The Newport Beach Tax Attorney Blog

OC Man Sentenced to 2 years in Prison for Laundering Bitcoin

Cryptocurrency News Alert: 6.7.2021

An Orange County was sentenced today to 24 months in federal prison for operating an illegal virtual-currency money services business that exchanged up to $25 million – some of it on behalf of criminals – through in-person transactions and a network of Bitcoin ATM-type kiosks.

Kais Mohammad, a.k.a. "Superman29,"of Yorba Linda, was sentenced by United States District Judge Josephine L. Staton.

Mohammad pleaded guilty in September 2020 to a three-count criminal information charging him with operating an unlicensed money transmitting business, money laundering, and failing to maintain an effective anti-money laundering program. Mohammad has agreed to forfeit to the government 17 Bitcoin ATMs, $22,820 in cash, 18.4 Bitcoin and 222.5 Ethereum cryptocurrency.

From December 2014 to November 2019, Mohammad owned and operated Herocoin, an illegal virtual-currency money services business. As part of his business, Mohammad offered Bitcoin-cash exchange services, charging commissions of up to 25 percent – significantly above the prevailing market rate.

Using the moniker "Superman29," Mohammad advertised his business online to buy and sell Bitcoin in transactions up to $25,000. In a typical transaction, he met clients at a public location in Southern California and exchanged currency for them. Mohammad generally did not inquire as to the source of the clients' funds and, on certain occasions, he knew the funds were the proceeds of criminal activity. Mohammad knew at least one Herocoin client was engaged in illegal activity on the dark web.

Mohammad processed cryptocurrency deposited into the machines, supplied the machines with cash that customers would withdraw, and maintained the server software that operated the machines. Mohammad was able to monitor transactions on the machines and identify each transaction that occurred on them.

During the time of Herocoin's operation, Mohammad, a former bank employee who trained others on compliance matters, intentionally failed to register his company with the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN). Mohammad was aware that he was required to – but chose not to – develop and maintain an effective anti-money laundering program, file currency transaction reports for exchanges of currency in excess of $10,000, conduct due diligence on customers, and file suspicious activity reports for transactions over $2,000 involving customers he knew, or had reason to suspect, were involved in criminal activity.

With respect to his Bitcoin ATM network, Mohammad's machines allowed customers to conduct financial transactions without requiring any identification and permitted customers to conduct multiple, consecutive transactions of up to $3,000 each without ever reporting suspicious activity to regulators or law enforcement.

After FinCEN contacted Mohammad in July 2018 about his need to register his company, Mohammad did so, but he continued to fail to comply fully with federal law concerning money laundering, conducting due diligence and reporting suspicious customers.

"Rather than use his knowledge to create a robust compliance program, (Mohammad) avoided one altogether and profited by making his business an efficient, unchecked, and nearly anonymous conduit for money laundering and other crimes," prosecutors wrote in their sentencing memorandum.

From February 2019 to August 2019, Mohammad also conducted multiple in-person transactions with undercover agents who represented they worked at a "karaoke bar" that employed women from Korea who entertained men in various ways, including engaging in sexual activity. On August 28, 2019, Mohammad met with an undercover law enforcement agent and exchanged $16,000 in cash, which the agent represented were the proceeds from illegal activity, for 1.58592 Bitcoin. Mohammad never filed a currency transaction report or suspicious activity report for these transactions.

In total, Mohammad exchanged between $15 million and $25 million from in-person exchanges and transactions occurring at his Bitcoin kiosks.

Wilson Tax Law Group, APLC (www.wilsontaxlaw.com) is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense. Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board. Wilson Tax Law Group is exclusively comprised of former IRS litigators and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division and Criminal Division.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Newport Beach and Yorba Linda, California

Tel: (949) 397-2292 (Newport Beach Office)

Tel: (714) 463-4430 (Yorba Linda Office)

IRS Extends Employment Tax Deposit Penalty Relief for Employer Credits

The IRS has extended the penalty relief provided in Notice 2020-22, 2020-17 I.R.B. 664, for failure to deposit employment taxes to eligible employers that reduce their required deposits in anticipation of the following credits:

the paid sick and family leave credits under the Families First Coronavirus Response Act (Families First Act) (P.L. 116-127), as amended by the COVID-related Tax Relief Act of 2020 (Tax Relief Act) (Division N of P.L. 116-260), for qualified leave wages paid with respect to the period beginning January 1, 2021, and ending March 31, 2021;

the paid sick and family leave credits under Code Secs. 3131, 3132, and 3133, added by the American Rescue Plan Act of 2021 (ARP) (P.L. 117-2), for qualified leave wages paid with respect to the period beginning April 1, 2021, and ending September 30, 2021;

the employee retention credit under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (P.L. 116-136), as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Division EE of P.L. 116-260), for qualified wages paid with respect to the period beginning January 1, 2021, and ending June 30, 2021;

the employee retention credit under Code Sec. 3134, added by the ARP, for qualified wages paid with respect to the period beginning July 1, 2021, and ending December 31, 2021; and

the COBRA Continuation Coverage Premium Assistance credit under Code Sec. 6432, added by the ARP, for continuation coverage premiums not paid by assistance eligible individuals under section 9501(a)(1) of the ARP, during the period beginning April 1, 2021, and ending September 30, 2021.

Background

Eligible employers claim the paid sick and family leave credits under the Families First Act, and the employee retention credit under the CARES Act, against the employer’s share of the Old Age, Survivors, and Disability Insurance (Social Security) portion of FICA tax under Code Sec. 3111(a). Employers that are eligible for the paid sick and family leave credits under Code Secs. 3131, 3132, and 3133, the employee retention credit under Code Sec. 3134, or the COBRA Continuation Coverage credit under Code Sec. 6432, can claim the credit(s) against the employer’s share of the Hospital Insurance (Medicare) portion of FICA tax under Code Sec. 3111(b). The credits are also available to eligible railroad employers for the attributable Railroad Retirement Tax Act (RRTA) taxes under Code Sec. 3221(a).

These refundable tax credits are reported on the employer’s employment tax return for reporting its liability for FICA tax, which for most employers is the quarterly Form 941. Certain employers may claim an advance payment of the refundable credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Code Sec. 6656 imposes a penalty for failure to timely deposit required tax amounts, unless the failure is due to reasonable cause and not willful neglect. Failure to deposit employment taxes required under Code Sec. 6302 generally subjects an employer to the penalty. The various legislative acts and provisions implementing the refundable employment tax credits described above either instruct the IRS to waive the penalty or authorize guidance that provides penalty relief.

Paid Sick and Family Leave Credit Penalty Relief

An employer can reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of the applicable paid sick or family leave credit anticipated for the calendar quarter prior to the required deposit, as long as:

the employer paid qualified leave wages, qualified health plan expenses, or qualified collectively bargained contributions, for the period beginning on April 1, 2021, and ending on September 30, 2021, to its employees in the calendar quarter prior to the time of the required deposit,

the amount of employment taxes that the employer does not timely deposit is less than or equal to its anticipated applicable paid leave credits claimed for the calendar quarter as of the time of the required deposit, and

the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of the deposit reduction cannot be more than the total amount of the employer’s anticipated paid leave credits as of the time of the required deposit, minus any amount of those anticipated credits that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

Employee Retention Credit Penalty Relief

After a reduction, if any, of an employment tax deposit by the amount of the anticipated paid sick or family leave credits, an employer may further reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of its applicable employee retention credit anticipated for the calendar quarter prior to the required deposit, as long as:

the employer paid qualified retention wages for the period beginning January 1, 2021 and ending December 31, 2021, to its employees in the calendar quarter prior to the time of the required deposit,

the amount of employment taxes that the employer does not timely deposit—reduced by the amount of employment taxes not deposited in anticipation of the paid leave credits claimed— is less than or equal to the amount of the employer’s anticipated applicable employee retention credits for the calendar quarter as of the time of the required deposit, and

the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of any deposit reduction cannot be more than the total amount of the employer’s anticipated employee retention credit as of the time of the required deposit, minus any amount of the anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

COBRA Continuation Coverage Credit Penalty Relief

After a reduction, if any, of an employment tax deposit by the amount of the anticipated paid sick or family leave credits and the anticipated employee retention credit, an employer may further reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of the employer’s COBRA continuation coverage credit anticipated for the calendar quarter prior to the required deposit, as long as:

the employer is a “person to whom premiums are payable,”

the amount of employment taxes that the employer does not timely deposit—reduced by the amount of employment taxes not deposited in anticipation of the paid leave credits and the employee retention credits claimed—is less than or equal to the amount of the employer’s anticipated credits under Code Sec. 6432 for the calendar quarter as of the time of the required deposit, and

the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of any deposit reduction cannot be more than the total amount of the employer’s anticipated COBRA continuation coverage credit as of the time of the required deposit, minus any amount of the anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

Wilson Tax Law Group, APLC (www.wilsontaxlaw.com) is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense. Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board. Wilson Tax Law Group is exclusively comprised of former IRS litigators and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division and Criminal Division.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Newport Beach and Yorba Linda, California

Tel: (949) 397-2292 (Newport Beach Office)

Tel: (714) 463-4430 (Yorba Linda Office)

9th Circuit Ruling Prohibits IRS from Charging Multiple Foreign Bank Account Report Non-Willful Penalties

In a case of first impression, the Court of Appeals for the Ninth Circuit ruled that the IRS can impose only one non-willful penalty under 31 USC 5321(a)(5)(A) when an untimely, but accurate, Report of Foreign Bank and Financial Accounts (FBAR) is filed, no matter the number of foreign financial accounts. The circuit court reversed and remanded a district court's judgment in an action for tax penalties and interest involving an individual’s failure to report foreign financial accounts.

The taxpayer had fourteen financial accounts in the United Kingdom from which she received interest and dividends. However, the taxpayer failed to report the interest and dividends from these accounts on her tax return for the tax year at issue or disclose the accounts to the IRS. Subsequently, the taxpayer participated in the IRS's Offshore Voluntary Disclosure Program and submitted an FBAR listing her multiple foreign accounts. The taxpayer also amended her tax return for the tax year at issue to include the interest and dividends from those accounts.

The IRS concluded that the taxpayer had committed thirteen non-willful violations of the reporting requirements—one for each account she failed to timely report for the tax year at issue—and sued the taxpayer for civil penalties. The district court agreed with the government that the relevant statutes and regulations authorized the IRS to assess one penalty for each non-reported account.

The Ninth Circuit examined the statutory and regulatory scheme for reporting a relationship with a foreign financial agency under 31 USC 5314, and found that it authorizes a single non-willful penalty for the failure to file a timely FBAR. The court held that under the statutory and regulatory scheme, the taxpayer’s conduct in failing to timely file the FBAR amounted to one non-willful violation.

The government argued that, based on the statutory scheme as a whole and legislative intent, the amount of the penalty can be assessed on a per-account basis. The court was not persuaded: it found nothing in the statute or regulations to suggest that the penalty can be calculated on a per-account basis for a single failure to file a timely FBAR that is otherwise accurate.

Reversing and remanding an unpublished DC Calif. decision.

Wilson Tax Law Group, APLC (www.wilsontaxlaw.com) is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense. Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board. Wilson Tax Law Group is exclusively comprised of former IRS litigators and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division and Criminal Division.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Newport Beach and Yorba Linda, California

Tel: (949) 397-2292 (Newport Beach Office)

Tel: (714) 463-4430 (Yorba Linda Office)

IRS Highlights Direct Deposit and Electronic Filing for Swift Tax Refunds

The IRS has reminded taxpayers that the fastest way to get their tax refund is by filing electronically and choosing direct deposit. Further, eight out of ten taxpayers get their refunds by using direct deposit. The IRS uses the same electronic transfer system to deposit tax refunds that is used by other federal agencies to deposit nearly 98% of all Social Security and Veterans Affairs benefits into millions of accounts. Moreover, taxpayers can simply select direct deposit as the refund method when using tax software or working with a tax preparer, and either they or their tax preparer type in their account and routing number. The Service has reminded taxpayers they should only deposit refunds directly into U.S. affiliated accounts that are in their name, their spouse’s name or both if it’s a joint account.

In addition, by using direct deposit, taxpayers can split their refund into up to three financial accounts, including a bank or Individual Retirement Account. Taxpayers can split their refund by using tax software or by using Form 8888, Allocation of Refund (including Savings Bond Purchases), if they file a paper return. However, no more than three electronic tax refunds can be deposited into a single financial account or prepaid debit card. Taxpayers who exceed the limit will receive an IRS notice and a paper refund will be issued for the refunds exceeding that limit. The safest and most accurate way to file a tax return is to file electronically. Taxpayers can track their refund using "Where’s My Refund?" or by downloading the IRS2Go mobile app.

Wilson Tax Law Group, APLC (www.wilsontaxlaw.com) is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense. Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board. Wilson Tax Law Group is exclusively comprised of former IRS litigators and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division and Criminal Division.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Newport Beach and Yorba Linda, California

Tel: (949) 397-2292 (Newport Beach Office)

Tel: (714) 463-4430 (Yorba Linda Office)

Employers Can Claim the Employee Retention Credit for 2020 on the 4th Quarter Form 941

The IRS has clarified that, under section 206(c) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, an employer that is eligible for the employee retention credit (ERC) can claim the ERC even if the employer received a Small Business Interruption Loan under the Paycheck Protection Program (PPP). Accordingly, eligible employers can claim ERS on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. However, any wages that could count toward eligibility for ERC or PPP loan forgiveness can be applied to wither of these programs, but not both.

Further, if an employer received a PPP loan and included wages paid in the 2nd and/or 3rd quarter of 2020 as payroll costs in support of an application to obtain forgiveness of the loan (rather than claiming ERC for those wages), and the employer's request for forgiveness was denied, the employer could claim the ERC related to those qualified wages on its 4th quarter 2020 Form 941, Employer's Quarterly Federal Tax Return. Additionally, the employer could report on its 4th quarter Form 941 any ERC attributable to health expenses that are qualified wages that it did not include in its 2nd and/or 3rd quarter Form 941. Moreover, employers who chose the 4th quarter procedure must add the ERC attributable to these 2nd and/or 3rd quarter qualified wages and health expenses on line 11c or line 13d (as relevant) of their original 4th quarter Form 941 (along with any other ERC for qualified wages paid in the 4th quarter). Further, employers should:

Include the amount of these qualified wages paid during the 2nd and/or 3rd quarter (excluding health plan expenses) on line 21 of your original 4th quarter Form 941 (along with any qualified wages paid in the 4th quarter).

Enter the same amount on Worksheet 1, Step 3, line 3a.

Include the amount of these health plan expenses from the 2nd and/or 3rd quarter on line 22 of the 4th quarter Form 941 (along with any health expenses for the 4th quarter)

Enter the same amount on Worksheet 1, Step 3, line 3b.

www.wilsontaxlaw.com

Joseph P. Wilson

Wilson Tax Law Group

Wilson Tax Law Group, APLC

(949) 397-2292

Newport Beach Office)

(714) 463-4430

Yorba Linda Office

IRS Highlights Temporary Tax Changes Designed to Help Individuals and Businesses Who Give to Charity

The IRS has highlighted four temporary tax changes which are a part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). These tax changes have been designed to help individuals and businesses who give to charity before the end of this year.

Individuals who don’t itemize

Individuals who elect to take the standard deduction generally cannot claim a deduction for their charitable contributions. However, the CARES Act permits these individuals to claim a limited deduction on their 2020 federal income tax returns for cash contributions made to certain qualifying charitable organizations and still claim the standard deduction. Under this change, these individuals can claim an "above-the-line" deduction of up to $300 for cash contributions made to qualifying charities during 2020. The maximum above-the-line deduction is $150 for married individuals filing separate returns.

Individuals who itemize

Subject to certain limits, individuals who itemize may claim a deduction for charitable contributions they make to qualifying charitable organizations. These limits generally range from 20-percent to 60-percent of an individual’s adjusted gross income (AGI) and vary by the type of contribution and type of charitable organization. The CARES Act permits electing individuals to apply an increased limit, up to 100-percent of their AGI, for qualified contributions (Increased Individual Limit). The election is made on a contribution-by-contribution basis. Qualified contributions are limited to those made in cash during calendar year 2020 to qualifying charitable organizations. Individuals who would like to take advantage of the Increased Individual Limit must make their elections with their Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors.

Increased Corporate Limit for charitable contributions

The CARES Act has permitted C Corporations to apply an increased limit of 25-percent of taxable income (Increased Corporate Limit) for charitable contributions of cash they make to eligible charities during the 2020 calendar year. The maximum allowable deduction is usually limited to 10-percent of a corporation’s taxable income. C Corporations must elect application of the Increased Corporate Limit on a contribution-by-contribution basis.

Businesses donating food inventory

Businesses donating food inventory that is eligible for the enhanced deduction (for contributions for the care of the ill, needy, and infants) are eligible for increased deduction limits. For contributions made in 2020, the limit for these contribution deductions is increased from 15-percent to 25-percent. For C Corporations, the 25-percent limit is based on their taxable income. For other businesses, including sole proprietorships, partnerships, and S corporations, the limit is based on their aggregate net income for the year from all trades or businesses from which the contributions were made. A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.

In addition, the IRS has reminded both individuals and businesses that special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction. For donations of property, additional recordkeeping rules may apply, including filing a Form 8283, Noncash Charitable Contributions, and obtaining a qualified appraisal. The Service has requested taxpayers to see Publication 526, Charitable Contributions, for additional details on how to apply the percentage limits described above and a description of the recordkeeping rules for substantiating gifts to charity.

Wilson Tax Law Group, APLC (www.wilsontaxlaw.com) is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense. Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board. Wilson Tax Law Group is exclusively comprised of former IRS litigators and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division and Criminal Division.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Newport Beach and Yorba Linda, California

Tel: (949) 397-2292 (Newport Beach Office)

Tel: (714) 463-4430 (Yorba Linda Office)

The IRS is adding a cryptocurrency question to Form 1040 for 2020

Many Bitcoin owners have adopted a “Play dumb and hope for the best” strategy when it comes to taxes. But now that strategy—never a great idea at the best of times—is riskier than ever in light of a proposed change to next year’s tax forms.

The Internal Revenue Service revealed the change in a preview of the Form 1040 that every American uses to file his or her federal income tax. Now, right at the top of the form, below the address line, is a new yes or no question that asks if the filer has acquired an interest in virtual currency:

The proposed IRS change comes as the agency continues to ramp up scrutiny of Bitcoin and other cryptocurrencies. In some cases, the focus of the IRS has been criminal activity involving digital currency, while in others the agency has sought to identify those who fail to report profits from trading.

While millions of Americans own cryptocurrency accounts, a relatively small portion of them have reported income from them. In a lawsuit with cryptocurrency giant Coinbase, for instance, the IRS testified that only 807 individuals reported Bitcoin-related transactions in 2015.

In the past three years, Coinbase and other exchanges have provided more tax reporting tools, but the number of filers remains relatively small. The owner of a firm specializing in crypto taxes told the Wall Street Journal that he estimates fewer than 150,000 crypto owners filed returns last year.

According to the Journal, which first reported the new IRS form, the change to the 1040 amounts to laying “a trap” for those who would feign ignorance of the reporting requirements—and is similar to the approach the agency took to forcing Americans to disclose overseas income.

The aggressive new tactic by the IRS is likely to irk many in the cryptocurrency industry given that current tax rules consider any sale or purchase involving crypto—such as buying a cup of coffee with Bitcoin—to be a taxable event. The industry has lobbied for an exemption for transactions under $200, but the agency has said any such changes to its rules must come from an act of Congress. And while the industry has been increasing its influence in Washington, D.C., it still faces hostility from lawmakers and from the White House.

Barring any changes, the virtual currency question will appear on next year’s next forms. In 2019, the IRS did include a cryptocurrency question, but only on a form for additional income known as Schedule 1 that many Americans don’t use.

Wilson Tax Law Group, APLC (www.wilsontaxlaw.com) is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense. Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board. Wilson Tax Law Group is exclusively comprised of former IRS litigators and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division and Criminal Division.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Newport Beach and Yorba Linda, California

Tel: (949) 397-2292 (Newport Beach Office)

Tel: (714) 463-4430 (Yorba Linda Office)