IRS Gives Tax Deadline Relief to Victims of Hurricane Irma

September 12th, 2017

The IRS today announce that they are extending tax filing deadlines for victims of Hurricane Irma to January 31, 2018. The relief applies to any area designated by FEMA as qualifying for individual assistance (areas in Florida, Puerto Rico, and the Virgin Islands currently). Here is the pertinent part of the IRS announcement:

The tax relief postpones various tax filing and payment deadlines that occurred starting on Sept. 4, 2017 in Florida and Sept. 5, 2017 in Puerto Rico and the Virgin Islands. As a result, affected individuals and businesses will have until Jan. 31, 2018, to file returns and pay any taxes that were originally due during this period.

This includes the Sept. 15, 2017 and Jan. 16, 2018 deadlines for making quarterly estimated tax payments. For individual tax filers, it also includes 2016 income tax returns that received a tax-filing extension until Oct. 16, 2017. The IRS noted, however, that because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief.

A variety of business tax deadlines are also affected including the Oct. 31 deadline for quarterly payroll and excise tax returns. Businesses with extensions also have the additional time including, among others, calendar-year partnerships whose 2016 extensions run out on Sept. 15, 2017 and calendar-year tax-exempt organizations whose 2016 extensions run out on Nov. 15, 2017. The disaster relief page has details on other returns, payments and tax-related actions qualifying for the additional time.

In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due during the first 15 days of the disaster period. Check out the disaster relief page for the time periods that apply to each jurisdiction.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

IRS Appeals Steele Decision

September 7th, 2017

Earlier this year a court ruled that the IRS cannot charge for Practitioner Tax Identification Numbers (PTINs). To no one’s surprise, yesterday the IRS appealed the decision to the US Court of Appeals for the District of Columbia. It will likely be sometime next year before the case is heard and a decision rendered. I also expect the IRS to ask the Court of Appeals to lift the permanent injunction on charging for PTINs while the appeal is being heard.

I will update when there is additional news.

Hat Tip: NAEA

Can You Use a §1031 Exchange to Defer Gain with Cryptocurrency?

September 5th, 2017

I recently wrote an article noting that if you exchange one cryptocurrency for another you have a capital gain (or loss). I was recently asked if you could defer such a gain by using a §1031 Exchange.

What Is a §1031 Exchange? A §1031 exchange is a way of deferring the capital gain on a property by exchanging it for another property. And didn’t the IRS rule that cyrptocurrency is property? So let’s look at the statutory language of §1031:

26 U.S. Code §1031 – Exchange of Property Held for Productive Use or Investment
(a) Nonrecognition of Gain or Loss from Exchanges Solely In Kind
(1) In General No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.

Well, there’s the first two hurdles: Is cyrptocurrency held for productive use in a trade or business or for investment? Well, cryptocurrency likely isn’t held for productive use in a trade or business but it certainly is held by some for investment.

But that wasn’t all of 26 U.S. Code §1031. There is property that is not eligible for like-kind treatment. Let’s no look at §26 USC 1031(a)(2):

(2) Exception This subsection shall not apply to any exchange of—
(A) stock in trade or other proprety held primarily for sale,
(B) stocks, bonds, or notes,
(C) other securities or evidences of indebtedness or interest,
(D) interest in a partnership,
(E) certificates of trust or beneficial interests, or
(F) choses in action.

There’s a problem here: The closest analog to how cyrptocurrency should be treated are stocks and bonds. And §26 USC (a)(2)(B) states that you can’t do a §1031 exchange for stocks and bonds.

“But Russ,” you say, “cyrptocurrency isn’t stocks or bonds. It’s a virtual currency. So if I exchange Bitcoin for Ethereum, that should be ok, right?” Let’s assume that §26 USC (a)(2)(B) doesn’t apply. Are Bitcoin and Ethereum like-kind property?

Unfortunately, the answer is a maybe, with “no” more likely than “yes.” The IRS has been asked to look at exchanging gold bullion for gold coins, gold coins for other gold coins, and gold bullion for silver bullion as §1031 exchanges. You can use a §1031 exchange to exchange Mexican 50 peso gold coins for Austrian 100 corona gold coins and gold bullion for Canadian Maple Leaf gold coins. However, you cannot use a §1031 exchange to exchange gold bullion held for investment for silver bullion held for investment (different metals used in different ways), $20 gold numismatic-type coins for South African Krugerrand bullion-type gold coins (different underlying investments and different valuation bases), and Swiss Francs for US Double Eagle Gold Coins (numismatic versus circulating currency).

I believe the IRS would likely rule that Bitcoin and Ethereum are two different underlying investments and do not qualify for like-kind treatment.

But let’s further assume I’m wrong, and they do qualify. You go on a Bitcoin exchange and swap n Bitcoins for x Ethereum. Is that a §1031 Exchange?

Well, there are numerous technical rules regarding a §1031 exchange. First, they must be reported on IRS Form 8824 so the idea of simply ignoring them on your tax return is a certain way to make sure your transaction is not a §1031 exchange. There are 67 pages of regulations on §1031 exchanges (search for “1031” in the link for them). Most §1031 exchanges use a Qualified Intermediary. Certainly the dealer I use is that Qualified Intermediary, right?

Well, almost certainly not. When you use an Exchange to buy a cryptocurrency, the dealer almost certainly doesn’t meet the technical requirements listed in the regulations. There is no paperwork; the trades occur close to instantly (not over the months it takes to complete a §1031 exchange); and several other issues with a dealer.

“But Russ,” you say, “my friend Scott has x Ethereum and is willing to swap it for my n Bitcoins. We agree to directly swap our positions. That would be a §1031 exchange, right?”

This is the most likely to meet IRS scrutiny, but only if the IRS considers Bitcoin and Ethereum to be like-kind. The tax professional community has asked the IRS to give guidance on this, but the IRS (to date) has ignored this issue. You could request a Private Letter Ruling from the IRS. A Private Letter Ruling is a means to get an answer from the IRS given a specific set of facts. The Private Letter Ruling binds the requestor and the IRS. However, you must pay for a Private Letter Ruling; the cost will be at least $2,400. It also takes time to receive the Private Letter Ruling (think months, not weeks).

The conclusion I’ve drawn is that most exchanges of one cryptocurrency for another do not qualify as §1031 exchanges and it’s more likely than not that the IRS will rule that two different cryptocurrencies are not eligible for like-kind treatment.

Gilbert Hyatt (Mostly) Wins at Board of Equalization; What This Teaches Us About Moving from California

August 31st, 2017

Remember Gilbert Hyatt? He’s the microprocessor inventor who made a fortune and then moved to no-tax Nevada from high-tax California, but California’s Franchise Tax Board (FTB) said didn’t move. The case has gotten to the US Supreme Court twice, and there’s still a related civil case at the 9th Circuit Court of Appeals. The underlying tax audit–an audit that began in 1993–was (mostly) resolved in Mr. Hyatt’s favor yesterday at California’s Board of Equalization.

Let me first start with the basic history of the case. Gilbert Hyatt invented (and patented) items related to microprocessors in 1990. He realized he would owe 10% of his very large upcoming income to California if he remained in the state, so in October 1991 he moved to Nevada. In 1993, the FTB audited Mr. Hyatt (the FTB is California’s income tax agency), alleging he didn’t move from California until April 1992. The FTB alleged he owed taxes on $5.4 million plus fraud penalties of another $5.4 million.

The FTB, as part of its investigation, skirted the law in Nevada. They rummaged through Mr. Hyatt’s garbage, and (as found by a jury here in Nevada) committed fraud. The first Supreme Court decision, in 2003, allowed Mr. Hyatt to sue the FTB in court in Nevada alleging that the FTB committed a wide range of torts. The FTB argued because the FTB is immune from lawsuits in California it could not be sued in Nevada; the FTB lost that argument.

The case went to trial, and Mr. Hyatt was awarded $400 million (including punitive damages). The FTB appealed, and the Nevada Supreme Court lowered the damages. The FTB appealed again to the US Supreme Court; the Supreme Court ruled that damages are limited to what could be awarded against a Nevada agency (something less than $100,000).

Meanwhile, Mr. Hyatt’s audit results were appealed to the Board of Equalization in the mid 1990s. Yesterday, some twenty years later, the BOE finally heard the case. (The BOE hears appeals from the FTB. However, beginning January 1, 2018 the BOE will no longer hear such appeals.) After a 13-hour hearing, the BOE ruled 4-1 that there was no fraud; the BOE ruled 3-2 that Mr. Hyatt moved to Nevada in October 1991 (as he had said). However, the BOE also ruled that Mr. Hyatt conducted his business primarily out of California after his move to Nevada in 1991. It’s likely Mr. Hyatt owes taxes on somewhere between $1 and $2 million (plus interest and penalties). This decision could be appealed into the California court system by either side.

More interestingly to blog readers, what does this teach us about changing your domicile from one state to another?

1. Really Move. This sounds basic, but tax agencies don’t like it when you say you move from their high-tax jurisdiction to a low-tax one. If you suddenly come into income, you’re far more likely to be audited, and if the tax agency discovers you’re using your friend’s house in your old hometown to conduct business they won’t be happy. If possible, don’t keep an address in your old state; simply have forwarding orders with the post office.

2. Do the Little Things. There are a lot of things involved when you move, but if you may be a subject of a residency audit it pays to do them. Register to vote in your new city. Make sure you register your car(s), and get a new driver’s license. Yes, the DMV isn’t fun but you need to do this. Change your address with your financial institutions. Have utility bills in your name. Find a new house of worship in your new home. The list is lengthy, but the more you do the easier a residency audit will be.

3. Document, Document, Document. One of my favorite sayings is that if you keep good records an audit is an annoyance; if you don’t keep good records an audit is a painful annoyance. You need to double or triple that for a residency audit.

The last residency audit I was involved with was for a couple that moved from New York to Las Vegas. They really moved and had all their documents. New York alleged that because they didn’t buy a new home for six months after they moved to Las Vegas they were still New York residents. However, the couple (and their children) really did move: There was a lease for their rental home, private school receipts from here, voter registration cards, etc. The couple won the residency audit.

4. Stay Around. You need to stay in your new tax home for four months (minimum)–six months or longer is far better–or your old home could say you haven’t changed your domicile (the place you intend to return to). Indeed, if you can avoid your old home for a year that’s far better.

5. California Tries to Exhaust Litigation Opponents. If you end up in a fight with California one component of the state’s strategy is to financially exhaust opponents. Mr. Hyatt’s dispute began in 1993. It is now 2017. I wouldn’t be surprised if there’s still litigation involved with the dispute into the next decade. Most individuals in fights with the FTB don’t have the resources that Gilbert Hyatt has. It’s very easy to have a Pyrrhic victory in a fight with a tax agency.

There’s a lot more involved when you change your residency. Realize if you’re a high-income individual and you move from California to Nevada you’ve painted a target on your back. If you really do move, do the little things and keep good records.

IRS e-Services Outages the Next Two Weekends

August 30th, 2017

The IRS announced today that they will be conducting their normal Labor Day maintenance this coming weekend. Most IRS e-Services applications will be down beginning Saturday, September 2nd at 8pm EDT, with normal operations scheduled to resume Tuesday, September 5th at 5am EDT.

Additionally, the IRS announced new dates for the transition to their new e-Services platform. e-Services registration, ACA, e-file, TIN Matching will be taken offline Thursday, September 7th at 6am EDT. The transcript delivery system will be taken offline Friday, September 8th at 10pm EDT. The transcript delivery system is schedule to come back online on Monday, September 11th at 6am EDT; all other systems are scheduled to come back online on Tuesday, September 12th at 6am EDT.

(TIN Matching may come back online on September 11th. In the email announcing the outages the IRS listed two different days for when TIN matching will be taken offline and come back online. It’s unclear which is correct.)

More information is available here.

The Law Isn’t Fair, But You Have to Pay the Tax

August 29th, 2017

A California couple received an Advance Premium Tax Credit (part of the “Affordable Care Act,” aka ObamaCare). Through bureaucratic errors at Covered California, they’re unable to change their plan once they’re both employed to stop the credit, nor do they receive a Form 1095-A. It’s not as if they ever received the credits themselves; they went to insurers. The IRS assesses the repayment of the Advance Premium Tax Credit and assesses an accuracy-related penalty. The dispute ends up in Tax Court; do they have to pay the tax and penalty?

The facts of the case aren’t in dispute. The couple (for 2014) enrolled in a Silver plan based on lower income. When the wife took a job she promptly notified Covered California that their income increased; clearly, the credit needed to be adjusted. Months later, Covered California sent a letter to them…except the letter was never received.

What happened to that letter is unclear. The records from Covered California that were provided in this case are incomplete. But according to the records in evidence, “during Covered California’s first open enrollment period, Covered California was so busy that it was not uncommon that changes were not implemented.” What the record makes clear is that the [couple] made repeated efforts to get Covered California to take into account the change in household income, but it never did so. [footnote omitted]

They also notified Covered California of their address change; Covered California ignored that. They had an administrative hearing with the California Department of Health Care over Covered California’s errors; they lost on procedural grounds: “The Administrative Law Judge lacks jurisdiction to decide an issue involving an error on the part of Covered California for failure to recalculate the appellant’s eligibility for APTC after the appellant reported a change in income in January 2014.” They never received the Form 1095-A. They did note on their 2014 return that they had health insurance but they ignored the Advance Premium Tax Credit. The IRS assessed the tax (in the amount of the disallowed tax credit) and an accuracy-related penalty.

The couple correctly notes the Catch-22 they were caught in:

[The Commissioner argues] that if Petitioners are liable for the deficiency, then they would be no worse off financially than if the APTC had been terminated in early 2014. This is simply untrue and does not alter the fact that it was Covered California’s responsibility to ensure clients only received the Advance Premium Tax Credit for which they qualified. We would never have committed to paying for medical coverage in excess of $14,000 per year. We cannot afford it and would have continued to shop in the private sector to purchase the minimal, least expensive coverage or gone without coverage completely and suffered the penalties. * * *

* * * If we are deemed responsible for paying back this deficiency, it would be devastating and completely unjust. We hope and pray you are convinced that we have made every single effort to get Covered California to make proper adjustments to our reported income and subsequently to the Advance Premium Tax Credit we were qualified to receive without success. The whole purpose of the Affordable Care Act was to provide citizens with just that, affordable healthcare. This has been an absolute nightmare and we hope you will rule fairly and justly today.

Unfortunately, the Tax Court is not a court of equity:

In other words, the [couple] considered themselves to have been trapped in a health plan that they could not afford without the subsidy provided by the ACA. And they ask us to rule “fairly and justly” or, otherwise stated, equitably.

But we are not a court of equity, and we cannot ignore the law to achieve an equitable end. Although we are sympathetic to the [couple’s] situation, the statute is clear; excess advance premium tax credits are treated as an increase in the tax imposed. The [couple] received an advance of a credit to which they ultimately were not entitled. They are liable for the $7,092 deficiency. [citations omitted]

To add insult to injury, the couple were also charged with an accuracy-related penalty. Here, though, the law is on the couple’s side:

On the totality of the facts and circumstances, the [couple] acted reasonably and in good faith with respect to the underpayment of tax on their return. They did not receive a Form 1095-A showing the income they received in the form of an advance premium assistance credit, and they did not directly receive that income. They did not know nor should they have known that they had additional income required to be shown on their return, and consequently they are not liable for the accuracy-related penalty under section 6662(a).

This result is anything but equitable for the couple. They tried to have the credit adjusted but the bureaucracy ignored them. It just goes to show that when Ronald Reagan stated the following in 1986 he was dead-on accurate:

The nine most terrifying words in the English language are: I’m from the government and I’m here to help.

Case: McGuire v. Commissioner, 149 T.C. No. 9

IRS Gives Tax Relief to Victims of Hurricane Harvey

August 28th, 2017

The IRS announced today that they are granting residents of parts of Texas additional time to file certain individual and business tax returns and make some payments; the extension is until January 31, 2018. This relief currently applies for 18 counties that have been designated by FEMA as qualifying for individual assistance, but will be automatically extended to additional counties added to the disaster area.

The tax relief postpones various tax filing and payment deadlines that occurred starting on Aug. 23, 2017. As a result, affected individuals and businesses will have until Jan. 31, 2018, to file returns and pay any taxes that were originally due during this period. This includes the Sept. 15, 2017 and Jan. 16, 2018 deadlines for making quarterly estimated tax payments. For individual tax filers, it also includes 2016 income tax returns that received a tax-filing extension until Oct. 16, 2017. The IRS noted, however, that because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief.

A variety of business tax deadlines are also affected including the Oct. 31 deadline for quarterly payroll and excise tax returns. In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after Aug. 23 and before Sept. 7, if the deposits are made by Sept. 7, 2017. Details on available relief can be found on the disaster relief page on…

Currently, the following Texas counties are eligible for relief: Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria and Wharton.

The IRS Is Coming! The IRS is Coming!

August 24th, 2017

As first reported by Bob McKenzie this morning, the IRS has purchased software to help them identify Bitcoin transactions. The IRS is reportedly using a product from Chainalysis, Inc., a New York-based supplier of products used to analyze Bitcoin activity.

The Daily Beast notes that “The purpose of this acquisition [by the IRS] is…to help us trace the movement of money through the bitcoin economy.” Chainalysis’s products appear to include features that can locate specific Bitcoin users and anyone connected to that user.

Government may be slow in acting, but it’s clear the IRS and other federal law enforcement agencies are very interested in Bitcoins. As noted in a previous post, IRS records show that only 802 individuals included Bitcoins on their 2015 returns. The IRS has issued a summons to Coinbase (this is currently in litigation); I expect further IRS enforcement activity against both domestic and international wallets. And I doubt the IRS’s interest will stop at Bitcoins; other cryptocurrencies will be examined, too. I’m also aware of other federal law enforcement agencies investigating Bitcoin users.

If you’ve been including your Bitcoin sales on your tax return, you can (generally) ignore this kerfuffle. Your taxes are correct, you’re following the law, so there’s not much for you to directly worry about from a tax standpoint. However, if you’ve been thinking, “No 1099, no reporting,” think again. And if you’re acting as an active seller, now is an excellent time to make sure you’re in compliance with money transmittal business laws (on both the state and federal level) and tax law. It’s very clear that the IRS is coming on the Bitcoin front.

Taxes When a Cryptocurrency Splits Into Two

August 21st, 2017

The IRS ruled that cryptocurrencies are treated as property (like stocks and bonds). What happens when a cryptocurrency splits into two separate cryptocurrencies?

Let’s start with the analogous situation with a stock. Suppose Acme Industries, Inc. spins off its subsidiary, SubCo Inc.; on October 1st stockholders of record will receive one share of SubCo for every share of Acme they own. This is almost certainly a tax-free event. (For those who care, Internal Revenue Code (IRC) Section 355 governs corporate spinoffs. Tax-free spinoffs can be accomplished either by distributing shares based on current ownership or by giving shareholders the option to exchange shares for the new spun off entity.)

Now, let’s examine a cryptocurrency split. Let’s take HYPO, a hypothetical cryptocurrency. On October 1st everyone who has 1 HYPO will still have their HYPO but will also now own 1 THET. The published goal is so that more transactions can be run through the blockchain. Will this be a tax-free event?

Probably. IRC Section 355 doesn’t apply here; this is not a corporate spin-off. That said, the analogy should hold: Presumably nothing of value has been created. If HYPO was selling for $1,000 prior to the split, the sum of 1 HYPO and 1 THET should be worth the same $1,000 after the split. If that’s the case all that’s happened is that your basis in HYPO must be split into HYPO and THET. For example, if you purchased your 1 HYPO for $500, your basis post-split in HYPO and THET must add to the same $500. There wouldn’t be a capital gain based on the split. (The allocation should be based on the fair market value of HYPO and THET immediately after the split.)

One other question that must be answered: Do you obtain the same holding period for the spin-off as you had for the original cyrptocurrency? If it’s a true split into two cryptocurrencies, definitely.

Given there has been one cryptocurrency split already (and others will certainly follow) this will give you an idea of the basics in this situation. Something that absolutely holds is keep good records! Taxes when you have good records is fairly easy. When you don’t have good records, it’s definitely not.

On Tulips and Bitcoins

August 20th, 2017

When I was in junior high school, I remember being taught about the 17th century tulip mania. Tulips in 1637 cost more than a house! That was a bubble (though some economists think there may have been rational explanations, let’s just call it with what it was considered to be), and my gut feeling is that cryptocurrencies are also bubbling.

I’m not the only person who has made this comparison. There’s an article on CNBC that quotes Elliott Prechter stating that cryptocurrencies are in a bubble comparable to tulips. The head of the Dutch Central Bank has also made the same comparison.

But there’s something else with cryptocurrencies: government. While the US government hasn’t formally stated that it wants cryptocurrencies to go away, the policies of the Department of the Treasury and the Department of Justice show that’s the case.

Let’s look at what two agencies within the Department of the Treasury have done in regards to cyrptocurrencies. First, the Internal Revenue Service had a choice: Should cryptocurrencies be considered currencies or should they be considered property? If currencies, most taxpayers would just enter one number on their returns for the gain (or loss). (Currency trading falls under Section 988 of the Internal Revenue Code. Gains and losses are simply entered as Section 988 transactions as part of line 21 (“Other Income”) on Form 1040.) This would be simple and straightforward. Instead, the IRS ruled that cryptocurrencies should be treated as property. That means each time you use or sell a cryptocurrency you have a reportable capital gain or loss. That’s a much tougher recordkeeping requirement.

Meanwhile, the Financial Crimes Enforcement Network (FINCEN) ruled exactly the opposite. For FINCEN purposes, cryptocurrencies are currencies, not property. That means cryptocurrencies fall under the purview of FINCEN. If you are an active seller of cryptocurrencies to others, you may have to register and are subject to the money transmittal rules. (FINCEN has said “miners” and investors of cryptocurrency are not money transmitters.) FINCEN has gone after foreign (non-US) based wallets, too.

The US Department of Justice has prosecuted US individuals who have been selling Bitcoins.

Perhaps I’m cynical (well, I know I am), but it appears to me that the US government’s actions are designed to make cyrptocurrencies appear more unattractive. That to me is more likely than not to put downward pressure on cryptocurrencies.

I should point out that friends of mine who are far smarter than I am think that Bitcoins will be worth $10,000 in the near future (as I write this, the price of a Bitcoin is about $4,100). I don’t see that. I was in the dot-com industry when that was booming and the NASDAQ would “obviously” reach 100,000. Then the bottom fell out. The cryptocurrency craze of today reminds me of that and of tulips.