U.S. taxpayers who own foreign investments must meet certain requirements when reporting accounts and other assets to the IRS. A Report of Foreign Bank and Financial Accounts, commonly known as the FBAR, must be filed for each year in which a person has a financial interest in one or more accounts outside of the United States, and the aggregate value of these accounts is at least $10,000. Failure to report applicable accounts on an FBAR can result in significant penalties, and due to a recent court ruling, these penalties may be even higher for taxpayers who fail to report multiple accounts.

Appeals Court Addresses Non-Willful FBAR Penalties

A recent case heard by appellate judges in the Fifth Circuit addressed penalties for non-willful violations of the requirement to file an FBAR. Non-willful violations usually involve cases in which a taxpayer failed to file an FBAR or report one or more accounts because they were not aware of their requirements. The current maximum penalty for a non-willful violation is $12,921, and this amount is adjusted every year based on inflation.

Previously, courts that have addressed non-willful FBAR violations have applied the penalty on a per-year or per-form basis. That is, a single penalty would apply for each year in which a taxpayer failed to meet their requirements. However, the Fifth Circuit reviewed the applicable laws and determined that it would be more appropriate to apply the penalty on a per-account basis. This means that for each account that a person failed to report or reported incorrectly on an FBAR, they may face a separate penalty. For those with multiple accounts who failed to meet their requirements in multiple years, the penalties may add up quickly and total a much higher amount than had been previously applied.

The first few months of the year are often known as “tax season,” since this is when taxpayers will gather the necessary financial information to file their annual tax returns. While 2021 is not over yet, it is a good idea to begin preparing to address these issues, since filing a tax return as soon as possible after the new year will allow a person to receive a tax refund more quickly. When doing so, taxpayers will want to understand the changes to tax laws and IRS policies that may affect them. Some issues to be aware of include:

• Child Tax Credit - For 2021, the amount of the Child Tax Credit was increased to $3,000 or $3,600 for children 5 years old or younger. However, the amount of the credit is reduced for taxpayers who earn more than $75,000 when filing a single tax return, $112,500 when filing as head of household, and $150,000 for married couples who file jointly. In addition, the IRS began making advance cash payments of the Child Tax Credit to parents between July and December of 2021. Taxpayers can claim any remaining amount of the Child Tax Credit that had not been paid. If a person received payments totaling more than they will be able to claim on their tax return for 2021, they may need to repay some or all of the excess amount.

• Child and Dependent Care Tax Credit - The amount of the credit that a parent can claim for expenses related to the care of a child under the age of 13 has increased for 2021. This credit may be applied to $8,000 in expenses for one child or $16,000 for multiple children. The maximum percentage that may be applied to these expenses has been increased to 50 percent, and this percentage may be used by families who earned under $125,000 in 2021. Lower percentages will apply for families who earned more than $125,000 but less than $438,000.

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There are a variety of reasons why the IRS may choose to perform a tax audit on a business. While some audits may be performed as a matter of routine, others may be triggered by discrepancies on tax returns or the claiming of certain types of deductions or business losses. Business owners will want to understand the procedures followed during an audit and the types of documents and information the IRS will consider. By working with a tax law attorney, a business can determine the best ways to meet the IRS’s requirements and avoid or minimize its potential penalties.

Records and Documents the IRS May Request During an Audit

In many cases, audits of businesses will be conducted by mail, although there are some situations where the IRS will choose to perform a field audit in which an agent will visit a business and review information in-person. During an audit, the IRS will review certain types of records to determine whether there are any discrepancies between the business’s finances and what was reported on a tax return. The IRS may ask a business to provide multiple different types of records, including:

• Financial records - The IRS will review a business’s books to address any issues related to earnings, expenses, profits, and losses. Additional documents may also be provided to verify this information, such as bills or receipts for business expenses, purchase records for equipment or materials, or canceled checks for payments made to vendors, suppliers, or contractors.

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In today’s digital world, there are a multitude of lucrative opportunities for investors. Recently, many people have been able to make significant gains by investing in non-fungible tokens, or NFTs. These digital tokens use blockchain technology, similar to what is used for cryptocurrency, and they allow a person to maintain or transfer ownership of certain types of intangible assets, such as digital images, videos, or video game characters. As the buying, selling, and trading of NFTs has increased, the IRS has taken notice, and taxes will apply to these transactions. NFT creators and owners will need to be sure to understand what types of taxes they may be required to pay when engaging in these types of transactions.

Taxes on Digital Transactions

While the IRS has not yet issued guidance on how transactions involving NFTs will be taxed, investors will most likely be able to avoid potential penalties by treating these transactions the same as those involving virtual currencies. Since NFTs are often purchased with or traded for cryptocurrency, buyers and sellers may also need to address additional tax-related issues during these transactions. 

If an NFT is purchased using virtual currency, the buyer may need to report a gain or loss in the value of the currency. For example, if a person purchased a certain amount of virtual currency for $500, and the currency was valued at $1,000 when they traded it for an NFT, they will need to recognize a capital gain of $500.

Property owners in the state of California are often subject to high property taxes. Fortunately, while a home or commercial property may increase in value, California laws limit the amount by which property taxes can be increased. Each year, property taxes cannot increase by more than 2 percent, regardless of how the value of the property has changed. However when ownership of property is transferred, this may trigger a reassessment of property taxes based on the property’s current market value, and the new owner may be required to pay higher taxes than the previous owner. In cases where the parties to a transaction did not fully understand the tax consequences of a transfer of ownership, a deed may be rescinded, ensuring that property taxes will revert back to their previous levels.

Requirements for Deed Rescission

A deed rescission will return ownership of property to the previous owner as if the sale or transfer of property had never occurred. To be legally valid, a deed rescission must be mutual, meaning that all parties involved in the transaction must consent to the rescission. A rescission must be performed within a reasonable amount of time. Since each situation is unique, rescissions will be handled on a case-by-case basis, and a County Assessor will determine whether a rescission was completed promptly and within a reasonable time period. An assessor may look at factors such as whether the parties received benefits prior to the rescission, including earning income through ownership of the property.

All parties involved in a rescission must be restored to the position they were in before the transaction took place. Any payments received must be refunded, or other property received in exchange for real estate must be returned to the original owner. An assessor may look at different forms of evidence to determine whether the parties were restored to the status quo, such as bank records showing that funds were transferred or tax returns that demonstrate that the proper party received income from their ownership of the property.