect effect of reduced enforcement activities in 2030 and 2031 would result in revenue collections from audited taxpayers that were less than they would otherwise be," the CBO continued.

Tax leaders at Grant Thornton observed that the 2024 elections may determine the fate of any potential future changes to IRS funding, though the agency "will remain a target for future cuts."

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TC - Upholds $11M In Late Filed Form 3520 & 3520-A Foreign Reporting Penalties But Not Late Filed Form 5471 Penalty!

The Tax Court has continued to hold that the IRS lacks authority to assess penalties under Code Sec. 6038(b) (following its decision in Farhy, (2023) 160 TC No. 6) and that penalties imposed under Code Sec. 6677 are not fines and therefore do not implicate the Excessive Fines Clause. 

According to Law360, the U.S. Tax Court on April 8, 2024, upheld  $11 million in foreign reporting penalties against a man who admitted he hid money overseas, but the court declined to overturn its ruling that the IRS lacks authority to assess certain Form 3520 & Form 3520 A foreign reporting penalties in Mukhi v. Commissioner, docket number 4329-22L, in the U.S. Tax Court.

The Internal Revenue Service didn't abuse its authority in assessing $5 million in penalties against Raju J. Mukhi for failing to report foreign trusts for 2005 to 2008 and another $5.9 million for 2005 to 2010, according to the Tax Court, finding that penalties imposed under I.R.C. § 6677 are not fines and therefore do not implicate the Excessive Fines Clause.

But the IRS lacked authority to issue $120,000 in penalties against Mukhi under Internal Revenue Code Section 6038(b) for failing to timely submit a Form 5471, regarding information reporting for foreign corporations, for 2002 through 2013, the Tax Court said.

While Mukhi's challenge to the penalties was still pending in the Tax Court, it decided in April 2023 in Farhy v. Commissioner that the IRS lacked authority to make assessments under IRC Section 6038(b). After the decision, the IRS asked the court in Mukhi's case to overrule its decision in Farhy, saying it was incorrectly decided, according to Monday's ruling.

But the court said it wanted to give the weight of precedent to its previous decision in Farhy. Furthermore, even though Farhy is on appeal in the D.C. Circuit, Mukhi's case, if appealed, would go to the Eighth Circuit, meaning any ruling from the D.C. Circuit wouldn't be binding for Mukhi, the court said.

Mukhi pled guilty to one count each of filing a false return and failure to file a report of a foreign bank account following his indictment in 2014, according to the opinion. The IRS audited him and issued the penalties in 2017.

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