Tools To Help Crypto Currency Traders Prepare Their Tax Returns

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Tools To Help Crypto Currency Traders Prepare Their Tax Returns

After years of analyzing data from third parties involved in the cryptocurrency exchanges, the IRS announced in a press release on July 26, 2019 that it has started sending letters to cryptocurrency owners advising them to report their cryptocurrency transactions and pay their taxes. More than 10,000 taxpayers have been identified by IRS as being involved in cryptocurrency transactions but who the IRS believes may not have been compliant in reporting these transactions on their tax returns.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

All crypto sells, conversions, payments, donations, and earned income are reportable by U.S. taxpayers.  Fortunately, there are tools available that can make reporting easier.

STEP ONE: SCHEDULING YOUR 2019 CRYPTO CURRENCY TRANSACTIONS

Check out the tax tools below that can help you keep records of your crypto transactions to get you ready for tax return preparation: Beartax, Bittax Blox, Cointracker, Cointracking, Cryptotax, Cryptotrader, Koinly, Tokentax and Zenledger.

STEP TWO: SEEING A TAX PROFESSIONAL

Once you have all of your crypto records on hand, you should take them to a tax professional who can help you file your taxes.  While you may be tempted to prepare your taxes on your own using tax preparation software, you should see a tax professional as not all crypto transactions are taxable.  You should also see a tax professional if you were not compliant in prior years.

The 2019 Form 1040 Makes It Harder For U.S. Taxpayers To Avoid Non-compliance Or Claim Ignorance.

Starting with the 2019 Form 1040, Schedule 1, Additional Income And Adjustments To Income, includes the following checkbox question:

At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?   ◊ Yes            ◊ No

Taxpayers who file Schedule 1 to report income or adjustments to income that can’t be entered directly on Form 1040 will now be required to check the appropriate box to answer the virtual currency question. Taxpayers do not need to file Schedule 1 if their answer to this question is NO and they do not have to file Schedule 1 for any other purpose. This requirement is similar to how the IRS includes questions on Schedule B inquiring whether a taxpayer has foreign bank accounts.

Taxpayers who answer “no” and for who the IRS later determines should have answered “yes” could face civil or criminal penalties and it could affect their success in having penalties abated for reasonable cause.

Taxation Of Cryptocurrency

Cryptocurrency transactions are apparently wildly taxable – far more so than investors may think. Although the IRS has not issued much formal guidance, the position of IRS is that any transaction involving virtual currency can trigger a taxable event including air drops and fork transaction as well as conversions or trades from one virtual currency to another virtual currency.

The IRS in 2014 issued Notice 2014-21 stating that it treats crypto currency as property for tax purposes. Therefore, selling, spending and even exchanging crypto for other tokens all likely have capital gain implications. Likewise, receiving it as compensation or by other means will be ordinary income. This notice has since been supplemented by Revenue Ruling 2019-24 and frequently asked questions (FAQ’s).

Some would think that if bitcoin is property, trades should be tax deferred under the like-kind changes rues of I.R.C. §1031. Under that theory someone who owned Bitcoin could diversify their holdings into Ethereum or Litecoin, and plausibly tell the IRS it created no tax obligations. Unfortunately, the new Tax Cuts & Jobs Act of 2017 does away with that loophole making it clear that “like kind exchanges” which lets people swap an asset for a similar one without triggering a tax obligation are not available for non-real estate assets.

While Bitcoin receives most of the attention these days, it is only one of hundreds of crypto currencies. Everything discussed with regard to bitcoin taxation applies to all crypto currencies.

Here are the basic tax rules followed by IRS on specific crypto currency transactions:

  • Trading crypto currencies produces capital gains or losses, with the latter being able to offset gains and reduce tax.
  • Exchanging one crypto currency for another — for example, using Ethereum to purchase an altcoin — creates a taxable event. The token is treated as being sold, thus generating capital gains or losses.
  • Receiving payments in crypto currency in exchange for products or services or as salary is treated as ordinary income at the fair market value of the coin at the time of receipt.
  • Spending crypto currency is a tax event and may generate capital gains or losses, which can be short-term or long-term. For example, say you bought one coin for $500. If that coin was then worth $700 and you bought a $700 gift card, there is a $200 taxable gain. Depending on the holding period, it could be a short- or long-term capital gain subject to different rates.
  • Converting a crypto currency to U.S. dollars or another currency at a gain is a taxable event, as it is treated as being sold, thus generating capital gains.
  • Air drops are considered ordinary income on the day of the air drop. That value will become the basis of the coin. When it’s sold, exchanged, etc., there will be a capital gain.
  • Mining crypto currency is considered ordinary income equal to the fair market value of the coin the day it was successfully mined.
  • Initial coin offerings including certain forks do not fall under the IRS’s tax-free treatment for raising capital. Thus, they produce ordinary income to individuals and businesses alike.

Given the limited guidance by IRS, there are still tax positions that can be advocated or structured so that taxpayers dealing with crypto currency can defer gains and minimize taxes. That is why it is essential you seek qualified tax counsel.

Penalties For Filing A False Income Tax Return Or Under-reporting Income

Failure to report all the money you make is a main reason folks end up facing an IRS auditor. Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

Criminal Fraud – The law defines that any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

And even if the IRS is not looking to put you in jail, they will be looking to hit you with a big tax bill with hefty penalties.

Civil Fraud – Normally the IRS will impose a negligence penalty of 20% of the underpayment of tax (Code Sec. 6662(b)(1) and 6662(b)(2)) but violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty. In lieu of the 20% negligence penalty, the civil fraud penalty is 75% of the underpayment of tax (Code Sec. 6663). The imposition of the Civil Fraud Penalty essentially doubles your liability to the IRS!

What Should You Do?

The IRS has not yet announced a specific tax amnesty for people who failed to report their gains and income from Bitcoin and other virtual currencies but under the existing Voluntary Disclosure Program, non-compliant taxpayers can come forward to avoid criminal prosecution and negotiate lower penalties.

With only several hundred people reporting their crypto gains each year since Bitcoin’s launch, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns.

And now that like–exchange treatment is prohibited on non-real estate transactions that occur after 2017, now is the ideal time to be proactive and come forward with voluntary disclosure to lock in your deferred gains through 2017, eliminate your risk for criminal prosecution, and minimize your civil penalties.  Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the bitcoin tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.

 

Could California Finally Get Cannabis Tax Reform?

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Could California Finally Get Cannabis Tax Reform?

In a previous blog we reported that the California Department of Tax and Fee Administration (CDTFA) which oversees the reporting and collection of taxes for the California cannabis industry after conducting an analysis of statewide market data to determine the average mark-up rate between the wholesale cost and the retail selling price of cannabis and cannabis products, is increasing cannabis taxes effective January 1, 2020 by setting the mark-up rate at 80 percent.

Cannabis Excise Tax

The 15 percent cannabis excise tax is based on the average market price of the cannabis or cannabis products sold in a retail sale. The mark-up rate is used when calculating the average market price to determine the cannabis excise tax due in an arm’s length transaction. In an arm’s length transaction, the average market price is the retailer’s wholesale cost of the cannabis or cannabis products plus, the mark-up rate determined by the CDTFA. In a non-arm’s length transaction, the average market price is the cannabis retailer’s gross receipts from the retail sale of the cannabis or cannabis products.

Cannabis Cultivation Tax

As required by the Cannabis Tax Law, effective January 1, 2020, the cultivation tax rates reflect an adjustment for inflation. The adjusted rates for each category shown below will be reflected on the monthly and quarterly cannabis tax returns beginning January 1, 2020.

CANNABIS CATEGORY

CURRENT RATE

RATE EFFECTIVE 1/1/2020

Flower per dry-weight ounce

$9.25

$9.65

Leaves per dry-weight ounce

$2.75

$2.87

Fresh cannabis plant per ounce

$1.29

$1.35
  • On or after January 1, 2020, the rates apply to cannabis that a cultivator sells or transfers to a manufacturer or distributor.
  • Cultivator cannabis sales or transfers made prior to January 1, 2020, will use the current rate listed above.
  • All fresh cannabis plants must be weighed within two hours of harvesting.

If you are a cannabis retailer, you are required to collect the cannabis excise tax from your customers on each retail sale of cannabis or cannabis products starting January 1, 2018, and pay the excise tax to a distributor. Distributors are liable for paying the cannabis taxes to the CDTFA.

How This Impacts The Black Market

Many believe that the CDTFA’s decision to increase taxes on compliant cannabis operators while still mandating compliance with State and local regulations will widen the price disparity gap between cannabis products sold in the black market vs. cannabis products sold in the legal market. But with the State stepping up its enforcement efforts to uncover and prosecute illegal cannabis operators, the State is hoping to eliminate this discrepancy by eradicating non-compliant operators.

How Governor Newsom Is Looking To Reform This Area

We reported in a blog, Assembly Bill 37 signed into law last year by Governor Gavin Newsom that will approve cannabis companies for tax deductions that have otherwise been denied them under IRC Section 280E. 

On January 10, 2020, Governor Newsom released California’s proposed budget for 2020-2021, which includes proposals requested by the cannabis industry to streamline the regulatory, licensing, and tax process.  

These proposals notably include the following:

  • Consolidating the three licensing authorities (BCC, MCSB, CalCannabis Cultivation) into The Department of Cannabis Control by July 2021 with enforcement responsibilities against the regulated and illicit markets.
  • Proposing to move responsibility for cultivation tax collection to first distributor only (no final distributor or manufacturer). 
  • Proposing to move excise tax collection from the distributor to retailer which like sales taxes establishes liability on the “point of sale”.
  • Dedicating to work with industry on tax reform and reduction including the number of taxes and tax rates to simplify the system and to support a stronger, safer legal cannabis market.

Click here for the governor’s full 2020-2021 Budget Summary.

What Should You Do?

While the Governor’s support for reform is most welcomed, legislators must still approve of these changes which would not go into effect immediately so you still need to start your cannabis business on the right track under existing law.  Protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

When Facing An IRS Tax Audit, How Do Marijuana Businesses Explain To IRS A Cash Stash Accumulated From The Past?

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With the proliferation of licensed cannabis businesses sprouting in the State Of California and a growing number of States, a lot of cannabis business will be filing tax returns with the IRS for the first time. But beware, the IRS is well aware that successful cannabis businesses don’t just sprout overnight and now that your business is on the radar screen you can bet that the IRS will be inquiring how you accumulated all that cash before 2019. We refer to this accumulation of cash as “legacy cash”.

Legacy Cash Is A Big Problem For Successful Cannabis Businesses

In the early days of cannabis operations, the biggest issue was what to do with all the cash? Cash is bulky and risky, but you have to do something with it and cannabis entrepreneurs can’t just take it to their local bank and make a deposit like every other kind of business can. So what have cannabis entrepreneurs been doing for all these years? For the most part they are keep the cash and where that income was never reported on prior tax returns, they now run the risk of being caught by IRS and prosecuted for tax evasion.

Yes – Marijuana Businesses Have to Report Income To IRS And Pay Taxes!

While the sale of cannabis is legal in California as well as in a growing number of states, cannabis remains a Schedule 1 narcotic under Federal law, the Controlled Substances Act. As such businesses in the cannabis industry are not treated like ordinary businesses. Despite state laws allowing cannabis, it remains illegal on a federal level but cannabis businesses are obligated to pay federal income tax on income because I.R.C. §61(a) does not differentiate between income derived from legal sources and income derived from illegal sources.

The Sixteenth Amendment of the U.S. Constitution prohibits the Federal government from taxing “gross receipts”. In Edmondson vs. Commissioner, 42 T.C.M. (CCH) 1533 (T.C. 1981), the Tax Court decided that Jeffrey Edmonson, self-employed in the trade or business of selling amphetamines, cocaine, and cannabis, was permitted to deduct his business expenses resulting from his trade. Discomforted by this outcome, the following year Congress enacted I.R.C. §280E, disallowing all deductions and credits for amounts paid or incurred in the illegal trafficking in drugs listed in the Controlled Substances Act.

Under I.R.C. §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Cannabis, including medical cannabis, is a controlled substance. While I.R.C. §280E disallows cannabis-related businesses to deduct “ordinary and necessary” business expenses, it would be unconstitutional for the IRS to disallow businesses to deduct Cost Of Goods Sold when calculating gross income. This concept was first applied in the Tax Court case of Olive vs. Commissioner Of Internal Revenue, 139 T.C. 19 (2012).

I.R.C. Section 280E IRS Tax Audits

It is no surprise that cannabis businesses are proliferating as more States legalize cannabis and make available licenses to grow, manufacture, distribute and sell cannabis. The IRS recognizes this and it is making these cannabis businesses face Federal income tax audits. IRC §280E is at the forefront of all IRS cannabis tax audits and enforcement of §280E could result in unbearable tax liabilities.

Proving deductions to the IRS is a two-step process:

  • First, you must substantiate that you actually paid the expense you are claiming.
  • Second, you must prove that an expense is actually tax deductible.

Step One: Incurred And Paid The Expense.

For example, if you claim a $5,000 purchase expense from a cannabis distributor, offering a copy of a bill or an invoice from the distributor (if one is even provided) is not enough. It only proves that you owe the money, not that you actually made good on paying the bill. The IRS accepts canceled checks, bank statements and credit card statements as proof of payment. But when such bills are paid in cash as it typical in a cannabis business, you would not have any of these supporting documents but the IRS may accept the equivalent in electronic form.

Step Two: Deductibility Of The Expense.

Next you must prove that an expense is actually tax deductible. For a cannabis businesses this is challenging because of the I.R.C. §280E limitation; however a cannabis business can still deduct its Cost Of Goods Sold (“COGS”). Cost of goods sold are the direct costs attributable to the production of goods.

For a cannabis reseller this includes the cost of cannabis itself and transportation used in acquiring cannabis. To the extent greater costs of doing business can be legitimately included in COGS that will that result in lower taxable income. You can be sure the IRS agents in audits will be looking closely at what is included in COGS.

Appealing An I.R.C. Section 280E IRS Tax Audit

Now if your cannabis IRS tax audit is not resolved, the results may be challenged. After the Revenue Agent has concluded the tax examination, the agent will issue a copy of the examination report explaining the agent’s proposed changes along with notice of your appeals rights. Pay attention to the type of letter that is included as it will dictate the appeals process available to you.

The “30-day letter”

The “30-day letter” gives you the right to challenge the proposed adjustment in the IRS Office Of Appeals. To do this, you need to file a Tax Protest within 30 days of the date of the notice. The Appeals Office is the only level of appeal within the IRS and is separate from and independent of the IRS office taking the action you disagree with. Conferences with Appeals Office personnel are held in an informal manner by correspondence, by telephone, or at a personal conference.

The “Notice Of Deficiency”

If the IRS does not adopt your position, it will send a notice proposing a tax adjustment (known as a statutory notice of deficiency). The statutory notice of deficiency gives you the right to challenge the proposed adjustment in the United States Tax Court before paying it. To do this, you need to file a petition within 90 days of the date of the notice (150 days if the notice is addressed to you outside the United States). If you filed your petition on time, the court will eventually schedule your case for trial at the designation place of trial you set forth in your petition. Prior to trial you should have the opportunity to seek a settlement with IRS Area Counsel and in certain cases, such settlement negotiations could be delegated to the IRS Office Of Appeals. If there is still disagreement and the case does go to trial, you will have the opportunity to present your case before a Tax Court judge. The judge after hearing your case and reviewing the record and any post-trial briefs will render a decision in the form of an Opinion. It could take as much as two years after trial before an Opinion issued. If the Opinion is not appealed to a Circuit Court Of Appeals, then the proposed deficiency under the Opinion is final and your account will be sent to IRS Collections.

IRS Area Counsel are experienced trial attorneys working for the IRS whose job is to litigate cases in the U.S. Tax Court and look out for the best interests of the Federal government. So to level the playing field, it would be prudent for a taxpayer to hire qualified tax counsel as soon as possible to seek a mutually acceptable resolution without the need for trial, and if that does not happen, to already have the legal expertise in place to vigorously defend you at trial.

Dealing With The Cash Legacy Problem

The IRS has not yet announced a specific tax amnesty for people who failed to report their income from cannabis but coming forward under Voluntary Disclosure could result in non-compliant taxpayers avoiding criminal prosecution and lower penalties.

What Should You Do?

While more States are legalizing cannabis, risks to the cannabis industry still exist. Considering the risks of cannabis you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Getting Ready For The 2020 Tax Filing Season

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Getting Ready For The 2020 Tax Filing Season

On January 6, 2020, the Internal Revenue Service (IRS) announced that it will process 2019 tax returns beginning January 27, 2020.

April 15th Filing Deadline.

The filing deadline to submit 2019 tax returns is Wednesday, April 15, 2020.

Since the IRS will begin processing tax returns on January 27th there is no advantage to filing tax returns on paper in early January instead of waiting for the IRS to begin accepting e-filed returns.  Nevertheless, it makes sense to start organizing your information early and so when the IRS filing systems open on January 27th, you are ready to submit your tax return right away.

Refunds in 2020.

Choosing e-file and direct deposit for refunds remains the fastest way to file an accurate income tax return and receive a refund.  The IRS still anticipates issuing at least 90%of tax refunds in less than 21 days, but there are some important factors to keep in mind for taxpayers that could cause delay.  Under the Protecting Americans from Tax Hikes (PATH) Act, the IRS is required to hold refunds for tax returns which include a claim of the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until mid-February 2020. Also consider that it would still take several days for these refunds to be released and processed through financial institutions, and factoring in weekends, and the President’s Day holiday, taxpayers claiming these credits may not have actual access to their refunds until the later part of February.

The status of your tax refund can be checked directly with IRS by using the Where’s My Refund? ‎on IRS.gov and the IRS2Go phone app.

Time Limits For Keeping Your Tax Records

Even though your 2019 income tax return is processed by the IRS and a refund is issued, that does not mean the IRS can later question or audit the tax return,  In fact the Statute Of Limitations allows the IRS three years to go back and audit your tax return.  That is why it’s a good idea to keep copies of your prior-year tax returns and supporting backup documentation for at least three years.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you and if you are involved in crypto-currency, check out what a Bitcoin tax attorney can do for you.

Starting In 2020 New Worker Classification Law Takes Effect In California

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Starting In 2020 New Worker Classification Law Takes Effect In California

On January 1, 2020, Assembly Bill 5 (AB 5) went into effect and may impact whether your workers are treated as employees or as independent contractors under California law.

In 2018, the California Supreme Court adopted “the ABC test” in Dynamex v. Superior Court. Under the ABC test, a worker is considered an employee, and not an independent contractor, unless the hiring entity can demonstrate that it meets all three of the following requirements:

  1. The individual is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  2. The individual performs work that is outside the usual course of the hiring entity’s business; and
  3. The individual is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Assembly Bill (AB 5) was signed into law to codify – or write into statute – the ABC test from the Dynamex v. Superior Court decision. Under AB 5, the “ABC test” must be used to determine the appropriate classification of workers in most occupations for purposes of the Labor Code, the Unemployment insurance Code, and Industrial Welfare Commission (IWO) wage orders.

There are two exceptions to the current application of AB 5:

  1. AB 5 applies to work performed after January 1, 2020. Exceptions have specific requirements and the EDD will use the Borello common law test in these cases. View AB 5 for more details on exceptions.
  1. Additionally, AB 170 exempts newspaper distributors and carriers from the ABC test until January 1, 2021.

Federal Worker Classification Status More Complicated

Under Federal law, the determination of worker classification can be complex and depends on the facts and circumstances of each case. The determination is based on whether the person for whom the services are performed has the right to control how the worker performs the services. It is not based merely on how the worker is paid, how often the worker is paid, or whether the work is part-time or full-time.

There are three basic categories of factors that are relevant to determining a worker’s classification:

  • Behavioral control (whether there is a right to direct or control how the worker does the work),
  • Financial control (whether there is a right to direct or control the business part of the work), and
  • Relationship of the parties (how the business and worker perceive the relationship).

Generally, if you are an independent contractor you are considered self-employed and should report your income (nonemployee compensation) on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), or Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship). Most self-employed individuals will need to pay self-employment tax (comprised of social security and Medicare taxes) if their income (net earnings from self-employment) is $400 or more. Use Schedule SE (Form 1040), Self-Employment Tax, to figure the tax due.

Generally, there is no tax withholding on income you receive as a self-employed individual as long as you provide your taxpayer identification number (TIN) to the payer. However, you may be subject to the requirement to make quarterly estimated tax payments. If you do not make timely estimated tax payments, the IRS may assess a penalty for an underpayment of estimated tax. Unlike independent contractors, employees generally pay income tax and their share of social security and Medicare taxes through payroll deductions (withholding).

California Employment Development Department

The Employment Development Department (EDD) administers payroll taxes which includes all employer paid taxes, State Income Tax Withholding of employees, State Disability Insurance (“SDI”) Taxes and Unemployment Insurance (“UI”) Taxes.

The greatest impact of AB 5 is that: after January 1, 2020, workers will be considered employees unless proven otherwise. The hiring entity must show that workers meet all conditions of the ABC test in order to classify them as independent contractors, unless there is a statutory exclusion or determination of employment. AB 5 does not change how out-of-state workers are classified. You can be certain that if your business is selected for audit by the EDD, the EDD will be applying AB 5.

Generally, the EDD employment tax audits cover a three-year statutory period, comprising the 12 most recently completed calendar quarters. An audit begins with the examination of records for a test year which is generally the most recent completed calendar year. However, the examination may be expanded to include the records for the entire period covered by the audit and in some situations may extend beyond the three-year statutory period.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. Federal and State Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Riverside County Sheriff’s Office Releases Its Report Card On 2019 Illegal Cannabis Eradication Activity

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Anyone conducting business in cannabis surely knows that under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. So the risk is apparent that at any time Federal authorities could come and shut you down but don’t think that just because cannabis is legal in California, you do not have to worry about the State.

California law mandates that you can only sell cannabis if you have obtained a license to do so. These licenses being issued by the BCC. If you don’t have a license, then selling cannabis or transporting it in order to sell it is still a crime under H&S Code §11360.

Here Are The Stats –

At the beginning of 2019, Riverside County Sheriff Chad Bianco directed the Hemet Station Investigations Bureau to aggressively seek out and eradicate illegal marijuana grows in the community.   On January 2, 2020 the Riverside County Sheriff’s Office announced its 2019 Marijuana Eradication Year End Totals:

  • Served nearly 250 search warrants for marijuana cultivation,
  • Eradiated almost 280,000 plants,
  • Destroyed over 11,500 pounds of processed marijuana,
  • Over 233 tons of marijuana (with an estimated value of $466,000,000) was seized and taken to local landfills, 
  • 88 firearms and over $77,000 in cash were seized, and
  • 82 arrests were made pursuant to the service of the search warrants.

Statewide Commitment To Enforcement

In a previous blog we wrote about Governor Gavin Newsom’s promise made in February 2019 to deploy the California National Guard against marijuana grows in California. Multijurisdictional task forces have long been deployed against marijuana grows in California as we noted in the following blogs:

  • Click here on a raid that occurred in Riverside County.
  • Click here on a raid that occurred in Kern County
  • Click here on a raid that occurred in the City of Santa Rosa in Sonoma County.
  • Click here on a raid that occurred in the City of Carpinteria in Santa Barbara County.
  • Click here on a raid that occurred in Riverside County.
  • Click here on a raid that occurred in the City of Buellton.

Penalties For Selling Cannabis Without A License.

For most defendants, unlicensed sale or transport for sale of cannabis is a misdemeanor punishable by up to six months in county jail and/or a fine of up to $1,000. For defendants under 18, it is an infraction. Also, giving away or transporting for sale up to 28.5 grams of cannabis without a license is an infraction.

But the sale/transport for sale of cannabis without a license to do so is a felony for the following defendants:

  1. Defendants who have a prior conviction for one of a list of particularly serious violent felonies, including murder, sexually violent offenses, sex crimes against a child under 14, or gross vehicular manslaughter while intoxicated, or a sex crime that requires them to register as a sex offender;
  1. Defendants who have two or more prior convictions for H&S Code §11360 sale/transportation of cannabis; 
  1. Defendants who knowingly sold, attempted to sell, or offered to sell or furnish cannabis to someone under 18; or
  1. Defendants who imported or attempted or offered to import into California, or transported or attempted/offered to transport out of California for sale, more than 28.5 grams of cannabis or more than four grams of concentrated cannabis.

In any of these scenarios, black market sale or transportation for sale of cannabis under H&S Code §11360 is punishable anywhere from two to four years in jail.

Transporting cannabis without intent to sell it, or giving cannabis away, is not a crime in California so long as BOTH of the following are true:

  1. You transport or give away not more than 28.5 grams of cannabis or eight grams of concentrated cannabis, and
  1. Any people you give cannabis to are 21 years of age or older.

What Should You Do?

You can count on other county governments coordinating resources and making comprehensive strikes on unlicensed and illegal cannabis operations for the safety of the public.

Both civil and criminal penalties will apply to unlicensed operators so it is imperative that anyone cultivating, manufacturing or distributing cannabis on a commercial basis in California seeks a local and state license for their operations immediately, if they have not already done so. Protect yourself and your investment by engaging a cannabis tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Major League Baseball To Remove Cannabis From List Of Banned Substances – If You Can’t Beat Them, Then Join Them!

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Under Federal law (Controlled Substances Act 21 U.S.C. 801) cannabis is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

The federal penalties for possession of any amount of marijuana are as follows:

  • First Offense – Misdemeanor involving up to one year of incarceration and $1,000 in fines
  • Second Offense – Misdemeanor punishable by 15 days to 2 years behind bars and $2,500 in fines
  • Third and subsequent offenses – Misdemeanor or felony punishable by 90 days to 3 years of incarceration and fines of up to $5,000.

The penalties for the sale of marijuana depend on the amount of marijuana you have been accused of selling or attempting to sell:

  • Less than 50 kilograms – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 kilograms – Felony punishable by up to 20 years in prison and/or fines of up to $1,000,000
  • 100 to 999 kilograms – Felony involving 5 to 40 years incarceration and/or fines of up to $2,000,000
  • 1000 kg and up – Felony carrying a sentence of 10 years to life in prison and/or up to $4,000,000 in fines

As for the cultivation of marijuana, the federal authorities punish it on the basis of the number of plants you were caught growing:

  • Less than 50 plants – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 plants – Felony punishable by up to 20 years in prison and/or up to $1,000,000 in fines
  • 100 to 999 plants – Felony carrying a 5 to 40-year prison sentence and/or fines of up to $5,000,000
  • 1,000 plants or more – Felony involving 10 years to life in prison and/or fines of up to $10,000,000

With aggravating factors such as a trafficking activity that results in an injury or death, a sale within 1,000 feet of a school, or a case involving five grams sold to a minor, the above penalties may increase dramatically.

Major League Baseball To Remove Cannabis From List Of Banned Substances

Major League Baseball (MLB) and the MLB players union announced that they have reached an agreement to remove marijuana from the list of banned substances and will begin to treat its consumption by players in the same way that  alcohol use is handled.

The announcement stated: “Going forward, marijuana-related conduct will be treated the same as alcohol-related conduct under the Parties’ Joint Treatment Program for Alcohol-Related and Off-Field Violent Conduct, which provides for mandatory evaluation, voluntary treatment and the possibility of discipline by a Player’s Club or the Commissioner’s Office in response to certain conduct involving Natural Cannabinoids.”

Players will only face discipline for violations related to unsanctioned conduct while under the influence, rather than simply for testing positive for THC. Previously, a positive test resulted in mandatory treatment, and failure to comply was punishable by a fine of up to $35,000.

The changes will take effect beginning with 2020 Spring Training.

But despite this change in policy, the cannabis industry will still have to bear the followings risks and challenges:

Higher Taxes Still Remain

While the developments listed above are favorable for cannabis business, it still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

Reporting Of Cash Payments Still Remain

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  Also, if you are involved in crypto currency, check out what a Bitcoin Tax Attorney can do for you.

Appealing An I.R.C. § 280E IRS Tax Audit

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While the sale of cannabis is legal in California as well as in a growing number of states, cannabis remains a Schedule 1 narcotic under Federal law, the Controlled Substances Act. As such businesses in the cannabis industry are not treated like ordinary businesses. Despite state laws allowing cannabis, it remains illegal on a federal level but cannabis businesses are obligated to pay federal income tax on income because I.R.C. §61(a) does not differentiate between income derived from legal sources and income derived from illegal sources.

Taxation Of Cannabis Businesses

The Sixteenth Amendment of the U.S. Constitution prohibits the Federal government from taxing “gross receipts”. In Edmondson vs. Commissioner, 42 T.C.M. (CCH) 1533 (T.C. 1981), the Tax Court decided that Jeffrey Edmonson, self-employed in the trade or business of selling amphetamines, cocaine, and cannabis, was permitted to deduct his business expenses resulting from his trade. Discomforted by this outcome, the following year Congress enacted I.R.C. §280E, disallowing all deductions and credits for amounts paid or incurred in the illegal trafficking in drugs listed in the Controlled Substances Act.

Under I.R.C. §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Cannabis, including medical cannabis, is a controlled substance. While I.R.C. §280E disallows cannabis-related businesses to deduct “ordinary and necessary” business expenses, it would be unconstitutional for the IRS to disallow businesses to deduct Cost Of Goods Sold when calculating gross income. This concept was first applied in the Tax Court case of Olive vs. Commissioner Of Internal Revenue, 139 T.C. 19 (2012).

I.R.C. Section 280E IRS Tax Audits

It is no surprise that cannabis businesses are proliferating as more States legalize cannabis and make available licenses to grow, manufacture, distribute and sell cannabis. The IRS recognizes this and it is making these cannabis businesses face Federal income tax audits. IRC §280E is at the forefront of all IRS cannabis tax audits and enforcement of §280E could result in unbearable tax liabilities.

Proving deductions to the IRS is a two-step process:


• First, you must substantiate that you actually paid the expense you are claiming.

• Second, you must prove that an expense is actually tax deductible.

Step One: Incurred And Paid The Expense.

For example, if you claim a $5,000 purchase expense from a cannabis distributor, offering a copy of a bill or an invoice from the distributor (if one is even provided) is not enough. It only proves that you owe the money, not that you actually made good on paying the bill. The IRS accepts canceled checks, bank statements and credit card statements as proof of payment. But when such bills are paid in cash as it typical in a cannabis business, you would not have any of these supporting documents but the IRS may accept the equivalent in electronic form.

Step Two: Deductibility Of The Expense.

Next you must prove that an expense is actually tax deductible. For a cannabis businesses this is challenging because of the I.R.C. §280E limitation; however a cannabis business can still deduct its Cost Of Goods Sold (“COGS”). Cost of goods sold are the direct costs attributable to the production of goods. For a cannabis reseller this includes the cost of cannabis itself and transportation used in acquiring cannabis. To the extent greater costs of doing business can be legitimately included in COGS that will that result in lower taxable income. You can be sure the IRS agents in audits will be looking closely at what is included in COGS.

Appealing An I.R.C. Section 280E IRS Tax Audit

Now if your cannabis IRS tax audit is not resolved, the results may be challenged. After the Revenue Agent has concluded the tax examination, the agent will issue a copy of the examination report explaining the agent’s proposed changes along with notice of your appeals rights. Pay attention to the type of letter that is included as it will dictate the appeals process available to you.

The “30-day letter”

The “30-day letter” gives you the right to challenge the proposed adjustment in the IRS Office Of Appeals. To do this, you need to file a Tax Protest within 30 days of the date of the notice. The Appeals Office is the only level of appeal within the IRS and is separate from and independent of the IRS office taking the action you disagree with. Conferences with Appeals Office personnel are held in an informal manner by correspondence, by telephone, or at a personal conference.

The “Notice Of Deficiency”

If the IRS does not adopt your position, it will send a notice proposing a tax adjustment (known as a statutory notice of deficiency). The statutory notice of deficiency gives you the right to challenge the proposed adjustment in the United States Tax Court before paying it. To do this, you need to file a petition within 90 days of the date of the notice (150 days if the notice is addressed to you outside the United States). If you filed your petition on time, the court will eventually schedule your case for trial at the designation place of trial you set forth in your petition. Prior to trial you should have the opportunity to seek a settlement with IRS Area Counsel and in certain cases, such settlement negotiations could be delegated to the IRS Office Of Appeals. If there is still disagreement and the case does go to trial, you will have the opportunity to present your case before a Tax Court judge. The judge after hearing your case and reviewing the record and any post-trial briefs will render a decision in the form of an Opinion. It could take as much as two years after trial before an Opinion issued. If the Opinion is not appealed to a Circuit Court Of Appeals, then the proposed deficiency under the Opinion is final and your account will be sent to IRS Collections.

IRS Area Counsel are experienced trial attorneys working for the IRS whose job is to litigate cases in the U.S. Tax Court and look out for the best interests of the Federal government. So to level the playing field, it would be prudent for a taxpayer to hire qualified tax counsel as soon as possible to seek a mutually acceptable resolution without the need for trial, and if that does not happen, to already have the legal expertise in place to vigorously defend you at trial.

What Should You Do?

While more States are legalizing cannabis, risks to the cannabis industry still exist. Considering the risks of cannabis you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

IRS Criminal Investigation Division Releases Its 2019 Annual Report

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IRS Criminal Investigation Division Releases Its 2019 Annual Report

On December 5, 2019 the IRS released the Criminal Investigation Division’s (CI) annual report, highlighting significant successes and criminal enforcement actions taken in fiscal year ending September 30, 2019.

In issuing this report IRS Commissioner Chuck Rettig states: “CI is critical to the overall enforcement efforts of the IRS in pursuing its Mission in a fair, impartial, diligent and, where appropriate, tenacious manner. The Fiscal Year 2019 Annual Report summarizes various CI activities throughout the year but vastly understates the importance of CI to the overall IRS mission. CI supports the efforts of compliant taxpayers by visibly demonstrating the risks of noncompliance thereby helping otherwise honest taxpayers stay honest and compliant.”

According to the report, CI initiated 2,485 cases in fiscal year 2019, applying approximately 75% of its time to tax related investigations. CI is the only federal law enforcement agency with jurisdiction over federal tax crimes achieving a conviction rate of 91.2% in fiscal year 2019.

The Special Agent’s Role In The IRS Criminal Investigation Division

An IRS Special Agent works for the CI. Special Agents are duly sworn law enforcement officers who are trained to “follow the money”. They investigate potential criminal violations of the Internal Revenue Code, and related financial crimes. Unless they are working undercover they will identify themselves with credentials which include a gold badge. The same gold badge appears on their business cards. Generally, IRS Special Agents travel in pairs if they are going to interview someone. One to conduct the interview, and the other to take notes, and act as a witness if necessary.

If you are contacted by an IRS Special Agent it is because he or she is conducting a CRIMINAL investigation. It is possible that the Special Agent is only interested in you as a witness against the target of the IRS investigation. However, it is a bad idea to speak to Special Agent without a criminal tax attorney present. IRS Special Agents are highly trained financial investigators. If you are the target or subject of an IRS criminal investigation you are not going to talk your way out of it, by “cooperating”; instead you may be giving the IRS more evidence to use against you.

Even if the IRS Special Agent tells you that you are only a witness you should still consult with an experienced criminal tax attorney BEFORE speaking with an IRS agent. If you make misstatements that you think put you in a better light you could change your role from a witness into a target. The best tactic is to simply tell the Special Agent that you are uncomfortable talking to him until you have had a chance to speak with your attorney. Then ask him for his business card. In this way your tax attorney can contact the Special Agent directly, and determine the best course of action.

There are a number of statutes in the Internal Revenue Code that authorize the federal government to prosecute individuals, including those dealing with tax evasion, fraud and false statements, failure to file returns, failure to pay tax, etc. Some, like the tax evasion statute, are worded in particularly broad terms and may ensnare the unwary or careless taxpayers.

If CI recommends prosecution, it will give its evidence to the Justice Department to decide the special charges. Individuals are typically charged with one or more of three crimes: tax evasion, filing a false return, or not filing a tax return. All of which are tax fraud.

Two Special Programs Run By CI

With the avalanche of billions of data flowing to IRS, CI has been running two special programs: the International Tax Enforcement Group (ITEG), and the Nationally Coordinated Investigations Unit (NCIU). Both focus on increasing the rate of taxpayer compliance with income reporting requirements contained in the Internal Revenue Code – particularly those pertaining to the disclosure of foreign financial accounts, reporting of virtual currency transactions, and reporting transactions involving cannabis.

What Should You Do?

Very quickly a criminal investigation can turn to the worst for a targeted taxpayer so you should promptly seek tax counsel who can act proactively before the IRS does. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) protect you from excessive fines and possible jail time. Also, if you are involved in cannabis, check out how a cannabis tax attorney can help you. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Top Four Tax Errors That Can Be Costly For Small Businesses When Dealing With The IRS

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Top Four Tax Errors That Can Be Costly For Small Businesses When Dealing With The IRS

A small business owner often wears many different hats. They might have to wear their boss hat one day, and the employee hat the next. When tax season comes around, it might be their tax hat but even innocently failing to comply with tax laws, violating tax codes, or filling out forms incorrectly can leave business owners open to possible penalties and headaches from the IRS.

Being aware of common mistakes can also help tame the stress of tax time.

When it comes to the IRS, here are the top four mistakes business owners should avoid:

  1. Underpaying estimated taxes

Business owners should generally make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. If they don’t pay enough tax through withholding and estimated tax payments, the IRS can charge a penalty.

  1. Under-depositing (or failing to deposit) employment taxes

Business owners with employees are expected to deposit taxes they withhold, plus the employer’s share of those taxes, through electronic fund transfers.  If those taxes are not deposited correctly and on time, the IRS can charge penalties to the business owner.

  1. Filing late

Just like individual returns, business tax returns must be filed in a timely manner. To avoid late filing penalties, taxpayers should be aware of all IRS tax requirements for their type of business the filing deadlines.

  1. Not separating business and personal expenses

It can be tempting to use one credit card for all expenses especially if the business is a sole proprietorship. Doing so can make it very hard to tell legitimate business expenses from personal ones. This could cause errors when claiming deductions and become a problem if the taxpayer or their business is ever audited as the IRS will be looking deny deductions which are suspected to be personal.      

What Should You Do?

Consider dropping the tax hat and instead engage qualified tax representation.

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.