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Thursday, January 28, 2021

FBAR Reporting to Be Expanded to Include Foreign Accounts Holding Virtual Currency

Presently, for U.S. persons a foreign account holding virtual currency is not a reportable account for purposes of having to file an FBAR.

In a recent announcement FinCEN has advised that it intends to amend the FBAR regulations to include those accounts.

In today's environment, this is about as surprising as the sun coming up this morning.

FinCEN Notice 2020-2

Tuesday, January 26, 2021

Applicable Federal Rates - February 2021

For the applicable federal rates for the above month, preceding months, and a data table that visually shows trends, click here!  

Direction of rates: moving up 

Wednesday, January 20, 2021

Antideferral Tax Legislation on the Horizon? What is Antideferral Tax Legislation?

President Biden has made no secret of his plans to raise taxes. One possible avenue is through the adoption of antideferral rules, along the lines recently outlined in a report by Senator Ron Wyden, the ranking member of the Senate Finance Committee.

Presently, taxpayers who own appreciating assets are not taxed on the appreciation until the sale of those assets. Further, the gains may be subject to preferential rates of tax.

Both of these concepts would go out the window in an antideferral regime. First, the report recommends the elimination of favorable capital gains rates. Second, as to publicly traded securities, taxpayers would be required to "mark-to-market" the value of their accounts each year for income tax purposes. To the extent those assets went up in value during the year, taxes would be due on that appreciation (or a deduction would be allowed for any loss) even though the asset was not sold. The taxpayer could no longer defer tax on gains until sale. Third, as to nonpublicly traded property, in lieu of a mark-to-market arrangement, a penalty would be imposed on the taxpayer which would grow for the longer the property is held, so as to deny the benefits of tax deferral to the taxpayer. The penalty might be an interest charge or a tax surcharge.

Special rules could apply to residences, retirement assets, and other special classes of assets. The report suggests the rules should apply only to high income or high asset households.

Such a plan would radically transform the taxation of capital in the U.S. While purportedly applicable only to wealthier taxpayers, history shows that such taxable classes tend to expand to less wealthy taxpayers over time. The plan would also result in increased tax return complexity and bookkeeping, and costs of compliance. 

Most importantly, the plan does not discuss the impacts on capital formation. It is capital investment and formation that drives economies and is the policy behind reduced capital gains rates. This new arrangement would eliminate the tax incentives to capital investment that currently exist, and may punish long-term capital investments. Treating capital badly has two principal effects. First, it takes productive capital out of circulation, where it otherwise would be producing goods, services, jobs, and innovation through research and development. Second, it would drive capital out of the U.S. to other jurisdictions that treat capital investment more favorably under the principle that capital goes to where it is treated best. None of this will improve the economy and indeed could adversely affect it in a material manner.

President Biden promised to undo the tax cuts made by President Trump. The antideferral rules, if adopted, would go far beyond undoing those cuts and instead would install a tax regime that never existed in the U.S. and a new drag on the economy that would likely have both unforseen and unfavorable consequences. Keep an eye out to see where this is going.

Below is a link to the report.

Treat Wealth Like Wages Report

high taxpayers - how long

tax compliance and compolexity


Saturday, January 02, 2021

IRS Is Proposing a User Fee for Estate Tax Closing Letter

Executors and personal representatives of estates of decedents can be held personally liable for distributing or applying estate assets when there are unpaid estate taxes due, if the IRS does not get paid. When an estate tax return is filed, the final amount of estate taxes due is not known until either the statute of limitations expire, or there is an audit (possibly followed by ongoing dispute, resolution through Appeals, and/or litigation). The estate fiduciaries are thus in the dark about whether or when an adjustment to the estate taxes will be forthcoming, or if the IRS has accepted an estate tax return as filed. This is unfair to the fiduciaries, and the beneficiaries, since a prudent fiduciary will need to hold back on distributions until the tax amount is more certainly known.

So as to assist the fiduciaries in determining if tax is or will be due, when an estate tax return is filed the IRS has traditionally issued an estate tax closing letter when an estate tax return has been filed. This is generally issued after the IRS' review of the return and determination not to audit or after completion of post-audit procedures or litigation.

Several years ago, the IRS stopped automatically issuing them. This was done in part as a cost-saving measure, and because the IRS believed that fiduciaries could obtain the same information as a closing letter by determining if the transaction code and explanation of "421 - Closed examination of tax return" was entered on the estate's tax transcript.

However, since fiduciaries, local probate courts, State tax departments, and others had come to rely on the convenience of estate tax closing letters and the explanations they contained, estates could still request a closing letter if they wanted one. This request could be made by telephone or fax  - but presently only by fax due to COVID-19 operational restrictions.

Noting the continuing burden of responding to these requests, and the continuing volume of estate tax returns (in part due to the portability rules and the need to file estate tax returns to obtain the benefits of portability), the IRS is now proposing, via proposed regulations, a $67 user fee to request a closing letter to help it defray costs.

While the fee amount is not outrageously high, it is always irksome when the government charges members of the public before the government will discharge its duty. In this case, that is particularly so since it is the liability that the government imposes on fiduciaries (both in their fiduciary capacity and their individual capacity) that necessitates a closing letter.

A secondary concern is fee creep. We have all seen modest government fees increase over time to unreasonable amounts. Look no further than the fees charged for private letter rulings - these at one time had no fee, then a small fee, and now bear fees in the many thousands of dollars.

As of now, the fee is only proposed. Stay tuned.

Proposed Regulation Section 300.13