IRS Audit Triggers

IRS Audit Triggers

IRS Audit Triggers

IRS Audit Triggers: In 2021, the US Government actively seeks to increase funding for the Internal Revenue Service. While this may help to make the IRS function better (which would be a welcome benefit), it will also lead to an avalanche of audits and examinations by Agents and Examiners in years to come. Moreover, the industries that the IRS usually focuses on will also change. Each year, the Internal Revenue Service publishes its dirty dozen tax scams to be aware of. While these are key focuses for the IRS — and oftentimes serve as exam and investigation triggers — there are several less publicized but equally important IRS audit triggers that Taxpayers should be aware of in the coming years. Let’s go through some of the basics of the new IRS audit triggers to consider for 2021 and 2022.

Doubling IRS Work Force (More Audits)

This is not so much an audit trigger, as it is a numbers game. If there are more agents and examiners employed to conduct investigations and examinations, then more triggers will get pulled that lead to audits — if not for any other reason than the fact that there are more people to pulling the trigger. Therefore, it is expected that the number of audits in general will increase significantly in 2021 and 2022 as the IRS employs and trains more individuals to spot the audit triggers.

OPI (Office of Promoter Investigations)

The IRS is not a big fan of listed transactions and other reportable transactions. From the IRS’s perspective, these types of transactions are improper avoidance schemes that should be avoided. In recent years, the focus has been Captive Insurance Companies and Syndicated Conservation Easements

Taxpayers who invest in these offshore schemes, significantly reduce their tax liability — and oftentimes it is the IRS’s opinion that they are improper — if not illegal. Therefore, in 2021, the IRS launched the Office of Promoter Investigations to focus on this specific issue. Therefore, for taxpayers who have reportable transactions that either did not report it on Form 8886 or were reported but may not be entirely kosher, should consider their options.

Puerto Rico Acts 20/22 and 60

Puerto Rico Act 20 and 22 — which were later combined with several other acts into PR Incentives Code 60 — has been targeted by the IRS. For taxpayers who qualify for the PR program, they are able to minimize (if not completely avoid) income tax by sourcing income to Puerto Rico. Taxpayers can accomplish this without having to go through formal expatriation and/or relinquishing their passport or Permanent Resident Card. The IRS is coming down hard on participants in this program, so it is important for taxpayers to ensure that they meet all the necessary requirements to be considered a resident of Puerto Rico — noting, they may still be investigated and audited by the IRS.

Willful FBAR Penalties & Reckless Disregard

On a positive note, in recent months many non-willful taxpayers have successfully convinced courts to limit non-willful FBAR penalties to a single $10,000 penalty (adjusted for inflation) per year — instead of  multiple FBAR violations in the same year. Unfortunately, taxpayers have not been as successful when it comes to willful FBAR and Reckless Disregard penalties.

Two recent appellate courts have affirmed the IRS’ position that if the US government can show the taxpayer acted with reckless disregard (no intent necessary), then this is sufficient to show willful FBAR penalties — which are typically issued at 50% maximum value of the unreported accounts.

This is especially important for taxpayers who are considering litigating an FBAR penalty and the costs involved in that litigation.

Cryptocurrency Income

Currently, the IRS treats cryptocurrency as property not currency. As a result, the tax requirements for the exchange of property are very different than when currency is used to acquire property instead. For Tax Year 2020, the IRS Form 1040 includes a threshold question on Page 1 regarding virtual currency transactions. In addition, the IRS has issued various soft letters (in different batches) to Taxpayers reminding them of their crypto compliance requirements. This was followed by the Internal Revenue Service’s ability to secure multiple John Doe Summons — and even the arrest of the alleged leader of a notorious dark web company, whose operations focused on further hiding cryptocurrency ownership so crypto could be used for criminal purposes.

Offshore Cryptocurrency Reporting

On the one hand, the US government takes the position that cryptocurrency is property and therefore treats it differently than currency for tax purposes. Yet, on the other hand, they also want US persons who have foreign accounts with cryptocurrency to ensure that the accounts are being reported on international reporting forms such as the FBAR. Recently, the US government issued FinCEN notice 2020-2 — which proposes the US government will require cryptocurrency accounts to be reported in similar fashion to currency accounts on forms such as the FBAR.

For those who may not be aware, the penalties for not reporting FBAR properly are incredibly unfair and lopsided in comparison to the violation.

Be on the Lookout for New IRS Audit Triggers

The Internal Revenue Service is on the lookout for taxpayers who are in violation of the Internal Revenue Code. Each year, the IRS focuses on different aspects of non-compliance and it is important to stay abreast of what the IRS is focusing on, in order to stay in compliance and to avoid any unnecessary audit triggers. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically FBAR penalties and IRS offshore disclosure & compliance.

Contact our firm for assistance.