A hearing is scheduled for September 11, 2023 for interested persons and organizations to provide testimony on proposed regulations on the timing and approval process for penalties. Section 6751(b) provides that:

No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate. 

The timing of when the approval is required by Section 6751(b) has been the subject of significant litigation. The Second Circuit in Chai v. Commissioner concluded that Congress enacted section 6751(b) to “prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle.” This has caused a lot of litigation in both the Tax Court and U.S. District Courts such that there are currently two different standards on timing of when such supervisory approval is required. If supervisory approval is to meet the goal of not being used as an unfair “bargaining chip” it must be required before such unwanted behavior can occur. Many groups have submitted comments asking for supervisory approval to be done earlier in the examination process than the proposed regulations require and that approval be done by a direct supervisor and not just anyone with penalty approval rights within the IRS.Continue Reading IRS Sanctioned for Bad Faith on Supervisory Approval of Penalties While Proposed Regulations on the Same Issue are Pending

Providers of digital asset services would be subjected to tax reporting regulations akin to those governing brokers of securities and analogous financial instruments, as outlined in the inaugural set of proposed regulations delineating protocols for assets like cryptocurrency and nonfungible tokens. These guidelines, disseminated by the Internal Revenue Service on Friday, introduce the requirement for digital asset brokers to submit information returns and payee statements relating to asset sales conducted on behalf of customers during specific transactions, in accordance with Internal Revenue Code Section 6045.

Additionally, the comprehensive 282-page proposal recommended that brokers incorporate gain or loss details and basis information for sales occurring on or after January 1, 2026, under specific circumstances. This provision is designed to equip customers with the requisite information for compiling their tax returns.

The effective date of these regulations is slated for transactions from the preceding year, with enforcement beginning in 2026.

Law360 covered the topic in an article on August 25, 2023 where Gray Reed Partner Joshua Smeltzer was one of the experts interviewed. Board Certified in Tax Law by the Texas Board of Legal Specialization, Joshua uses his experience as a former litigator for the U.S. Department of Justice to defend clients in tax audits, tax appeals, and litigation in Federal District Court, U.S. Tax Court, the U.S. Court of Federal Claims, and tax issues in U.S. Bankruptcy Court.Continue Reading Joshua Smeltzer Quoted by Law360 on Proposed Broker Rules for Digital Asset Transactions

The FATCA Data Haystack Remains Just That

The Foreign Account Tax Compliance Act (FATCA) has resulted in a massive influx of financial information to the IRS over the past 13 years, but the extent of this data remains unknown. Despite expectations of significant revenue, FATCA has not met its financial goals, and the IRS is grappling with the challenge of effectively utilizing the data it has received from partner jurisdictions to enforce tax compliance. Tax Notes covered the topic in an article on August 23, 2023. Gray Reed Partner Joshua Smeltzer was one of the experts interviewed. Board Certified in Tax Law by the Texas Board of Legal Specialization, Joshua uses his experience as a former litigator for the U.S. Department of Justice to defend clients in tax audits, tax appeals, and litigation in Federal District Court, U.S. Tax Court, the U.S. Court of Federal Claims, and tax issues in U.S. Bankruptcy Court.

Excerpt:

Some of the funding will be used to help narrow the field of taxpayers potentially selected for audit, as the agency has been given a mandate to go after wealthy taxpayers, said Joshua D. Smeltzer of Gray Reed. “It will be difficult to target improvements in enforcement directly to FATCA because . . . dissecting enforcement increases on a granular level is just too hard,” Smeltzer said. However, because many more taxpayers in middle- and high-income brackets have worldwide finances, “the efforts by the IRS for FATCA enforcement will increase as well,” he said.Continue Reading Joshua Smeltzer Quoted by Tax Notes on FATCA and Cryptocurrency

For some time, promoters have shopped around an arrangement known as a “section 643(b) trust,” known alternatively as a “non-grantor, irrevocable, complex, discretionary, spendthrift trust.”  On August 9, 2023, IRS Chief Counsel issued a Memorandum that shoots down many of the contentions raised by the promoters relating to the tax benefits of these arrangements. The full Memorandum can be found here.  Taxpayers who have entered into these types of arrangements should take careful note of the IRS Chief Counsel Memorandum and should discuss its implications with a tax professional.Continue Reading IRS Takes Warning Shot at Section 643(b) Trust Arrangements

Section 2301 of the CARES Act, as amended, permits employers to claim employee retention credits (“ERCs”) if they meet certain requirements. Under one of those requirements, an employer may claim an ERC if the employer’s trade or business operations were fully or partially suspended due to a federal or state COVID-19 governmental order (the “Business Suspension Test”).Continue Reading IRS Chief Counsel Issues GLAM on ERC Supply-Chain Disruption Eligibility

The IRS, like the rest of society, has faced several challenges as a result of the pandemic. Some of those challenges are still lingering, such as funding, backlog, lack of guidance and inexperienced auditors. Efforts to fix these problems are underway but will take time. As taxpayer advisors, it’s important to recognize the limitations in

UPDATE:  On August 15, 2022, Judge Otis D. Write II in the Central District of California entered an order approving service of the summons by the IRS on sFOX for account and transaction records.  The Department  of Justice entered a press release the following day with Commissioner Chuck Rettig quoted as saying “the John Doe Summons remains a highly valuable enforcement tool that the U.S. government will use again and again to catch tax cheats and this is yet one more example of that.”  Deputy Assistant Attorney General David A. Hubbert of the Department of Justice Tax Division was also quoted as well saying “taxpayers who transact with cryptocurrency should understand that income and gains from cryptocurrency transactions are taxable.”


The IRS knows it has a problem, in that it knows there are far more cryptocurrency transactions than are being reported on tax returns. The IRS may also get an $80 billion increase in funding for enforcement that will help solve that problem.  What can taxpayers and cryptocurrency service providers expect?  More John Doe Summonses.  If there was any doubt, the IRS filed two new John Doe Summons requests (here and here) this week on cryptocurrency service provider sFOX. sFOX is the full-service crypto prime dealer for institutional investors, providing brokerage services for digital assets. It’s also now a target for information by the IRS and the Department of Justice Tax Division.
Continue Reading IRS Continues to Hunt for Cryptocurrency Investors with John Doe Summonses

Many people, myself included, can sometimes be accused of poor penmanship. As our paperwork becomes more and more electronic, we write less and less down with pen and paper. However, a recent decision from the tax court may be sending more supervisors at the IRS to penmanship classes.  The taxpayers, Gregory and Simone Colbert, were assessed income tax deficiencies and associated accuracy related penalties. The Colberts admitted the deficiencies but disputed the interest and penalties.
Continue Reading IRS Penalty Denied Because of Poor Penmanship

It is well-established that attorneys and their clients are entitled to private and protected communications.  But what level of protections are available when an accountant is used in an engagement to provide an area of expertise not possessed by the attorney?

This is a significant question because accountants are frequently relied upon as indispensable members of legal teams because they have the ability to properly interpret complex technical accounting concepts and explain them to lawyers, judges and juries.  When utilizing accountants in legal matters, the level of protections afforded will often depend on the agreement entered into between the parties.

As an initial matter, parties involved in legal disputes should understand that the accountant-client privilege generally does not provide the same level of protections as the attorney-client privilege.  Relying solely on the accountant-client privilege presents substantial risks for the client.  Rather, the parties should recognize and consider the benefits of entering into a Kovel Agreement to protect their communications.
Continue Reading Protecting Client Information When Using Accountants in Legal Matters

Cryptocurrencies might, simplistically, be defined as virtual currencies that use cryptography to secure transactions which are digitally recorded on a widely distributed ledger.  The ledger technology uses independent digital systems to timestamp and harmonize transactions. The cryptocurrencies associated with a ledger are often called “coins” or “tokens”.

Cryptocurrency can be acquired in multiple ways.  This post covers only common methods, such as purchase, gift, or airdrop following a hard fork.  A hard fork occurs when a ledger is subject to modifications that “break” compatibility with an earlier protocol; in other words, each leg of the fork follows different “rules” so the blockchain ledger is split into an original chain and new chain. Hard forks sometimes result in the creation of a new cryptocurrency.  An airdrop is a method of distributing cryptocurrency units to the ledger addresses of individual taxpayers. Airdrops sometimes, but not always, follow hard forks. While blockchain technology is interesting, and an elementary understanding of its technological mechanics is useful, it is the tax consequences of the receipt and disposition of cryptocurrency which is the subject of this post.
Continue Reading Cryptocurrency: The Basics of Tax Treatment and Recognition