As many readers know, the Bipartisan Budget Act of 2015 (“BBA”) repeals the long standing TEFRA procedures governing IRS examinations of partnerships.  As a result, beginning January 1, 2018, partnerships are subject to a centralized partnership audit regime.  However, partnerships are permitted to make an election to have the BBA rules apply to partnership returns filed for tax periods beginning after November 2, 2015 and before January 1, 2018.  For most partnerships, this will apply to the 2016 and 2017 tax years.

Early Election Procedures under Section 1101(g)(4) of the BBA

Partnerships who receive written notification that a partnership return for an eligible year has been selected for examination have 30 days after the date of such notification to file an election to be subject to the BBA centralized partnership regime for that year.  The election can be made on Form 7036,  or by preparing a statement that complies with the regulations.  The election statement requires the partnership representative to represent that the partnership (1) is not insolvent and does not reasonably anticipate becoming insolvent before resolution of any adjustment for the partnership taxable year for which the election is being made; (2) is not currently and does not reasonably anticipate become subject to the bankruptcy petition under Title 11; and (3) has sufficient assets, and reasonably anticipates having sufficient assets, to pay a potential imputed underpayment.

IRS Guidance

On June 29, 2017, the Commissioners of the LB&I division and the SB/SE division issued a memo addressing procedures initial contacts with taxpayers eligible to make the early election.  The memo educates managers and examiners on which partnerships are eligible to make the election, how and when the election is made, the proper content of the election statement, and related correspondence procedures.  The memo requires the issuance of a new Initial Contact Letter, Letter 2205-D, at the beginning of a partnership examination.  If the partnership responds by making an early election, the process outlined below is followed.  If an early election is not made, examiners are instructed to follow existing TEFRA or NonTEFRA procedures.

The memo instructs examiners who receive elections to verify that no amended returns or administrative adjustment requests have been filed as this would disqualify the partnership from making the early election.  The memo also instructs examiners to ensure that Form 7036 is properly completed or that an election not on Form 7036 meets the requirements of Treas. Reg. section 301.9100-22T, request any missing information from the taxpayer if the 30-day election window is still open, and determine whether the election is valid.  The memo further instructs the examiner to wait 30 days after the valid election is received before issuing a notice of administrative proceeding.  The reason for the 30-day waiting period is to allow the partnership to file any administrative adjustment requests as permitted under Section 6227 as amended by the BBA.  During this 30-day period, examiners are instructed to perform a “cursory check” to determine whether the partnership representative’s name, address, identification number and phone number are correct.  Examiners are not permitted to issue a notice of administrative proceeding until the 30-day period expires.

We expect to see continued guidance from the IRS on BBA centralized partnership examination procedures as the rules become effective.

Over at the In The Weeds blog (which explores developments in cannabis law and business), Melissa T. Sanders writes about the recent publication by the Treasury Department’s Financial Crimes Enforcement Network of its “Marijuana Banking Update.”  In this publication, FinCEN summarizes the number of depository institutions providing banking services to marijuana-related businesses in the United States as reported by the filing of “suspicious activity reports” (SARs).  Marijuana-related businesses present myriad anti-money laundering compliance challenges, as well as complex federal tax issues as our colleague Jennifer E. Benda has addressed here, here, and here.

Earlier this year we wrote that the Internal Revenue Service is moving forward with its controversial “Private Debt Collection” program amid a sharp uptick in instances of fraud by scammers posing as legitimate IRS debt collectors. The new private tax collector program, authorized under a federal law enacted by Congress in December 2015, enables designated private contractors to collect, on behalf of the IRS, unpaid tax debts. Usually, these are unpaid individual tax obligations that are not currently being worked by IRS collection employees and often were assessed several years ago.

Critics of efforts by the IRS to outsource debt collections to private companies have long warned that such programs provide fraudsters with additional opportunities to perpetrate long-running scams where criminals prey on unsuspecting victims by posing as IRS representatives seeking to collect tax debts. According to the Treasury Inspector General for Tax Administration, this widespread fraud scheme has caused taxpayer losses of over $55 million. To date, more than 50 individuals have been criminally charged for their roles in a complex fraud scheme in which individuals from call centers in India impersonated IRS officials in demanding payment of back taxes. Call center operators targeted U.S. victims who were threatened with arrest, imprisonment, fines, and/or deportation if they did not pay money allegedly owed to the IRS. Victims who agreed to pay the scammers were instructed on how to provide payment, such as by purchasing stored value cards or wiring funds.

As the IRS is rolling out its private debt collection program, the tax agency is simultaneously warning taxpayers of a new phone scam that makes use of phony certified letters. In a press release entitled “IRS Warns of New Phone Scam Involving Bogus Certified Letters; Reminds People to Remain Vigilant Against Scams, Schemes this Summer,” the IRS cautioned taxpayers that fraudsters are utilizing new scams to defraud unsuspecting victims:

The Internal Revenue Service today warned people to beware of a new scam linked to the Electronic Federal Tax Payment System (EFTPS), where fraudsters call to demand an immediate tax payment through a prepaid debit card. This scam is being reported across the country, so taxpayers should be alert to the details.

In the latest twist, the scammer claims to be from the IRS and tells the victim about two certified letters purportedly sent to the taxpayer in the mail but returned as undeliverable. The scam artist then threatens arrest if a payment is not made through a prepaid debit card. The scammer also tells the victim that the card is linked to the EFTPS system when, in fact, it is entirely controlled by the scammer. The victim is also warned not to contact their tax preparer, an attorney or their local IRS office until after the tax payment is made.

“This is a new twist to an old scam,” said IRS Commissioner John Koskinen. “Just because tax season is over, scams and schemes do not take the summer off. People should stay vigilant against IRS impersonation scams. People should remember that the first contact they receive from IRS will not be through a random, threatening phone call.”

EFTPS is an automated system for paying federal taxes electronically using the Internet or by phone using the EFTPS Voice Response System. EFTPS is offered free by the U.S. Department of Treasury and does not require the purchase of a prepaid debit card. Since EFTPS is an automated system, taxpayers won’t receive a call from the IRS. In addition, taxpayers have several options for paying a real tax bill and are not required to use a specific one.

Tell Tale Signs of a Scam:

The IRS (and its authorized private collection agencies) will never:

•  Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. The IRS does not use these methods for tax payments. Generally, the IRS will first mail a bill to any taxpayer who owes taxes. All tax payments should only be made payable to the U.S. Treasury and checks should never be made payable to third parties.

•  Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.

•  Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.

•  Ask for credit or debit card numbers over the phone.

For anyone who doesn’t owe taxes and has no reason to think they do:

•  Do not give out any information. Hang up immediately.

•  Contact the Treasury Inspector General for Tax Administration to report the call. Use their IRS Impersonation Scam Reporting web page. Alternatively, call 800-366-4484.

•  Report it to the Federal Trade Commission. Use the FTC Complaint Assistant on FTC.gov. Please add “IRS Telephone Scam” in the notes.

For anyone who owes tax or thinks they do:

•  View your tax account information online at IRS.gov to see the actual amount you owe. You can then also review your payment options.

•  Call the number on the billing notice, or

•  Call the IRS at 800-829-1040. IRS workers can help.

The IRS does not use email, text messages or social media to discuss personal tax issues, such as those involving bills or refunds. For more information, visit the “Tax Scams and Consumer Alerts” page on IRS.gov. Additional information about tax scams is available on IRS social media sites, including YouTube videos.

Yesterday the Taxpayer Advocate published a blog post entitled “The IRS’s New Passport Program: Why Notice to Taxpayers Matters (Part 1 of 2)” which criticizes the Internal Revenue Service’s planned initiative to revoke, or deny, passports of individuals who have substantial tax liabilities. We have previously covered the planned rollout of this program by the IRS here and here. In our last article on this subject, we reported — based on information contained on the IRS website — that the IRS planned to begin issuing certifications of individuals with “seriously delinquent tax debt” to the State Department in “early 2017.” According to the IRS web page addressing the passport revocation program – which was last updated on June 2, 2017 – certifications to the State Department have in fact not yet started, but are slated to begin at some point “in 2017.” According to the Taxpayer Advocate, “there is no firm date for implementation” of the passport revocation/denial program at this time, although the IRS plans to publish a notice providing more details about the program shortly before implementation.

The passport revocation provision was enacted into law in December 2015 as part of the Fixing America’s Surface Transportation Act (FAST Act), which contained two controversial measures designed to assist the IRS in collecting delinquent taxes: (1) re-authorizing the use of private collection agencies for certain delinquent tax accounts; and (2) authorizing the State Department to revoke, or deny, passports to taxpayers with “seriously delinquent tax debt.”

“Seriously delinquent tax debt” is defined as a federal tax liability that been assessed and is greater than $50,000 (including interest and penalties), and for which the IRS has either filed a lien or levy. The dollar threshold will be adjusted for inflation every year. Taxpayers who have entered into installment agreements or offers-in-compromise, or have requested collection due process hearings or innocent spouse relief, are not considered to have “seriously delinquent tax debt” even if they owe the IRS more than $50,000.

In the blog post, the Taxpayer Advocate notes prior efforts by the U.S. government to restrict issuance of passports to individuals with other types of non-tax debt:

The concept of restricting a person’s travel to incentivize behavior isn’t new. In 1996, Congress passed the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996, which requires the DOS to deny a passport application and allows the DOS to revoke or limit a passport if the person owes delinquent child support exceeding $5,000 (subsequently lowered to $2,500). Courts have long recognized that the right to travel internationally is a liberty right, protected by the Due Process Clause. See e.g., Kent v. Dulles, 357 U.S. 116 (1958). In the context of passport denial for unpaid child support, courts have found the statute meets due process requirements because it provides for notice and an opportunity to be heard prior to the state agency certifying the unpaid child support to the federal government. Weinstein v. Albright, 261 F.3d 127 (2nd Cir. 2001), aff’g 2000 WL 1154310 (S.D.N.Y. 2001).

The Department of Health and Human Services, Office of Child Support Enforcement (OCSE) requires states to issue (or request OCSE to issue) a Pre-offset Notice (PON) for all new cases within the Federal Tax Refund Offset Program, the Administrative Offset Program, and the U.S. Passport Denial Program. Following the issuance of a PON, there is a 30 day holding period before the passport denial occurs. The primary focus of the PON is to communicate the pending consequences of not resolving the unpaid amount – that is, administrative offset, federal tax refund offset, and passport denial if the amount is greater than $2,500. You can view a sample PON in the OSCE Federal Offset Program Technical Guide. The OSCE Guide strongly encourages states to send repeated PONs to the noncustodial parents at least annually.

The Taxpayer Advocate’s primary concern about the new IRS passport revocation program is its lack of meaningful notice and opportunity to be heard, which are the hallmarks of constitutional due process:

In the context of passport denial for a seriously delinquent tax debt, notice and an opportunity to be heard prior to the certification are limited. The FAST Act only requires two forms of notice to taxpayers who will be certified:   (1) a notice sent to the taxpayer close to or at the same time as the IRS certifies the seriously delinquent tax debt (“contemporaneous notice”), and (2) language included in Collection Due Process (CDP) hearing notices explaining the potential certification.

Unlike the PONs in the child support context, currently, the IRS does not plan to provide any additional, direct notice to affected taxpayers beyond the statutory requirements. I believe this lack of notice may not satisfy taxpayers’ due process rights under the Fifth Amendment of the Constitution because taxpayers do not have a meaningful opportunity to be contest the certifications prior to them taking place. Furthermore, it infringes on the Taxpayer Bill of Rights, notably the right to be informed and the right to challenge the IRS’s position and be heard. The passport language in the broader CDP notice is delivered at a time when the taxpayer is focusing on resolution of the debt and claiming CDP rights – thus the language is buried among the other information and may not constitute effective notice. This is in contrast to the child support PON, which focuses primarily on the soon to occur consequences – offset and passport denial. Additionally, some taxpayers may not have the benefit of the passport language in the CDP notice at all because they received their CDP notices prior to the IRS including this language. At this time, the IRS has no plans to send a separate notice to these taxpayers.

Although the passport revocation program has not yet been implemented, the IRS is now including the following warning language on levy notices:

Denial or Revocation of United States Passport
On December 4, 2015, as part of the Fixing America’s Surface Transportation (FAST) Act, Congress enacted section 7345 of the Internal Revenue Code, which requires the Internal Revenue Service to notify the State Department of taxpayers certified as owing a seriously delinquent tax debt. The FAST Act generally prohibits the State Department from issuing or renewing a passport to a taxpayer with seriously delinquent tax debt. Seriously delinquent tax debt means an unpaid, legally enforceable federal tax debt of an individual totaling more than $50,000 for which a Notice of Federal Tax Lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted, or a levy has been issued. If you are individually liable for tax debt (including penalties and interest) totaling more than $50,000 and you do not pay the amount you owe or make alternate arrangements to pay, we may notify the State Department that your tax debt is seriously delinquent. The State Department generally will not issue or renew a passport to you after we make this notification. If you currently have a valid passport, the State Department may revoke your passport or limit your ability to travel outside of the United States. Additional information on passport certification is available at www.irs.gov/passports.

The Taxpayer Advocate’s critique of the passport revocation program continued by calling for the IRS to provide additional notice to affected taxpayers that their right to travel may be at risk:

The IRS’s current policy of relying exclusively on the CDP notice to provide pre-certification notice also ignores behavioral research. This is a topic I discussed last year in the Annual Report to Congress Most Serious Problem on Voluntary Compliance and in a related Literature Review on Behavioral Science Lessons for Taxpayer Compliance. One topic that came up repeatedly in the literature was the concept of salience, focusing on the timing and relevancy of communications. A simple way to increase the salience of the passport notice would be to issue a stand-alone notice shortly before the certification, similar to the child support PON that is issued 30 days prior.

The IRS needs to approach passport certifications from the point of view, “If we want people to do something, what’s the best way to make that happen?” Here, the IRS wants taxpayers to resolve their tax debts – either by fully paying the liability, entering into a payment plan, or having their accounts corrected if the liability is incorrect. A stand-alone notice, focusing only on the pending harm that will occur if the taxpayer does not resolve their account quickly, is likely to be successful in prodding taxpayers to take action. However, the IRS doesn’t plan to send out a separate notice other than the notice at the time of the passport certification, which triggers many kinds of actions.

As the IRS and State Department are preparing to implement the passport revocation program, it remains to be seen whether those agencies will take note of any of the Taxpayer Advocate’s comments, particularly her concerns about meaningful lack of notice and opportunity to be heard before certification to the State Department. The Taxpayer Advocate concludes by noting that in her next blog post, she intends to discuss “the actual operations of the passport certification process, showing how the IRS’s lack of notice leads to an inefficient and burdensome process.” Stay tuned.

The IRS recently released Revenue Procedure 2017-31 which adds Belgium, Columbia and Portugal to the list of participates in the automatic exchange of information on bank interest paid to nonresident alien individuals for interest paid on or after January 1, 2017. Back in December, we discussed the previous additions to the list of participates and the implications of the expanding program. With these additional countries, there are now 43 countries participating in the automatic exchange program.

The IRS may only share information with a foreign government that has entered into a mutual information exchange agreement. The U.S. only enters into information exchange agreements after the U.S. Treasury and IRS are satisfied that the foreign government has strict confidentiality protocols and protections. The IRS is statutorily barred from sharing information with another country without such an agreement in place. All U.S. information exchange agreements require that the information exchanged under the agreement be treated and protected as secret by the foreign government.

As has been the case for the last decade, U.S. is ramping up enforcement through the use of information reporting requirements, which is one of the most effective tools it has to combat tax evasion.

2000px-Seal_of_the_United_States_Department_of_Justice_svgIn its continuing effort to fight fraud in the controversial EB-5 immigrant visa program, the Justice Department announced last week that it had filed federal lawsuits seeking the forfeiture of nine real properties across Southern California that were allegedly purchased with proceeds generated by a fraudulent scheme that collected more than $50 million from foreign investors seeking “Green Cards” through the EB-5 visa program. The suits allege that much of the money collected from investors, who were primarily Chinese, either was refunded to the foreign nationals or was stolen by participants in the scheme.

The EB-5 visa program provides a pathway to lawful permanent residence – commonly known as a “Green Card” – to foreign nationals who invest at least $500,000 in a U.S. business that creates at least ten American jobs. If a project ultimately meets the visa program’s requirements, the investors are granted permanent legal residence in the U.S.

The EB-5 program has been in existence since the 1990s, but its popularity increased following the financial crisis of 2008. During that crisis, many U.S. real estate developers ran out of sources for cash, and the EB-5 program helped meet that need by bringing in foreign investment. Interest in obtaining EB-5 visas has continued to increase, in large part because of demand from wealthy Chinese citizens. In 2015, the U.S. government granted nearly 10,000 EB-5 visas, and 85 percent of those went to Chinese nationals.

A 2013 report by the Department of Homeland Security Office of Inspector General found serious problems with the oversight of the EB-5 program. The Government Accountability Office published a study on fraud in the EB-5 program last year, which found that progress had been made in fraud detection, but improvements were still needed.

Earlier this year, a hotel developer in Chicago was sentenced to three years in prison for using the EB-5 program to fraudulently raise capital from Chinese nationals seeking U.S. residency. The defendant in that case told investors he was building a hotel and convention center near O’Hare International Airport. He solicited Chinese nationals to invest $500,000 apiece in the project, plus $41,500 in administrative fees to his company. Each Chinese national who participated in the project also applied for an EB-5 visa. While soliciting investors, the defendant made several false statements, including lies about funding and tax credits from the State of Illinois and the City of Chicago, none of which materialized. The $900 million project never got off the ground, and no EB-5 visas were ever granted to investors. In addition to the three-year prison term, the Court also ordered the defendant to pay $8.85 million in restitution to the victim investors. According to a Justice Department press release, this case represented the largest EB-5 criminal case in U.S. history to date. In all, the defendant raised approximately $158 million from more than 290 investors. The Securities and Exchange Commission brought a civil lawsuit against Sethi and was able to restore approximately $147 million to Chinese investors.

The asset forfeiture suits filed last week in California allege that attorney Victoria Chan and her father, Tat Chan, operated a business called California Investment Immigration Fund, LLC (CIIF) from 2008 until this year. CIIF allegedly convinced more than 100 Chinese nationals to invest over $50 million in CIIF and related companies. Rather than investing those funds into U.S. businesses – as required by the EB-5 program – CIIF either refunded the funds to the investors while their EB-5 petitions were pending, in direct violation of program requirements, or stole millions of dollars to use for personal expenditures, including the purchase of luxury homes.

In April 2017, federal agents raided CIIF’s offices and homes of its executives. According to an affidavit filed in federal court as part of those search warrants, CIIF sought money from more than 100 Chinese investors, and in the process helped many of them to obtain U.S. green cards through the EB-5 program. Several of the investors who received green cards were fugitives wanted by the Chinese government.

In seeking approval for their investment fund in 2008, the father and daughter said their projects would focus on real estate developments, especially in the restaurant and hotel industries. As part of the investigation, agents found 72 bank accounts linked to the investment fund or one of many holding companies affiliated with it. From 2009 to 2016, approximately $50 million was wired or deposited into the accounts, the affidavit said. Most of the money originated from accounts in mainland China or Hong Kong.

About $15 million of the money was used to purchase several personal homes as well as business properties, but agents found no significant work was ever done on any of the proposed business projects. Approximately 30 of the investors received some or all their money back — amounting to about $10 million — but did not disclose the refunds to U.S. officials and have continued to pursue legal permanent residence in the country. In June, investigators sent an undercover informant into the office to meet with Victoria Chan. Chan stated that his $500,000 investment would be returned within five years, according to the search warrant affidavit.

The civil lawsuits filed last week allege that the properties named in the asset forfeiture lawsuits were purchased with proceeds derived from mail fraud, wire fraud, or visa fraud and that the purchases themselves constituted money laundering. The lawsuits seek the forfeiture of the following real properties:

  • a commercial property in the City of Industry valued at over $3 million;
  • five residences in the cities of Rancho Cucamonga, Arcadia (worth approximately $4 million), Diamond Bar, Riverside and Duarte (valued at $5.5 million); and
  • parcels of land located in Ontario, Indio (worth nearly $6 million) and Rancho Cucamonga (valued at more than $7.7 million).

To date, no individuals have been arrested or charged in this investigation, but the raids conducted in April and the asset forfeiture lawsuits filed last week strongly suggest that criminal charges will be forthcoming in the near future. In the meantime, the EB-5 program has been extended through September 30, 2017, while many in Congress are seeking to reform the program to prevent recurrences of the type of fraud illustrated by these cases.