Resources to Assist You

The IRS Fresh Start Initiative, or Fresh Start program, is almost 10 years old. It focuses primarily on collection policies and procedures and offers a variety of flexible payment options, streamlined payment and penalty abatement procedures and flexibility in withdrawing IRS tax liens. It includes streamlined procedures for accepting Offers in Compromise, establishing automatic installment agreements, allowing for first-time penalty abatements, and more lenient lien releases. If you meet the criteria and you’re struggling to manage your tax debt, the IRS Fresh Start Initiative is something to take advantage of.

Not all IRS installment agreements or IRS payment plans are treated equally. There are various types of “guaranteed” and “streamlined” payment plans with the IRS. A “guaranteed” installment agreement is available if you owe $10,000 or less and it is easy to apply online. You must have a previous compliance history, have filed all past-due tax returns, not used an installment agreement plan within the previous five years, and must pay the tax amount due within three years or less. If you meet these criteria, your installment agreement is “guaranteed”.

For tax debts up to $50,000, you may be eligible for a “streamlined” installment agreement. The biggest difference with “streamlined” installment agreements is that they offer a longer payment term, up to 72 months or six years.

If you owe over $50,000, your installment agreement options become a little bit more difficult to obtain. You must submit financials to the IRS so they can determine the proper installment agreement terms. This is where your negotiation becomes more difficult and it is advisable that you seek professional legal assistance.

Finally, there is an opportunity for a “Partial Pay” installment agreement. This is basically a “tiered” approach to paying your tax debt over time. It involves paying less on the front end and increasing tiered payments in later years. The IRS CSED becomes particularly important in “partial pay” in installment plans. The “partial pay” installment option requires careful negotiation and it is advisable that you seek professional legal assistance. “Currently Not Collectible” is also an option if you cannot currently pay your tax debt at all. Also, expect the IRS to file a federal tax lien to guarantee its debt collection and protect its interests.

We have all heard of the Offer in Compromise program, where the taxpayer pays less than he or she owes in full settlement of their tax debt. There are three different types of Offers in Compromise. One is “Doubt as to Liability”, which involves a situation where there is doubt as to whether the taxpayer is liable for the underlying tax liability. The most common Offer in Compromise is “Doubt as to Collectability”. This type of Offer in Compromise is by far the most common; however, there is a third type. It is called an “Effective Tax Administration” Offer in Compromise. This is a situation where a taxpayer may have the means to full-pay the tax debt, but compelling public policy or equity considerations provide a basis for accepting less than the full amount of tax owed. A situation where, due to exceptional circumstances, collecting the tax in-full would undermine the public’s confidence that the tax laws are being administered in a fair and equitable manner.

For example, despite the ability to full-pay, a bedridden elderly grandmother living primarily off Social Security and a modest retirement pension may be a good candidate for an “Effective Tax Administration” Offer in Compromise. Her retirement pension could pay the tax owed, but it would be inequitable to expect her to deplete her modest pension to pay the tax in-full. In this situation, the IRS might find that there are compelling reasons and an inherent inequity to make her pay the tax liability in-full – given her life circumstances. This is by far the most delicate Offer in Compromise negotiation. It can be very difficult to convince the IRS that public policy and compelling equity factors exist. It sometimes involves using technical analysis, like life expectancy actuarial tables and economic forecasts.

If you are under investigation for, or have been assessed, a civil penalty for your company’s nonpayment of employment tax, you know how devastating the Trust Fund Recovery Penalty can be. If the IRS determines you are a “Responsible Person” for the nonpayment of employment tax, you will be assessed a Trust Fund Recovery Penalty under IRC 6672. The penalty is assessed against any person required to collect, account for, and pay over employment taxes held in trust for the benefit of the IRS. You must have “willfully” failed to perform those duties. The penalty is equal to the total amount of employment or excise tax evaded, not collected, or not accounted for and paid over.

The Trust Fund Recovery Penalty, or 6672 penalty, is a matter of status, duty, and authority. It can apply to officers or employees of a corporation, partners or employees of a partnership, corporate directors or shareholders, employees of a sole proprietorship, limited liability company (LLC) members, managers or employees, and others.

There are multiple factors in determining “responsibility”, including: the ability to exercise independent judgment over financial affairs of the business, owning stock or membership interests in the business, the authority to sign checks, and many other “responsibility” factors.

The IRS must also establish “willfulness” however. Willfulness means intentional, deliberate, voluntary, reckless, knowing acts, as opposed to accidental. No evil intent or bad motive is required. To show willfulness, the IRS generally must demonstrate that a Responsible Person was aware, or should have been aware, of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. The defense of the Trust Fund Recovery Penalty is a delicate noneegotiation, often times involving legal research and witness preparation. An inadvertent admission can easily destroy a defense.

Cryptocurrency and Estate Planning are not normally used in the same sentence. But given the popularity of cryptocurrency, it is becoming necessary to account for digital assets within estate planning documents. There are several key reasons why “traditional” estate planning documents fail to adequately address cryptocurrencies. It is a new asset class and old “boilerplate” language just doesn’t capture the nuances of cryptocurrency.

The biggest failing is the drafting itself. Assuming the Trustee or Executor (“Fiduciary”) even knows of the existence of the Decedent’s cryptocurrency, he or she must be able to access it and administer it. Estate planning documents should explicitly permit Fiduciaries to “access” the Decedent’s digital devices, such as laptops, cell phones and digital storage devices. These devices may have information about cryptocurrencies owned by the Decedent at death. Even if the Fiduciary has access to “private” keys, without the properly drafted permissions a search through digital devices, online platforms and even the “use” of the private keys may violate federal or state privacy laws, terms of service agreements, or computer fraud and data protection laws. Digital permission clauses should be drafted with precision.

Another drafting concern involves competent administration. Many corporate Fiduciaries may not administer cryptocurrency and may not have the ability to be a custodian. To prevent responsibilities from falling into the lap of an inept Fiduciary, “carve-outs”, or bifurcation, are important drafting considerations. For example, a corporate Fiduciary may be designated to administer the Trust generally; but a drafter might carve-out authority for a “Special” Trustee to administer cryptocurrency investment decisions and digital storage. The same could be true inside Trusts that do not utilize corporate Fiduciaries. The key is to bifurcate competent Fiduciaries to handle specific tasks. One to manage general administration and another, “Special” Fiduciary, to handle digital duties – one who is preferably digitally savvy.

Yet another drafting concern involves Fiduciary limitations. Cryptocurrencies are generally volatile, and many investors take “hold” positions despite that volatility. Because of this, a well-drafted Trust should indemnify Fiduciaries and release them from any duty to diversify investments. If not, non-diversification may run afoul of the Uniform Prudent Investor Act. Failure to draft around it may result in a Fiduciary administrating the Trust inconsistent with the Grantor’s desires – out of fear of legal exposure. Another idea is to draft a provision granting the Fiduciary the authority to retain (or “hold”).

Successor Trusteeship is also problematic and quite frankly, dangerous. It is not good practice to pass cryptocurrency from one “former” Fiduciary to a new “Successor” Fiduciary in soft wallets or on exchanges. This is because once the “former” Fiduciary knows the private keys, he or she can, if accessed, fully use the cryptocurrency and fears of theft arise. If a theft were to occur, there is no backing by a centralized authority to help rectify a loss. In a sense, it is just hard cash. One solution is to pass down the cryptocurrency – from one Fiduciary to the other – through “cold” storage.

On the cold storage device, Fiduciaries can create multiple wallets with different passphrases. Upon a change in Fiduciaries, the “Successor” Fiduciary can create an empty wallet and transfer the cryptocurrency to it with a new passphrase wallet. This is a way to transfer ownership from a “Former” Fiduciary to a “Successor” Fiduciary without the “Former” Fiduciary retaining the passcode and full access to the cryptocurrency. In effect, there is a changing of wallets with different passphrases to protect the cryptocurrency and the private keys. A memorandum memorializing the transfer of the cold storage device is also advisable – just as one might memorialize the transfer of a work of art.

Finally, all the above presupposes “knowledge” of the cryptocurrency’s existence. It is advisable to alert Fiduciaries now that crypto assets are owned. It is possible for a Fiduciary to discover ownership – for example, cryptocurrency apps on a cell phone – but it is much more difficult. There is no centralized bank to send as inquiry to. Plus, disclosure of ownership alone is not enough. A Fiduciary must know where to find the private keys. Without the private key, transferability, management, and true ownership of the crypto assets is not possible. This is where choosing a trusted person to act as a “digital” Fiduciary is critically important. It is akin to giving someone the code to your safe.

Some other practice points:

When funding an Irrevocable Trust with cryptocurrency, it is important to prepare a contemporaneous memorandum recording the transfer. That memorandum should record amounts, dates, times, digital transaction codes and FMV. It should also ensure that the Donor has not retained any control over the transferred cryptocurrency – for example, allowing only the Fiduciary access to the cold storage device and private keys. The memorandum is important because – to date – there is no authoritative guidance on funding Trusts with cryptocurrency, nor any direction on how such transfers should be memorialized for tax and asset protection purposes. The memorandum should be signed and dated with two witnesses present.

When gifting crypto assets, best practice includes getting an appraisal of the FMV of the cryptocurrency being gifted and executing a contemporaneous memorandum that includes details of the gift. In fact, two memorandums are recommended. One is prepared by the Donor. His or her memorandum might include the date and time of the transfer, digital transaction codes, the Donor’s basis in the gift, the FMV of the gift at the time of the transfer and the recipient’s information. The second memorandum should be a memorandum of acceptance of the gift by the Donee. The import is to evidence the Donor’s intent to give up control or dominion over the cryptocurrency and to identify that the gift is complete. If the gift is being made to a charitable organization, ensure the gift meets the requirements of IRC § 170(f) (to it qualify for an income tax charitable deduction).

These are just a few practice points and drafting considerations when dealing with crypto assets. Drafters should not assume dealing with cryptocurrency is just like dealing with other financial assets inside an estate plan. They simply are not. It is an entirely new asset class with distinct characteristics much different than other financial assets. Competent estate planning drafting should accommodate those differences.

The U.S. Department of Justice recently published its Cryptocurrency Enforcement Framework report describing its view of the types of threats cryptocurrencies pose, the tools the government will use to confront those threats, and some of the challenges with cryptocurrency enforcement. Here is a listing of some of the federal statutes that may be used in the cryptocurrency world:

• Wire Fraud – scheme to defraud by electronic means
• Money Laundering – scheme to conceal the origin of funds used for criminal activities
• Bank Secrecy Act – most commonly, failure to conduct “Know Your Customer” due diligence, which is a failure to implement proper anti-money laundering procedures
• Operating an Unlicensed Money Service Business – where a company fails to comply with the registration, licensing, and regulatory requirements for engaging in the money transmission       services business
• Securities and Commodities Fraud – knowingly executing, or attempting to execute, a scheme to defraud any person in connection with any commodity or any option on a commodity for future     delivery
• Tax Evasion – willful attempt to evade or defeat any tax imposed by the Internal Revenue Code

In addition to the Department of Justice, here are a list of government agencies who may also investigate and prosecute cryptocurrency crimes:

• FinCEN, Financial Crimes Enforcement Network, U.S. Department of the Treasury
• OFAC, Office of Foreign Assets Control (OFAC), U.S. Department of the Treasury
• OCC, Office of the Comptroller of the Currency (OCC), U.S. Department of the Treasury
• SEC, Securities and Exchange Commission
• CFTC, The Commodity Futures Trading Commission
• IRS, Internal Revenue Service
• Other state agencies and international consortiums

The enforcement arm of the U.S. Government is far-reaching. And given the new crypto focus, we can anticipate enforcement activity now and for years to come.

Can I dispute IRS penalties?

Yes, the IRS may waive penalties on the following grounds:

• Reasonable Cause;
• Administrative Waiver; or
• Statutory Exception.

What do the different grounds mean?

Reasonable Cause can mean a number of things:

• You exercised ordinary business care and prudence but were nonetheless unable to file or pay on time;
• You had matters beyond your control that left you unable to file or to determine the amount of deposit or tax due;
• You didn't receive the necessary financial information;
• You didn’t know you needed to file a tax return even though you made efforts to find out;
• You had a death in your immediate family;
• You or a member of your immediate family suffered a serious illness that kept you from handling your financial matters;
• You lost your tax documents in a fire or some other disaster.

This list is not exhaustive, but it gives you an idea of some the situations the IRS will consider. Other situations may also qualify for reasonable cause relief, however. The crux of any inquiry is: you did what any reasonable taxpayer would do, but because of some event or circumstances beyond your control you were unable to comply. If your situation fits that scenario, then you ask for a penalty abatement and be sure to request it in writing.

An Administrative Waiver is basically the IRS offering you a one-time forgiveness. First-time abatement procedure is just one example. The IRS may remove penalties under its First-Time Abatement policy if:

• You have no penalties for the 3 tax years prior to the tax year in which you received a penalty;
• You are filing compliant; and
• You have paid, or arranged to pay, any tax due (you are paying compliant).

Less common, but another example of an administrative waiver involves a taxpayer’s reliance on advice from the IRS. If you received incorrect verbal advice from the IRS, you may qualify for administrative relief of penalties. If you received incorrect written advice from the IRS, you may qualify for a statutory exception to the failure to file and/or the failure to pay penalties. If you feel you were charged a penalty because of erroneous written advice you received from the IRS, you would typically file a Form 843, Claim for Refund and Request for Abatement, to request penalty relief based on incorrect written advice from the IRS.

What if the IRS denies my Penalty Abatement Request?

You generally have appeals rights with penalty waiver denials and can request a conference or hearing before the IRS Office of Appeals. You typically have 30 days from the date of the penalty rejection letter to file your request for an appeal. IRS Appeals has greater latitude and wider discretion in granting penalty abatements. If you have grounds, you should always appeal a penalty denial to IRS Appeals.

How much are IRS penalties?

IRS penalties are high. Here is an overview of the penalty regime: IRS Penalties.