In 2022, the US Internal Revenue Service issued several statements, guidelines and regulations on issues such as partnerships, cryptocurrency reporting, facilitating syndicate protection and voluntary practices.

Below is my summary of the new and revised rules, along with the IRS statements released during 2022.

Stay on top of digital assets

.In a quest to obtain information about taxpayers with cryptocurrency assets, in recent years the IRS has asked cryptocurrency exchanges to share information about their customers. In October 2022, the IRS decided it wanted taxpayers to report this information directly on their tax returns for the 2022 tax year.

The IRS has been updated Form 1040 with a new reporting category titled “Digital Wealth,” which asks the following questions:

“At any time during 2022, did you: (a) receive (as a reward, prize, or payment for property or services); or b) sell, exchange, give away, or otherwise dispose of digital assets (or any financial interest in digital assets)?”

note that all taxpayers must answer the question, not only taxpayers with digital assets, according to plan 1040 instructions issued by the IRS.

This development is important, because it warns all taxpayers. Those who received digital assets as gifts may think that their gifts are not taxable, but gifts that exceed the IRS threshold of $16,000 per year or $12.06 million over a lifetime are taxable. Please see our article The IRS and US Legislature Define and Improve Crypto Tax Compliance for more information.

IRS Attacks Syndicated Conservation Easements

The government oversees the consolidation of syndicated land, which is a transaction in which investors buy land, grant conservation easements to that land, and then demand a reduction in charitable contributions. based on land valuation. Negotiating security facilitation is more likely to game the system through high valuations or other methods, and has been subject to significant litigation. In December, the IRS and the US Treasury Department released proposed rules Known negotiating relief from certain syndicate protections as an opportunistic tax transaction.

The background: Section 170(f)(3)(B)(iii) of the Internal Revenue Code allows taxpayers to take a deduction for qualified security contributions. According to the governmentA qualified security interest is an interest in real property that is granted to an approved organization solely for security purposes.

The problem: According to the government, some promoters are “bundling” security transactions by creating schemes where investors buy interests in cooperatives that buy land or already own land that is being offered. for the convenience of security. These properties are often overvalued, or do not qualify as conservation land.

In 2017, the IRS and Treasury specifically cited syndicated security facilitation transactions as abuses of Notice 2017-10. However, the U.S. Court of Appeals for the Sixth Circuit and the U.S. Tax Court have both ruled that the IRS and Treasury cannot list abusive transactions in notices, and must publish this through a proposed rule with a notice and comment period. See Green Valley Investors, LLC v. Commissioner, 159 TC No. 5 (2022) and Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022).

According to the legislation proposed in December, negotiations to facilitate protection against syndicate exploitation have the following four characteristics:

  • The program is advertised in promotional materials stating that investors can expect to receive a charitable deduction worth at least 2.5 times the taxpayer’s investment;

  • The investor has an interest in a partnership or pass-through company that owns the real property;

  • A pass-through participates in the property as a security easement and provides a discount to its counterparty;

  • Partners report the charitable contribution deduction on their federal income tax returns.

The IRS and the Treasury Department are accepting comments on the proposed regulations until February 6, 2023.

IRS Voluntary Update of Application and Implementation of Voluntary Declaration Application

Under the IRS’s Voluntary Disclosure Practice program, taxpayers who face criminal charges for not disclosing their income can avoid criminal prosecution if they come clean to the IRS and submit a -information is voluntary.

These taxpayers still face a state audit and must pay all taxes due with interest and penalties. Taxpayers who want to declare voluntarily must do so through Form 14457, Voluntary Application and Application. In February 2022, the Updated IRS Form 14457 has significant changes.

  1. Changes to form 14457

  • electronic signature: The IRS now accepts copies, facsimiles and scans of taxpayer signatures. Previously, these signatures had to be mailed.

  • Expanded virtual currency distribution: Taxpayers must list the domestic and foreign illegal virtual currencies that they owned, controlled, or beneficially owned directly or indirectly during the tax period(s) in question. This reporting requirement also extends to assets disposed of during that time.

  • Penalty structure for illegal activity, property and gift tax: Taxpayers must indicate whether they can fully pay their invalid taxes or not. If they can’t pay in full, they can prove why they can’t pay.

  1. Changes in related penalties

  • The property tax: 50 percent reduction in civil fraud penalties (IRC Section 6663) or unsanctioned fraud (IRC Section 6651f) will be applied instead of a 75 percent penalty in both cases.

  • Employment tax: The IRS will impose civil fraud penalties (IRC Section 6663) or unsanctioned fraud (IRC Section 6651f) to the quarter with the highest tax.

  • Gift tax: Here too, the IRS will impose civil fraud penalties (IRC Section 6663) or unsanctioned fraud (IRC Section 6651f), but there are some caveats. If the fraudulent activity involves only a single financial year, a reduced penalty of 50 percent applies instead of a penalty of 75 percent. If the activity involves more than one year, the fraud penalty is assessed in the year of the highest tax.

Partnership Tax Exemption

For the 2021 fiscal year, the IRS has created new Schedules K-2 and K-3, which address international tax reporting for domestic partnerships and S corporations. The new schedule is designed to standardize the international tax information that these entities must report under the Tax and Labor Act. In recognition of the fact that taxpayers must adjust to these new schedules, by February 2022, the IRS declared special transitional relief, exempting domestic partnerships and S corporations from filing a K-2 or K-3 schedule for the 2021 tax year if the conditions are met some of them are:

  • During the 2021 tax year, a direct partner of a partnership is not a foreign partnership, foreign corporation, individual, foreign estate, or foreign trust.

  • During the 2021 tax year, the partnership and S corporation had no foreign activities that generated or could be expected to generate income.

  • During the 2020 fiscal year, partnerships and S corporations did not provide the following information to partners and shareholders (they did not request it)

    • Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and

    • Line 20c, Form 1065, Schedules K and K-1 (Controlled foreign corporation, foreign investment corporation, 1120-F, section 250, section 864(c)(8), section 721(c) partnership, and section 7874) (line 17d for Form 1120-S)

  • For the 2021 fiscal year, the partnership and S corporation were not aware of the aforementioned information requests from shareholders or partners.

The importance of being informed

The regulations and reforms listed above are important because they highlight the IRS’s ever-increasing requests for taxpayer information as well as increased enforcement activity. All of these reforms continue through 2023. Taxpayers looking for more information about what these tax law changes might mean for their personal circumstances should seek advice to a trusted international consultant.

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