IRS Global High Wealth audits, delinquent international information returns, and Form 8300
Examinations
IRS Global High Wealth audit campaign
When the IRS’ People First Initiative concluded on July 15, 2020, the IRS began a new audit campaign to examine high-net-worth individuals, return preparers and other professionals. The Global High Wealth Industry Group (GHW) of the Large Business and International division (commonly referred to as the IRS “Wealth Squad”) will lead this new campaign.
The Wealth Squad is a specialized group within the IRS that examines complex domestic financial affairs, offshore accounts, foreign trusts and entities controlled by the taxpayer, including partnerships, corporations, foundations and trusts. These examinations are expected to target several hundred individuals with assets or earnings exceeding $10 million, or more than $100,000 of projected tax due. The initiatives focus on the following taxpayers and transactions:
1. High-income individuals with foreign assets: The Wealth Squad may request documents relating to these foreign assets such as foreign bank accounts, offshore retirement accounts, foreign trusts, business interests in entities holding foreign accounts, and any assets or monies inherited from foreign sources. Another focus of these examinations is to give the IRS a complete financial picture of the taxpayer and the enterprises that they control.
2. Private foundations related to high-income individuals: The IRS has identified more than 1,000 private foundations as potential audit targets. These foundations are often abused by high-net-worth individuals to shield income or assets from taxation.
3. Licensed professionals involved with conservation easements or micro-captives: On June 18, 2020, Brendan O’Dell, the coordinator of IRS promoter investigations, announced that the IRS is targeting professionals who promote tax shelter activities. This includes attorneys, accountants, financial advisors and appraisers.
4. Return preparers with unfiled returns: The IRS will now also focus on return preparers who have failed to file their own tax returns. The Treasury Inspector General for Tax Administration (TIGTA) recently reported that 10,495 return preparers who prepared returns in 2016 failed to file their own personal tax return.
IRS Centralized Partnership Audit Regime
As of Sept. 30, 2020, partnerships subject to the Centralized Partnership Audit Regime (CPAR partnerships) can no longer take advantage of the temporary relief afforded by Revenue Procedure 2020-23. The revenue procedure allowed partnerships to file amended tax returns “the old fashioned way” and avoid the complexities surrounding Administrative Adjustment Requests (AARs). CPAR partnerships are now required to file AARs. Here is a detailed description of how to file AARs.
An open question is whether both the taxing agencies and tax return software providers are sufficiently equipped to handle the complexities of AARs filed by a CPAR partnerships. Some preliminary tips and observations are as follows:
- While many state governments have adopted CPAR, there is a general lack of guidance on how partnerships should report to states any changes resulting from an AAR filed by a CPAR partnership with the IRS. If adjustments from an AAR may impact a state tax liability, contact the state regarding next steps.
- The instructions to the Form 8082 instruct CPAR partnerships on how to pay imputed underpayments. Specifically, the instructions state that CPAR partnerships should select “BBA AAR Imputed Underpayment” when making payments via the Electronic Federal Tax Payment System. Unfortunately, this selection is not currently listed on irs.gov. As such, TACS recommends that CPAR partnerships mail paper checks to the IRS. In the memo line of the check, list the name, EIN, year, Form 1065 and “BBA AAR Imputed Underpayment.” Send the payment via certified mail, return receipt requested, and keep copies of everything.
- Most tax return software is not yet programmed to properly aggregate the various forms required to file an AAR. TACS recommends that CPAR partnerships prepare Form 8082 for electronic filing and then attach any requisite forms (e.g., Forms, 8985, 8986, etc.) via PDF. The various AAR forms are available on irs.gov.
Delinquent international information return submission procedures
On Nov. 5, 2020, the IRS quietly updated the webpage that provides instructions for its delinquent international information return submission procedures. These procedures were designed to provide taxpayers with delinquent international information returns – such as Forms 5471, 5472, 3520 and 3520-A – and who are not under exam to file an amended return with the delinquent forms and attach a reasonable cause statement requesting the IRS to not impose penalties. Historically, the IRS has not imposed applicable penalties in these situations.
With the update to the procedure, there is now concern that the IRS will impose penalties upon filing a delinquent international information return pursuant to this procedure due to the following language:
“During processing of the delinquent information return, penalties may be assessed without considering the attached reasonable cause statement. It may be necessary for taxpayers to respond to specific correspondence and submit or resubmit reasonable cause information.”
It remains to be seen whether the paradigm will shift away from the IRS generally not imposing penalties upon processing amended returns filed pursuant to this procedure.
Notices and collections
On Nov. 2, 2020, the IRS announced a new taxpayer relief initiative. The highlights of this new initiative are as follows:
- Flexible installment agreements for individual taxpayers who owe less than $250,000: The IRS service center will generally enter into installment agreements without requiring financial disclosures for individual taxpayers with balances under $250,000. The terms of the installment agreement require repayment within 84 months (or before the expiration of the collection statutes of limitations), the issuance of a tax lien and a direct debit. Significantly, this flexible installment agreement is not available once a case is assigned to a revenue officer. As such, taxpayers who wish to take advantage of this installment agreement should proactively contact the IRS service center. This program is not available for businesses, and TACS’s experience has been that it does not apply to trust fund recovery assessments.
- No liens for unpaid 2019 liabilities: If an individual taxpayer’s only unpaid liability relates to the 2019 tax year, the IRS will not issue a federal tax lien under the above-described flexible installment agreement.
- An extension of the short-term payment plan: Historically, the IRS has offered taxpayers an option to pay an assessed liability within 120 days. This “120 days to pay in full” option can be accomplished with one phone call. The IRS will provide taxpayers written notification of the agreement with a payoff figure. The IRS has extended the short-term time frame to 180 days, i.e., a 60-day increase.
Reporting of cash transactions – IRS Form 8300
Do you receive cash in the normal course of your trade or business? Maybe you are a cash intensive business and aware of the IRS filing obligations if you receive more than $10,000 in cash in a single transaction (or two or more related transactions over the course of 12 months). However, what if you are not used to receiving cash payments and you take in more than $10,000 in a single transaction or a series of related payments? You may be completely unaware, but in general, it is likely that the requirements to file Form 8300 with the IRS have been triggered. The requirements are codified in Internal Revenue Code section, 6050I and there are significant civil and criminal penalties for non-compliance.
So what do you need to know and what do you have to do? If you are a person, company, corporation, partnership, association, trust or estate and you receive more than $10,000 in cash in a single transaction or two or more related transactions, you must file Form 8300 with the IRS. If any part of the transaction occurs within the 50 states, Washington D.C. or a U.S. possession or territory (American Samoa, The Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico and the U.S. Virgin Islands), you must file the Form 8300 with the IRS by the 15th day after the transaction occurred. Then, you are required to provide a statement to each party whose name you included on the Form 8300 by Jan. 31 of the following year.
So, what is “cash” you may ask? It is not just U.S. coins and currency. It also includes foreign currency, as well as cashier’s checks, bank drafts, traveler’s checks and money orders with a face value of $10,000 or less if received as part of a designated reporting transaction or any transaction in which the business knows the customer is trying to avoid reporting the transaction on Form 8300. However, cash does not include personal checks drawn on the account of the writer, or cashier’s checks, bank drafts, traveler’s checks or money orders with face values of $10,000 or more.
Are you confused yet? If you think you may have an issue in this area, please contact the Baker Tilly TACS group. Our team of professionals is comprised of former IRS attorneys, revenue agents and special agents who can help you navigate these waters.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
