Your company is under investigation. Federal agents show up at your business looking for documents, computer files and other evidence. It’s a critical moment. What should you do?

Matthew D. Lee, a former Justice Department trial attorney and partner in Fox Rothschild’s White Collar Compliance and Defense Practice, explains your options in Episode Two of his this five-part podcast, “Federal Agents at the Door.” Matt tells you exactly what to expect and how to respond.

In Episode One, Target, Subject or Witness?, Matt provided an overview and explained how your status in a probe should affect your overall response. In this episode, Matt explains what to do when agents arrive at your place of business brandishing a warrant.

If you prefer, download the transcript.

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You’ve seen it on CNN. Scores of agents in matching jackets descend on a business or residence, hauling out boxes of documents, laptops and cell phones. How would you react?

Don’t panic. Matthew D. Lee has every aspect covered in his new five-part podcast: “Federal Agents at the Door.” A former Justice Department trial attorney, and partner in Fox Rothschild’s White Collar Compliance and Defense Practice, Matt knows what to expect and how to respond.

Episode One: Target, Subject or Witness? Matt provides an overview and explains how your status in a probe should affect your response.

If you prefer, download the transcript.

In its 5-4 decision in South Dakota v. Wayfair, the U.S. Supreme Court gave states the authority to require online retailers to collect state sales taxes even if the retailer has no physical presence in a state. The decision overturned pre-internet era rulings that had prohibited states from forcing online retailers to collect sales taxes unless a retailer had a “physical presence” in a state.

Wayfair will likely increase states’ sales tax revenue. The Supreme Court noted that the physical presence standard may have cost states up to $33 billion in sales tax revenue every year. South Dakota alone estimated that it lost $48 to $58 million yearly. This was a serious problem for states like South Dakota that do not have an income tax.

On the other hand, the decision will drive up costs for small online retailers, and those without the resources to comply with numerous taxing jurisdictions will be hit hard. Members of the House Judiciary Committee issued a statement calling Wayfair a “nightmare for … small online sellers, who will now have to comply with the different tax rates and rules of, and be subject to audits by, over 10,000 taxing jurisdictions across the U.S.”

But Justice Anthony Kennedy, who authored the majority opinion in Wayfair, thought there was “nothing unfair about requiring companies that avail themselves of the states’ benefits to bear an equal share of the burden of tax collection.”

Regardless of the policy arguments, the Wayfair ruling will likely significantly increase compliance costs and state audits for online retailers.

Now online retailers must determine whether the states where they have no physical presence require them to collect and remit sales tax. A state may require an online retailer to collect and remit sales tax based on the revenue the online retailer generates or the number of sales it makes in the state.

Online retailers should bear in mind, however, that states cannot impose collection requirements on an online retailer if it does not have a substantial nexus in the state.

Our colleague Alka Bahal has written an article for the Immigration View blog about a dramatic increase in the number of I-9 audits being conducted by U.S. Immigration and Customs Enforcement. More than 5,200 businesses around the country have been served with I-9 inspection notices since January in a two-phase nationwide operation that appears to be the largest I-9 inspection action ICE has undertaken to date. This latest round of workplace audits on employers clearly indicates that the I-9 inspection is now a top priority in U.S. immigration enforcement policy that targets employers rather than employees via the workplace raids of the past. You can read the article here.

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Our colleague Joseph A. McNelis III has written an excellent article for the In the Weeds blog about a recent statement from the U.S. Attorney in Massachusetts regarding his office’s enforcement priorities surrounding recreational marijuana.  In his statement, U.S. Attorney Andrew Lelling noted that while he cannot “immunize the residents of the Commonwealth from federal marijuana enforcement,” his office’s resources will be focused on (1) unauthorized out-of-state marijuana sales; (2) targeted sales to minors; and (3) organized criminal groups which use illicit drug sales to fund their activities.  You can read the blog post here.

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The States of New York, Connecticut, Maryland, and New Jersey filed a federal court lawsuit this week challenging the constitutionality of the new $10,000 cap on the federal tax deduction for state and local taxes (SALT). The lawsuit, filed in the Southern District of New York, names as defendants the Secretary of the Treasury, the Acting Commissioner of Internal Revenue, the Internal Revenue Service, and the United States of America. The States allege that the SALT deduction cap, enacted as part of 2017 tax reform, violates numerous provisions of the United States Constitution, including the Tenth Amendment, the Sixteenth Amendment, and Article I, Section 8.

According to a press release issued by New York Governor Andrew M. Cuomo, the lawsuit argues that the new SALT cap was enacted to target New York and similarly situated states, that it interferes with states’ rights to make their own fiscal decisions, and that it will disproportionately harm taxpayers in these states. An analysis by the New York State Department of Taxation and Finance shows that the cap will increase New Yorkers’ federal taxes by $14.3 billion in 2018 alone, and an additional $121 billion between 2019 and 2025. A press release issued by Connecticut Governor Dannel P. Malloy similarly estimated that Connecticut taxpayers will lose an estimated $10.3 billion in SALT deductions in 2018, and will increase Connecticut taxpayers’ federal income tax liability by approximately $2.8 billion in 2018.

The SALT deduction cap has been one of the most controversial provisions of the 2017 tax reform legislation.  We previously wrote about efforts by some states, including New York and New Jersey, to pass laws providing for mechanisms to work around the cap. These “workarounds” would allow taxpayers to make payments to specified entities in exchange for a tax credit against state and local taxes owed.  In May, the IRS the Internal Revenue Service notified taxpayers that it would soon be issuing regulations addressing the deductibility of state and local tax payments for federal income tax purposes, and issued a not-so-subtle reminder that federal law controls the characterization of payments for federal income tax purposes regardless of the characterization of the payments under state law.

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Last month we wrote about the Justice Department’s new corporate resolution policy, which is intended to curb the practice of multiple government authorities imposing separate punishments on a corporate defendant for the same underlying conduct. Employing a football metaphor, Deputy Attorney General Rod Rosenstein explained that the intent of the new policy was to prevent “piling on,” which he described as “a player jumping on a pile of other players after the opponent is already tackled.” In the wake of this policy change, we have been carefully following Justice Department announcements of corporate investigations to see how this policy will work in practice.

The Justice Department recently announced resolution of a Foreign Corrupt Practices Act investigation involving a Hong Kong subsidiary of Swiss bank Credit Suisse. The allegations involved the awarding of employment to friends and family of Chinese officials in exchange for banking business. As part of the resolution, the Credit Suisse subsidiary entered into a non-prosecution agreement and agreed to pay a criminal penalty of $47 million. The SEC simultaneously announced that Credit Suisse entered into a settlement agreement covering the same underlying conduct and agreed to pay disgorgement of nearly $25 million with nearly $5 million of prejudgment interest. In an apparent nod to the anti-“piling on” policy, the SEC agreed to refrain from imposing any civil penalty. In fact, the SEC administrative order expressly provides that “[Credit Suisse] acknowledges that the Commission is not imposing a civil penalty based upon the imposition of a $47 million criminal fine as part of Credit Suisse’s settlement with the United States Department of Justice.”

When Rosenstein unveiled this new policy last month, he cited two examples of recent corporate resolutions that he said were consistent with the new anti-“piling on” approach. One of those resolutions, announced in April 2018, is very similar to the Credit Suisse resolution announced last week. In that case, the Justice Department entered into a deferred prosecution agreement in an FCPA investigation of the subsidiary of a global electronics company. The company paid a criminal penalty of $137 million. In a related proceeding, the SEC filed a cease-and-desist order against the company, which required the payment of $143 million in disgorgement for the same conduct. Rosenstein noted that the SEC agreed to forgo the imposition of penalties given the company’s agreement to pay a criminal penalty to the Justice Department.

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I have recently penned a Law360 article discussing lessons learned from recent tax decisions impacting cannabis businesses.  We will continue to cover this topic on this blog.

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BitcoinEarlier this week the Internal Revenue Service announced creation of a virtual currency compliance initiative that will focus on tax compliance by taxpayers engaging in virtual currency transactions. The IRS intends to address non-compliance in this area by conducting audits and engaging in taxpayer outreach, and by issuing future guidance. As part of this announcement, the IRS urged taxpayers with unreported virtual currency transactions to correct their tax returns, but also cautioned that it has no plans to offer a voluntary disclosure program in this area.

As we have previously reported, the IRS is focusing significant attention on tax compliance with respect to cryptocurrency transactions. Last year, the IRS prevailed in its long-running litigation with Coinbase seeking the names of clients who engaged in cryptocurrency transactions during 2013-2015, and Coinbase announced that it was disclosing transaction data to the IRS for 13,000 of its customers. In addition, the IRS-Criminal Investigation Division is ramping up its scrutiny of cryptocurrency transactions by assembling a team of specialized investigators in this area. And earlier this year, the IRS issued a very public “reminder” to taxpayers about reporting cryptocurrency transactions and threating audits, penalties, and even criminal prosecution for non-compliance.

The virtual currency announcement by the IRS Large Business and International Division (LB&I) was part of its roll-out of five additional “compliance campaigns” which are targeted at specific issues presenting risks of non-compliance. In early 2017, LB&I announced that it would be moving toward a risk-based approach to taxpayer examinations, and to date has identified 35 compliance issues that will guide its examination strategy moving forward.

The IRS described its newly-announced virtual currency campaign as follows:

U.S. persons are subject to tax on worldwide income from all sources including transactions involving virtual currency. IRS Notice 2014-21 states that virtual currency is property for federal tax purposes and provides information on the U.S. federal tax implications of convertible virtual currency transactions. The Virtual Currency Compliance campaign will address noncompliance related to the use of virtual currency through multiple treatment streams including outreach and examinations. The compliance activities will follow the general tax principles applicable to all transactions in property, as outlined in Notice 2014-21. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts, future guidance, and development of Practice Units. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical. The IRS is not contemplating a voluntary disclosure program specifically to address tax non-compliance involving virtual currency.

The four other new compliance campaigns unveiled by LB&I this week include (1) restoration of sequestered AMT credit carryforward; (2) S corporation distributions; (3) repatriation via foreign triangular reorganizations; and (4) Section 965 transition tax. These campaigns are decribed in more detail as follows:

  • Restoration of Sequestered AMT Credit Carryforward

LB&I is initiating a campaign for taxpayers improperly restoring the sequestered Alternative Minimum Tax (AMT) credit to the subsequent tax year. Refunds issued or applied to a subsequent year’s tax, pursuant to IRC Section 168(k)(4), are subject to sequestration and are a permanent loss of refundable credits. Taxpayers may not restore the sequestered amounts to their AMT credit carryforward. Soft letters will be mailed to taxpayers who are identified as making improper restorations of sequestered amounts. Taxpayers will be monitored for subsequent compliance. The goal of this campaign is to educate taxpayers on the proper treatment of sequestered AMT credits and request that taxpayers self-correct.

  • S Corporation Distributions

S Corporations and their shareholders are required to properly report the tax consequences of distributions. We have identified three issues that are part of this campaign. The first issue occurs when an S Corporation fails to report gain upon the distribution of appreciated property to a shareholder. The second issue occurs when an S Corporation fails to determine that a distribution, whether in cash or property, is properly taxable as a dividend. The third issue occurs when a shareholder fails to report non-dividend distributions in excess of their stock basis that are subject to taxation. The treatment streams for this campaign include issue-based examinations, tax form change suggestions, and stakeholder outreach.

  • Repatriation via Foreign Triangular Reorganizations

In December 2016, the IRS issued Notice 2016-73 (“the Notice”), which curtails the claimed “tax-free” repatriation of basis and untaxed CFC earnings following the use of certain foreign triangular reorganization transactions. The goal of the campaign is to identify and challenge these transactions by educating and assisting examination teams in audits of these repatriations.

  • Section 965 Transition Tax

Section 965 requires United States shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Taxpayers may elect to pay the transition tax in installments over an eight-year period. For some taxpayers, some or all of the tax will be due on their 2017 income tax return. The tax is payable as of the due date of the return (without extensions).

Earlier this year, LB&I engaged in an outreach campaign to leverage the reach of trade groups, advisors and other outside stakeholders to raise awareness of filing and payment obligations under this provision. The external communication was circulated through stakeholder channels in April 2018.

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The Senate Finance Committee has scheduled a hearing for Thursday, June 22, 2018, to consider the nomination of Charles P. Rettig to be Commissioner of Internal Revenue.  The President nominated Rettig more than four months ago to succeed John Koskinen, whose term as Commissioner ended in November 2017. Since Koskinen’s departure, David J. Kautter has served as Acting Commissioner of Internal Revenue, and he also serves as Assistant Secretary of the Treasury for Tax Policy. We profiled Rettig in a prior post which you can read here.

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