Wednesday, August 30, 2017


By Steven J. Mopsick and Allison J. Ornelaz, Mopsick Tax Law, LLP
Almost everyone has heard about Bitcoin by now, a digital currency which appears to offer the user a degree of privacy if not secrecy. One of its  biggest attractions is it can be purchased and used anonymously which is a huge benefit for those wishing to keep certain financial affairs as below the radar as possible. Although every Bitcoin transaction is recorded in a public log, the user’s names are not revealed, only their “digital wallet” IDs. These “digital wallets” are basically a virtual bank account in which the user can access his funds.
Bitcoin appeared on the scene in 2009 attributable to an individual(s) named Satoshi Nakamoto[1] as a cryptocurrency[2]. Bitcoin is not tied to any government, currency, or bank, leaving the network under the control of its users worldwide. As such, the value of Bitcoin fluctuates in a real time market dependent on the number of users who are currently buying or selling. Similar to fluctuations in stock values, the structure of the market for Bitcoin is based on supply and demand which causes its value to be sometimes quite volatile.
Over the last 8 years, the value of one Bitcoin compared to the U. S. dollar has risen from practically no value to its all-time high of $4,522.13 as of August 25, 2017[3]. Seeing the value fluctuate over the years has caused many users to use Bitcoins as purely an investment opportunity, while others have turned Bitcoin trading into a livelihood.
The IRS knows about Bitcoin activity and Uncle Sam is pretty much convinced that with all of its popularity, there is bound to be some uncollected taxes somewhere. As anonymity is the name of the game, one could speculate a vast majority of Bitcoin users do not report their gains or losses from the underlying transactions on their tax returns. Or perhaps more importantly, it is likely that some of the transactions underlying the use of Bitcoin are themselves illegal, giving rise to the possibility that other law enforcement agencies may want to find out what is going on as well.
In Notice 2014-21, the IRS defined virtual currency (i.e., Bitcoin and other cryptocurrencies) as “property” for federal tax purposes. That means the exchange of Bitcoin for cash or Bitcoin for goods or services is taxable as any other property would be under the Internal Revenue Code. It could be considered a capital asset in the hands of some taxpayers or for others, it could be property used in a trade or business, the proceeds of which are taxed at ordinary income rates.    
On November 30, 2016, the federal court for the Northern District of California authorized[4] the IRS to serve a “John Doe” summons[5] on Coinbase, Inc. See U.S. v. John Doe, No. 3:2016-cv-06658 (N.D. Cal filed Nov. 17, 2016) and U.S. v. Coinbase, Inc., No. 3:2017-cv-01431-JSC (N.D. Cal. filed March 16, 2017).  Coinbase defines itself as “a secure online platform for buying, selling, transferring, and storing digital currency;” i.e., Coinbase then, is a “virtual wallet” for Bitcoin users.
The IRS summons requested information on all U.S. taxpayers who used a virtual currency during the 2013-2015 tax years[6]. IRS Commissioner John Koskinen stated “the John Doe summons is a step designed to help the IRS ensure people doing business in the emerging economy are following the tax laws and meeting their responsibilities[7].”
In response to the summons, a Coinbase customer filed a motion[8] to block the court order which would allow the IRS to access Coinbase’s Bitcoin transaction records. Arguing that the summons was illegally over-broad, Coinbase refused to comply with the summons and sought to quash it or alternatively seek a protective order and an evidentiary hearing permitting limited discovery[9].
On July 6, 2017, the IRS filed a notice of narrowed summons requests for enforcement[10] which limited the scope to only Coinbase users with at least $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013-2015 tax period and also limited the scope with regard to each user. This litigation is ongoing.
Despite its reputation as the most visible symbol of Big Government, if the use of Bitcoin is involved in a taxable or reportable transaction, the IRS just wants to be paid. But why are they focusing so heavily on Bitcoin users right now? Two reasons: it is an effort to reduce the Tax Gap (the difference between the amount of tax the IRS collects vs. the amount really owed) and it is a chance to peek into the Underground Economy. Bitcoin, innocuous in itself, offers a splendid vehicle to bury a transaction with digital finesse (if not the dark market itself) and avoid all regular reporting, registration, and disclosures.
The IRS believes there is currently ongoing mass tax evasion by a majority of Bitcoin users. In an affidavit[11] attached to its pleadings, the IRS said it searched its records for Form 8949, Sales and Other Dispositions of Capital Assets, for data for tax years 2013 through 2015 which showed that in 2013, only 807 individuals reported a transaction on Form 8949 using a property description likely related to Bitcoin; in 2014, that number went up to a modest 893 reported transactions; and in 2015, 802 individuals did so.
Although currently unknown, there is speculation that there are over 10 million Bitcoin users worldwide[12].
The IRS has contracted with a company called Chainalysis[13] to track down the identities of U.S. taxpayers with virtual wallets holding Bitcoin. In a letter from the co-founder of Chanalysis to the IRS (screenshot in an article by Fortune[14]), Chainalysis says (emphasis added):
Transactions in Bitcoin are made with pseudonyms, which need to be tied to real world identities in order to gain insights about the parties involved in a transaction and their purpose. Our tool has information on 25 per cent of all Bitcoin addresses, which account for approximately 50 per cent of all the Bitcoin activity. We additionally have over 4 million tags on Bitcoin addresses that we have scraped from web forums and leaked data sources including dark market forums and Mt. Gox deposit and withdrawal information.
Is there a message here for Bitcoin users?  
It took the government a while to wake up to technological advances which facilitate illegal activity and tax compliance enforcement. Seven years after the enactment of FATCA and a decade and a half of foreign bank account  reporting (FBAR), the IRS is now fully committed to staying  up to date on ways people use the digital world to evade  the internal revenue laws.  It may be that everyone is entitled as a matter of privacy to be anonymous, but the government is convinced that no one has the right to be invisible. 
One of the things the government is good at is integrating databases. These include cross checking FBAR filings with income tax filings, matching up 1099’s with forms 1040, soaking up reports on Americans directly from FATCA-friendly countries and banks, and using a vast cache of ever increasing digital data to search for patterns, transactions, and related entities.
No advice is offered here if the reader is involved in a criminal activity.
For those readers who use Bitcoin and see it as yet another way to do business in the modern world, the best advice is to keep good records. The IRS may want to chat with you at some time in the future.

[1] Speculation exists whether Satoshi Nakamoto is a real person or a group of individuals.
[2] A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
[7] Id.

Friday, July 14, 2017

Jackie Bugnion, Former Tax Director of American Citizens Abroad, Comments to U.S. Senate Finance Committee Request for Tax Reform Proposals: Adopt Residence-Based Taxation (RBT) for Americans Resident Overseas

One of the great anomalies in the world of international taxation is the fact that the United States is the only civilized nation in the world which taxes its citizens and long term residents on the basis of their world-wide income. This is known as CBT or citizenship-based taxation.  Everywhere else on the globe, people are taxed on the basis of where the income was earned, usually where they reside. Thus under RBT (Residence Based Taxation) people are taxed according to where they earned the money, reflecting the theory at least, that tax equity and fairness are maintained because generally, governments limit the reach of their jurisdiction by their water’s edge.

In practice, with increased IRS focus on international money and banking, citizenship based taxation has worked an extreme injustice on law-abiding Americans working abroad, because in the eyes of U.S. federal tax law, the American abroad is still required to report his income to his home country and the IRS, as well as to his newly-adopted country. Moreover, what appears to be a local bank in the eyes of most Americans abroad, is suspiciously seen by the IRS as fair game for inquiry regarding unreported income. Jackie Bugnion has been at the forefront of the fight for tax justice for Americans abroad as the tax director of American Citizens Abroad for several years and now in her individual capacity.

Founded in 1978, American Citizens Abroad, Inc. (ACA, Inc.) is a non-profit, non-partisan, volunteer association whose mission is to defend the rights of Americans living overseas. ACA works to represent overseas American interests before the Executive Branch of the US Government, the US Congress, the Federal Judiciary, and in the press.

This year, American Citizens Abroad, gave its highest award, the Eugene Abrams Award for 2017 to Jackie Bugnion. Mrs. Bugnion served on the ACA Board and Executive Committee for 12 years, from 2003 to 2015, and she was the driving force behind the promotion of Residence-Based Taxation (RBT), writing detailed RBT proposals, visiting lawmakers and giving speeches. She was instrumental in creating relationships with key legislators and the tax writing committees on Capitol Hill, and she wrote policy papers which helped establish ACA as the premier thought-leader on issues affecting the community of Americans living and working overseas.  Mrs. Bugnion participated in the team that published ACA’s anthology of short stories, “So Near Yet So Far.” The stories included in the collection are written by Americans living and working overseas and cover a myriad of experiences and issues. After publication, the book was sold to the public and copies were distributed to members of the Congress helping them to understand that Americans overseas were very much like those living in the United States and that their issues must be heard and addressed by their Representatives.

Jackie received her MBA from Harvard Business School and a BA in Economics from Cornell. She was born in the United States and later in life after graduation moved to Switzerland. 

With Jackie’s express permission, we are proud to republish the below article written by Jacqueline Bugnion which was submitted to the Senate Finance Committee following the Committee’s public request for tax reform proposals.


Submission to Chairman Hatch’s request for tax reform proposals

Adopt residence-based taxation (RBT) for Americans resident overseas
The Senate Finance Committee and the House Ways and Means Committee have both cited the need to review the way that the United States taxes its citizens and green card holders who reside overseas. The current policy known as citizenship-based taxation (CBT) is increasingly called into question as it taxes Americans on their worldwide income irrespective of their residence, domestic or overseas.  I am an American citizen who has resided overseas for 52 years, as my husband is a foreigner. I have personally observed the devastating consequences of CBT on Americans abroad and strongly urge Congress to adopt residence-based taxation (RBT).
What is RBT? Under RBT, the U.S. would tax its citizens and green card holders who reside abroad the same way that the U.S. currently taxes non-resident aliens, i.e. through taxation of U.S.-source income only. FDAP (Fixed, Determinable, Annual, Periodic) income would be taxed largely through withholding at source by the paying agent. Effectively connected U.S.-source earned income would be reported on Form 1040NR and taxed under U.S. income tax rules. Foreign-source income would not be taxable. 
RBT would apply to all bona-fide overseas residents. RBT would be immediate and automatic, but would not be open to residents of Puerto Rico or to military and diplomatic personnel stationed abroad. As an obvious anti-abuse measure, RBT would not be available to residents of designated tax havens. RBT would not be compulsory; Americans abroad for a short period of time, such as academics on sabbatical, may opt to stay under CBT.
The rules for RBT are already in place as they apply to foreigners with U.S.-source income. Withholding taxes on FDAP U.S.-source income would lead to automatic, efficient tax collection. In fact, withholding tax at source would in certain circumstances shift taxation from foreign countries to the U.S.
Shifting from CBT to RBT would be close to tax revenue neutral. Analysis of the IRS 2555 statistics, relating to the foreign earned income exclusion reported by overseas Americans, shows that a significant share of wages and salaries of the highest income groups is U.S.-source, and hence would continue to be taxed by the U.S. under RBT. The top 1% income group account for more than 50% of all taxes paid. In addition, the U.S. today under CBT renounces most claim on tax liability on foreign earned income, by allowing foreign tax credits and the foreign earned income exclusion. These two factors and few minor ones, lead to a neutral tax revenue situation.  Any possible difference between CBT and RBT would be utterly insignificant in the U.S. budget – less than 0.001% - so small that it could swing either way.
IRS enforcement costs under the current international tax system are disproportionate to revenue.  The international tax forms create burdensome filing costs for taxpayers and create heavy administrative costs for the IRS; this is terribly inefficient when the vast majority of overseas taxpayers owe no U.S. tax.
Tax collected currently under CBT, other than that linked to U.S.-source income, comes from unacceptable instances of double taxation. Incompatibilities between the U.S. tax code and foreign tax systems lead to double taxation.  The outrage of Boris Johnson, at the time Mayor of London, when the U.S. taxed the capital gain on the sale of his U.K. home illustrates this issue very well. There are numerous examples of differences between U.S. and foreign tax systems which penalize Americans abroad. To cite just a few:
  • IRS does not recognize foreign pension funds and therefore taxes all contributions; it treats income generated over the years as coming from a PFIC fund, guaranteeing a negative return.
  • U.S. legislates double taxation in the cases of the NIIT and the Additional Medicare Tax since neither allow foreign tax credits. This is particularly cynical since these taxes aim to finance U.S. medical care; Americans abroad pay into their foreign health programs and are excluded from the Affordable Care Act.
  • Some countries have a wealth tax on all net assets instead of a capital gains tax on securities investments.  The U.S. taxes the capital gains, but does not allow foreign tax credits against this income.
  • Definitions of what is an income tax and what is a social security tax varies enormously from country to country, with onerous tax consequences for U.S. citizens abroad.
  • All OECD countries, except the U.S., have replaced sales taxes by VAT, which can range up to 20% of the price of goods and services purchased.  The U.S. does not recognize VAT paid as compensation for the U.S. tax liability, even though it does accept deduction of U.S. state sales tax.
  • Entrepreneurs in countries without a totalization agreement are subject to double contributions to social security, in the foreign country and in the U.S.
Beyond the immediate issue of taxation, moving from CBT to RBT would have major advantages for Americans abroad, at essentially no cost or lost revenue to the U.S.:
  • CBT tax law and related FATCA asset and revenue reporting requirements amount to a bank lockout for Americans abroad. FATCA reporting rules imposed by the U.S. on foreign financial institutions, accompanied by draconian penalties for non-compliance, strongly discourage foreign banks from accepting American citizens as clients.  In addition, the U.S. Patriot Act know-your-client requirements have effectively cut off Americans abroad from access to U.S. financial institutions. It is difficult to function without a bank account in today’s world.
  • FBAR and Form 8938 reporting requirements shut off employment and investment opportunities for Americans abroad. The FBAR requirement to report bank accounts with only signature authority eliminates jobs in financial positions. Foreign employers refuse to have their accounts reported to the United States, and such reporting is illegal in many countries.  Form 8938 requires foreign companies in which an American holds 10% ownership to report this ownership to the IRS.  This measure has shut out entrepreneurial and partnership opportunities for Americans overseas.
Consequently, the number of renunciations of U.S. citizenship is skyrocketing from a few hundred in 2008 to well over 5,000 in 2016.  And this is just the tip of the iceberg.  The blatant discrimination and unfair treatment of Americans abroad at the hand of their own government has created massive anger and frustration in the overseas community of more than 8 million Americans. The financial burden of compliance is far in excess of reporting requirements for U.S. residents and easily runs into the thousands of dollars, which is all the more ludicrous when the vast majority have no U.S. tax liability.
Adopting RBT meets three of the four tax reform objectives cited by Senator Hatch.
  • First, it provides relief to middle-class individuals and corrects major unfairness. 
  • Second, it removes impediments and disincentives for savings and investments. 
  • Third, it makes Americans abroad and therefore the United States more competitive in the global economy while preserving the tax base.
I thank you for your attention to the above.
Sincerely yours,
Jacqueline Bugnion                                                                                                     July 8, 2017
BA in Economics, Cornell University, 1962
MBA, Harvard Business School, 1964
Tax Director, American Citizens Abroad, 2003-2015
Tax Notes International, Volume 62, Number 11, June 13, 2011, Jackie Bugnion, Overseas Americans Should Have a Say in National Tax Reform Debate
Tax Notes International, Volume 66, Number 5, April 30, 2012, Jackie Bugnion, American Citizens Abroad’s Recommendation for U.S. Tax Law Reform
Tax Notes, December 1, 2014, Jackie Bugnion and Roland Crim, Thank you Mayor Boris Johnson for speaking up for many
Tax Notes, Volume 148, Number 8, August 24, 2015, Jacqueline Bugnion, Concerns About the Taxation of Americans Resident Abroad
Tax Notes, May 30, 2016, Jacqueline Bugnion and Paula N. Singer, A Proposal for Fair U.S. Tax Treatment of Foreign Pensions

Monday, April 24, 2017

Americans Abroad: Welcome to the Hotel California: “You Can Check Out Any Time You Like But You Can Never Leave.”

Beware: Americans Thinking About Moving Abroad or Dropping Their U.S. Citizenship.
As the government looks for more ways to enforce the tax laws, a recent change allows the Department of State to deny or revoke a passport for anyone with a “seriously delinquent” IRS debt. [1] This change is noteworthy for the American abroad, as well as for those contemplating moving abroad or renunciation of citizenship.
The law is very clearly written and is easy to understand. Once the dollar threshold is met, all the IRS has to do is follow its normal procedures for issuing and protesting liens and levies.  If the taxpayer fails to participate in the lien/levy protest procedures or the process goes against him, the IRS is all set! It has laid the predicate for the IRS to notify the Department of State of the delinquency and permits stripping a person of one of the most prized documents on the planet: a U.S. passport.
No one can fairly criticize the IRS for not giving people enough advanced notice that they have a tax problem. The IRS will customarily issue several notices asking the targeted taxpayer to respond to provide an opportunity to resolve the tax matter.
Beyond this, the IRS has no obligation to hunt you down if it believes you might owe more tax than you reported or if you haven’t filed for multiple years.  The triggers which set off the events allowing the IRS to notify the State Department to pull someone’s passport are almost always computer-generated. There is absolutely no provision in the law which requires a real person (as opposed to a computer) to verify the prerequisites to meet the requirements for having what the law very specifically defines as a “seriously delinquent tax debt.”
It may be a good idea to make sure the IRS knows your “last known address”: In the realm of IRS compliance, remember all of the IRS notices are sent to what the IRS calls, and the law recognizes, a taxpayer’s “last known address,” a well-defined term of art which basically means the last address the IRS has for someone as shown on their last filed tax return.
The IRS doesn’t email, nor does it generally call its “customers” on the telephone.  It has no obligation to hunt you down on the Internet through your Facebook, Snapchat, Marco Polo or Instagram account. All they have to do is copy the address they have from the most recent tax return you filed.
For those who have tangled with the IRS before, mail from the IRS becomes increasingly more menacing, the longer it is that the IRS does not receive a response. IRS notices start out looking like junk mail and then work their way up to certified letters. By sending these notices, the IRS will have done all it is required to do even if you don’t receive any of their letters.
A spat with the IRS may turn out to be the most significant economic event in a taxpayer’s life. While it may be counterintuitive to some, experience teaches that it is almost always better to contact and correspond with the IRS as early on in the process as possible. Defaulting critical notices, missing an opportunity to talk to the IRS before an assessment is made, or failing to correct the government’s obvious mistakes as soon as they come to light, can become a mistake a taxpayer ends up regretting later.  
Here’s why an American should not leave the country with unresolved IRS issues:
I leave it to other patriots to answer the question of whether the punishment fits the crime where a person loses the right to travel on a U.S. passport because he has unresolved tax issues with the IRS. Agree with it or not. It is the law of the land.
There is also the issue of how the passport revocation law cuts with respect to the debate on Citizenship Based Taxation vs. Residence Based Taxation. At the end of the day this blog is surely nothing more than a tip on a smart business “best practice.”
Here is what could happen to some people:
There are many ways a taxpayer and the IRS can get sideways, especially when the source of the problem is a computer-generated notice based on incomplete facts, or an IRS error. Using a very simple “what if” scenario, assume the IRS commences a correspondence audit with a taxpayer who simply blows off all his IRS mail and moves overseas to take a job. Assume also that the correspondence audit ends up with the issuance of a Statutory Notice of Deficiency. Of all IRS correspondence, this is one of the real “drop dead” letters which a taxpayer ignores at his own serious peril. This is the letter which triggers a right to challenge the IRS before a tax assessment is complete, by filing a simple petition with the United States Tax Court.  A timely response to a Statutory Notice of Deficiency gives the taxpayer a chance to tell  his  story to a relatively higher level IRS employee who has the actual authority to make a decision for the government, and, if necessary, to a U.S. Tax Court judge.
Assume the taxpayer never receives the Statutory Notice of Deficiency. The citizen is now living and working abroad and hasn’t lived at the old address for a while and so the “last known address” is no good.  
A taxpayer has 90 days (or 150 days if addressed to a person outside the U.S.) to file a petition in response to a Statutory Notice of Deficiency. Once the taxpayer defaults because of a failure to file a petition within the allotted time, it becomes legal for the IRS to start issuing actual invoices requesting payment.  A defaulted Statutory Notice of Deficiency allows the IRS to enter the liability on its books.  This is called an “assessment.” The assessment in effect says,
Ok, you had your chance to explain why you shouldn’t be taxed based on what we proposed in our Statutory Notice of Deficiency, but you failed to do so. Welcome now to the world of IRS Collections.
This starts a whole new set of computer generated collection notices, as opposed to the pre-assessment notices where the IRS was open to challenges about whether or not a deduction was valid or not. The collection notices come with increasingly more menacing language with dire warnings which say if the taxpayer doesn’t start paying attention soon, the IRS will issue a notice of federal tax lien or final notice of intent to levy. Yet again, another series of required mailed notices begins with well-defined procedures to challenge the IRS on the merits of the IRS collection action, but with almost no ability to challenge the original assessment.
It doesn’t take long for the IRS to lose all patience with an unresponsive taxpayer and start the levy process, usually to administratively seize income and money in bank accounts. Let’s assume the IRS computer cannot find anything to seize in the taxpayer’s name in the United States. By this time, the IRS computer is smoking with anger about being ignored for so long. At this point, the IRS concludes that this taxpayer really needs to learn a hard lesson.
The new law then kicks in and a previously illegal disclosure to the Department of State is made.
Fast-forward to our hapless American abroad who tries to renew his soon-to-expire passport and learns the sad truth.  He is on a computer-generated list which says his passport was revoked and no renewal is possible until he makes good on his duty as an American citizen to square his accounts with Uncle Sam.
True to form, the State Department says in response to a request for help from an agency of our government with a long, long history of saying, “I am so sorry. There is absolutely nothing I can do to help you,” declines the application or revokes the passport with the advice to “please take up the matter with the IRS.”
Some Americans abroad may choose to continue to blow off the matter if they are not reliant on the U.S. passport since it is still quite rare for a foreign government to carry out a seizure on behalf of the IRS. 
For some Americans abroad who need a U.S. passport, this is a devastating blow. To some it is a mark of disdain and dishonor. To others, probably most people caught up in a mess like this, it presents a terrifying and very serious inconvenience with the potential to seriously interrupt their lives and business matters for the immediate future and consume almost all of their attention. The problem is that few things are resolved expediently with the U.S. government.
Welcome to the Hotel California. “You can check out any time you like but you can never leave.”[2]

[1] More than $50,000; See IRC 7345.
[2] From “Hotel California” by the Eagles.