We are pleased to announce that Steven Toscher, Michel R. Stein and Cory Stigile will be speaking at the upcoming Strafford webinar “IRS High-Wealth Examinations: IRS Wealth Squad, Targeted Issues, Preparation, IDRs, Appeals, and Litigation” Wednesday, May 15, 2024, 10:00 a.m. – 11:50 a.m. (PST).

The IRS Large Business and International Division is auditing high net worth individuals and their related entities, including partnerships, S corporations, trusts, and private foundations. The Wealth Squad, a highly-trained division of the IRS, is conducting these audits.

These examinations will target recently enacted and complex areas of taxation, including:

• Section 199A Qualified Business Income Deduction
• Section 163(j) Business Interest Deduction Limitation
• Section 965 Repatriation of Previously Untaxed Foreign Earnings
• Section 172 Net Operating Loss Deduction Refund Claims
• Required foreign reporting of trusts, bank accounts, assets, etc.

Although targeting specific areas, these are comprehensive audits covering most aspects of a taxpayer’s tax return. Tax professionals working with high-wealth clients need to prepare for potential examinations and understand how to represent these taxpayers.

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We are pleased to announce that on May 17, 2024, Sandra R. Brown, along with Gwen Moore (Moore Tax Law Group), Jennifer Breen (Morgan Lewis), and Pamela Grewal (Andersen Tax), will join a webinar with the Loretta Collins Argrett fellows and leadership to discuss navigating their career transitions and what it means to be a tax lawyer. In 1993, Loretta Collins Argrett became the first African American in Justice Department history to hold a position that required Senate confirmation and was confirmed by the US Senate as the Assistant Attorney General of the US Justice Department’s Tax Division. The Loretta Collins Argrett Fellowship Committee of the ABA Tax Section seeks to create a more accessible and equitable pipeline into the Section of Taxation and the tax bar. To learn more about the Honorable Loretta Collins Argrett or the Argrett Fellowship, please visit here.

My co-chair, Kathy Keneally and I are very pleased to ask you to save the date for the ABA 2024 Criminal Tax Fraud/Tax Controversy conference, to be held this year at the Wynn Encore on December 12-14, 2024. 

The program is still in the planning stage, but we can assure you that we continue to build on the success of last year’s program and we anticipate having the top tax controversy practitioners in the country presenting on the most important topics. 

We are pleased to announce that Steven Toscher, Michel R. Stein and Evan Davis will be speaking at the upcoming Strafford webinar “Cryptocurrency Tax Compliance: Tax Filing Requirements, Managing IRS Examinations” Thursday, May 9, 2024, 10:00 a.m. – 11:30 a.m. (PST).

The IRS continues to press its concern over “massive under-reporting” of income from cryptocurrency transactions, including recently charging the first “pure tax” cryptocurrency criminal case in February 2024. This is the first of many criminal cases against cryptocurrency holders promised by IRS Criminal Investigations. Tax advisers for clients with cryptocurrency holdings must understand the reporting requirements for exchange transactions and the IRS scrutiny cryptocurrency investors are likely to face in the future.

Cryptocurrency is a digital currency using encryption techniques–rather than a central bank–to generate, exchange, and transfer currency units. Uniquely, no bank or government authority verifies the transfer of funds.

The value of Bitcoin has prompted a massive compliance initiative aimed at taxpayers holding and trading cryptocurrency. The IRS treats all virtual currency as property rather than currency for U.S. tax purposes. The IRS requires reporting any transaction involving cryptocurrency as a sale or exchange of property, with the taxpayer bearing responsibility for calculating and maintaining basis in their virtual currency holdings.

Listen as our expert panel discusses recent IRS enforcement actions focused on cryptocurrency and provides practical guidance on the U.S. tax reporting and payment duties arising from cryptocurrency transactions.

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Steven Toscher, the managing principal for Hochman Salkin Toscher Perez P.C., has received the Jules Ritholz Memorial Merit Award from The American Bar Association’s (ABA) Tax Section Civil and Criminal Tax Penalties Committee. The award was presented during ABA’s 2024 May Tax Meeting, held in Washington, DC. on May 3, 2024. 

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Steven Toscher specializes in civil and criminal tax controversy and litigation. He is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization, a Fellow of the American College of Tax Counsel and has received an “AV” rating from Martindale Hubbell. Mr. Toscher was the 2018 recipient of the Joanne M. Garvey Award. The award is given annually to recognize lifetime achievement and outstanding contributions to the field of tax law by a senior member of the California tax bar.

We are pleased to announce that Jonathan Kalinski and Philipp Behrendt of our firm participated in the California Lawyers Association – Taxation Section’s Washington, D.C. Delegation on April 30 and May 1, 2024.

For over 30 years, the Taxation Section has annually selected a delegation to advocate for California tax lawyers’ ideas and proposals to officials in Washington, D.C. This opportunity allows tax practitioners to present significant issues to key tax officials and staff members from various government offices.

This year, our firm presented a paper addressing two fundamental cryptocurrency activities: liquidity staking and wrapping. The paper advocates that neither activity constitutes a taxable event. It proposes that the IRS issue guidance classifying the receipt and redemption of liquidity staking tokens and wrapping tokens in general as non-taxable.

Finally, the paper seeks clarification on the tax treatment of staking rewards, touching on Revenue Ruling 2023-14 and the applicability of the constructive receipt doctrine of tokens received by a staking pool. It proposes guidance that the concept of constructive receipt does not apply to staking rewards received through pool staking. Additionally, the paper suggests that legislators could address this issue by enacting a rule to defer the recognition of income from staking rewards until the sale or other disposition of the rewards received.

Jonathan and Philipp met with representatives from the IRS Office of Chief Counsel, the Joint Committee on Taxation, Senate Finance Committee, Treasury Department, and the Department of Justice Tax Division.

The proposals aim to provide standardized and clear tax guidance for common cryptocurrency transactions. We thank Natascha Fastabend, Jackie Zumaeta, Myriam Bouaziz, Troy Van Dongen, and Amy Spivey, for the successful delegation and this valuable opportunity to engage with tax authorities on these important issues. Our firm is continuing efforts to advocate for fair tax positions in complex areas, such as financial dealings in cryptocurrency.

Link to DC Delegation Paper

Jonathan Kalinski is a principal at Hochman Salkin Toscher Perez P.C. and specializes in both civil and criminal tax controversies as well as sensitive tax matters including disclosures of previously undeclared interests in foreign financial accounts and assets and provides tax advice to taxpayers and their advisors throughout the world. He handles both Federal and state tax matters involving individuals, corporations, partnerships, limited liability companies, and trusts and estates.

Philipp Behrendt is an Associate at Hochman Salkin Toscher Perez P.C., licensed in California as well as in Germany and assists in advising clients in civil and criminal tax controversies as well as international money laundering investigations stemming from tax avoidance structures. He also focuses on the technical aspects involved in advising voluntary disclosures in connection with DeFis, NFTs, and other crypto assets.
Philipp regularly speaks and blogs about the taxation of digital assets, as seen in his recent blog about the Form 1099-DA draft (Link) and also quoted in Tax Notes about tax consequences of 51% attacks (Link).

The IRS published the first draft of the 1099-DA with supplementary information on 4/22/2024 (89 FR 29433). The Form 1099-DA will be used by digital asset brokers to report transactions of US taxpayers, similar to the Form 1099-DIV brokers and banks issue every year.

Back in November 2021, the Infrastructure Investment and Jobs Act (“IIJA”) amended Code Sections 6045 and 6045A to expand their scope. These Code Sections impose reporting obligations on brokers and entities involved in the sale or transfer of securities. The IIJA amendments included digital assets in the reporting obligation. Originally, mandatory broker reporting for digital asset transactions were supposed to start with tax returns due in 2023, contingent upon the issuance of comprehensive regulations. Therefore, the reporting requirements remained pending until the IRS could provide the necessary regulatory guidance.

Last year, on August 29, 2023, the IRS issued proposed regulation (Proposed Regulation 2023-17565). The final regulations are expected to be issued soon, which means that the mandatory broker reporting for digital asset transactions will begin in 2025.

The first draft of the reporting form, the 1099-DA, is now published and offers clues as what suggested changes the final regulations have adopted, or have not adopted after receiving thousands of comments.

The checkbox labeled “Broker type involved in the transaction” on the form enumerates various broker categories including Hosted and Unhosted Wallet Providers, Digital Asset Payment Processors, and Kiosk Operators. This enumeration underscores that the forthcoming regulations do not exempt DEFI protocols and wallet providers from their obligations, contrary to suggestions by some commentators. Additionally, it dismisses the notion of a deferred implementation date proposed by others.

Field 10b requires cost basis to be tracked from 1/1/2023. The proposed regulations already outlined this requirement, but given that the proposed regulations were not issued until August 2023, many potential brokers either did not know that they might be subject to the reporting requirement until the regulations defined the term broker or did not expect to have to collect basis information retrospectively. So, the 1/1/2023 basis start date will be challenging for many brokers. If the start date as defined in proposed §1.6045-1, including -1(d)(2)(i)(C), does not change, the adjusted cost basis reporting will start for tax years beginning on or after January 1, 2026, and not for 2025. While the cost basis reporting is mandatory for all transaction occurring on January 1, 2026 and later, the data for the basis reporting has to go back to 1/1/2023, the start of the basis tracking. This does not preclude brokers to start reporting earlier and basis further back, voluntarily.

The Form at box 11 requires the listing of every Transaction Hash, which is a specific and unique number code that is assigned to each transaction on a blockchain. The listing of every single Transaction Hash will make these filing voluminous.

The form also holds a few surprises.  It includes in box 1i a field to report “Wash sales loss disallowed”. Now, this could mean that the IRS expects that digital assets are or in the near future will be subject to the wash sale rules. More likely, however, is that the IRS just included this field for digital assets that are also classified as securities and as such are subject the wash sale rule.

Box 5 has to be checked if a loss is not allowed based on the proceeds amount. The instructions state that no loss can be taken if gross proceeds are from a reportable change in control or capital structure This is the exact same instruction as for Form 1099-B, Box 7. “Taxpayers may be required to recognize gain from the receipt of cash, services, digital assets, or other property that was exchanged for a digital asset that is also the corporation’s stock.” (see 89 FR 29433)

All in all, the draft form suggests that the final regulations will not back down from many challenging requirements that were proposed in August 2023. This will continue the controversial debate over how the industry can and will be able to adapt. The IRS wants the digital asset transaction data even though it knows that processing the enormous amount of data will be challenging. That means, if they are willing to spend a portion of their new funding in processing these returns, they will up their enforcement to collect taxes, interest and penalties from taxpayers who hold digital assets.

We are pleased to announce that Sandra R. Brown will be moderating a panel at the upcoming ABA Tax Section 2024 May Tax Meeting on the on the topic of “The Importance of Interview Notes in Criminal Matters, From Investigation Through Sentencing” on Saturday, May 4, 2024, 10:30 a.m. (EST), along with co-panelists, Michael Kelly (Akerman LLP), Sara Kropf (Kropf Moseley PLLC) and Daniel Cady Davidson (Kostelanetz LLP).

Notes of interviews conducted by government agents play a critical role in criminal matters, including tax cases. Panelists will discuss defense strategies related to these notes, from the investigatory stage through indictment, plea or trial, and sentencing. The panel will explore means of obtaining government agent notes through negotiation and motion practice. Recent federal District Court cases that involved litigation over government agent notes will be discussed.

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Philipp Behrendt was quoted in Tax Notes Article on the question whether the IRS get a percentage after a crypto 51 percent attack (Posted on Apr. 16, 2024, by Nathan J. Richman and Mary Katherine Browne).

The article explores the question whether the IRS position on the worthlessness of digital asset is applicable to losses occurring a taxpayer may experience if certain blockchain networks become the target of 51% attacks.

The IRS Chief Counsel Advice from January 10, 2023 (ILM 202302011) is unclear in many aspects and does cover a fictional scenario that does not translate into a likely real-world event.

Furthermore, as Philipp noted, “To big network, [a 51% attack is] not a real risk. They are too powerful… . It’s just too expensive, prohibitively expensive”. Philipp explained that “[w]ith 2 percent more hashing power — 51 percent versus 49 percent — the attackers can get their work done just that much faster than anyone else” and “[i]f you have two different miners who come to different results in a block, the blockchain basically splits, so the longest one is the one that will be followed. Since you have more computational power, you are basically able to create the longest blockchain”.

Attackers would need unique, hard to acquire, and expensive equipment to launch a successful attack on a Proof-of-Work network (or invest significant amounts to acquire sufficient stakes, in Proof-of-Stake network). And larger networks, such as Bitcoin, have additional defense strategies in place.

Click Here for Link to the Article

Steven Toscher was quoted in a Tax Notes Article on the Tax Court’s recent decision in Mukhi v. Commissioner concerning an 8th Amendment challenge to foreign trust information reporting penalties. 

While the Tax Court rejected the 8th Amendment challenge to foreign trust information penalties, the controversy and arguments will continue. As noted by Steve ….

“. . . the government will continue to argue that tax penalties aren’t subject to the excessive fines clause, adding that there is “a long line of precedential support” for that position, going back to Mitchell. Still, he argued, taxpayers should continue to advance the argument, and they could prevail in the right case.”

“The information reporting penalties under the code are draconian and excessive [and] have little or no relation to the conduct involved,” Toscher said. “This is especially true where the government piles on with multiple penalties — where the tax harm itself is very small. Smart tax administration would suggest the government show restraint, but where they do not, it will be the role of the courts to protect taxpayers.”

Click Here for a Link to the Article