The Six Leading Tax Stories of Q1 2023 | International Wealth Tax Advisors

From NFTs to the Dirty Dozen, tax havens to FBAR, policymakers had their hands full during the first three months of 2023. What were the most impactful tax stories of the first quarter, and how will they impact taxpayers?

1 – NFTs Back in the Spotlight

The Treasury Department and the Internal Revenue Service announced they would solicit feedback for upcoming guidance regarding the tax treatment of a nonfungible token (NFT) as a collectible under the tax law. The IRS is requesting comments on the treatment of NFTs as collectibles and describes how the agency intends to determine whether an NFT is a collectible until further guidance is issued.

The plan is for the IRS to treat some NFTs in the same manner as it taxes tangible collectibles such as artwork or precious metals. Taxpayers have until June 19 to comment on the proposal. The IRS currently treats NFTs and cryptocurrency as property for federal income tax purposes, according to the agency’s website.

2 – The 2023 Dirty Dozen

Every year, the IRS lists 12 top tax scams as a warning to tax-paying individuals and businesses. For 2023, Employee Retention Credits have been added to the annual Dirty Dozen list of tax scams.

Employee Retention Credits evolved during the pandemic and are a refundable tax credit for businesses that continued to pay employees during COVID-19 closures or had significant declines in gross receipts from March 13, 2020 – Dec. 31, 2021. Scammers have utilized multiple forms of media to entice businesses to con ineligible people to claim the credit and in turn, gather their personal and financial information.

Other scams highlighted by the tax agency include phishing and smishing

— which uses text message apps to try and scam individuals, false fuel tax credit claims, and fake charities.

3 – Increasing Tax Haven Transparency

Introduced in early March, the Disclosure of Tax Havens and Offshoring Act seeks to provide transparency around corporations’ use of tax havens and incentives to offshore jobs. The bill would require public companies to disclose their financial reporting on a country-by-country basis in an effort to improve investor education about the companies they invest in, in addition to employees and profits for each country where they conduct operations.

4 – SCOTUS FBAR Decision is Positive for Taxpayers

FBAR, or Foreign Bank and Financial Accounts, compliance demands that U.S. citizens report money and assets in non-U.S. banks and financial accounts, no matter how great or small the amount. The FBAR is submitted to FinCEN, the U.S. Treasury Department’s Financial Crimes and Enforcement Network. Failure to comply, as imposed by Section 5321(a)(5) of the Bank Secrecy Act, authorizes the Treasury to impose a civil penalty “not to exceed $10,000 for any non-willful failure to file FBARs.” Recent Supreme Court decisions have changed the rules in favor of the taxpayer.

The background behind the Supreme Court decision began with a non-willful IRS penalty against Mr. Bittner in the amount of $2.72 million, which covered the period from 2007-2011, and was based on a “per account” penalty calculation. In response, Bittner argued that the penalty should be $50,000, or $10,000, for each year the FBAR report was not filed.

After multiple back and forth lower court decisions, the case went to the Supreme Court. Then in early March, the U.S. Supreme Court issued its ruling in a 5-4 decision that non-willful foreign bank and financial accounts (FBAR) penalties should be imposed on a per-form basis as opposed to a per-account basis. By limiting penalties for non-willful FBAR violations, the decision brings years of dispute between taxpayers and the IRS to a close and could potentially save taxpayers a significant amount of money.

For more on FBAR compliance and FBAR lower and high court cases, see our previous articles on the NTAS Report, and the Bittner and Toth cases.

5 – Fiscal 2024 “Green Book” Contains Significant Tax Changes

The Green Book, or the General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposal, is released annually by the Treasury Department and attempts to explain the Administration’s proposed fiscal year budget.

The President’s proposed budget had a number of significant changes for wealthy individuals as well as corporations, including:

• Increase in the marginal top tax rate for individuals to 39.6%
• Increase of the corporate income tax rate from 21 percent to 28 percent (effective 2023)
• Quadruple the stock buyback tax implemented in the Inflation Reduction Act from 1 percent to 4 percent (effective 2023)
• Increase the global intangible low-taxed income (GILTI) tax rate from 10.5 percent to 21 percent, calculate the tax on a jurisdiction-by-jurisdiction basis, and revise related rules (effective 2023)
• Repeal the 37.5% tax rate on foreign-derived intangible income (FDII), bringing it to 21.875%

6 – Keeping Innovation in the US

The Keep Innovation in America Act, co-sponsored by U.S. Rep. Patrick McHenry (R-N.C.) and Ritchie Torres (D-N.Y.), is the latest legislation looking at the digital assets industry and its ecosystem. The bill’s authors call it a “legislative fix,” aimed to clarify Section 80603 of the Infrastructure Investment and Jobs Act. If passed, the consequences for the cryptocurrency financial sector will be dramatic.

For instance, the Act would narrow the definition of a crypto broker for tax purposes, clarify the intent on defining a “digital asset,” and study the impact of expanding the definition of cash for reporting purposes.

What’s Next?

While policymakers already have their plates full, more is in store for the rest of 2023. Most notably, the 15% corporate minimum tax, which goes into effect this year and applies to U.S.-based companies that report income to shareholders averaging at least $1 billion over three years.

The tax and regulatory environment is constantly evolving and requires expert advice to navigate the ever-changing labyrinth of tax laws and codes affecting both domestic and foreign-based U.S. taxpayers.Watch this space for updates as new issues and resolutions come into focus.