Santa Barbara County Police Shuts Down Illegal Cannabis Operation

Santa Barbara County Police Shuts Down Illegal Cannabis Operation

/0 Comments/in , /by

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.

State Authorities Raid Illegal Cannabis Operation In Carpinteria

The Santa Barbara County Sheriff’s Office announced in a press release that on January 31, 2019, the Santa Barbara County Sheriff’s Cannabis Compliance Team concluded a four-month investigation into a local cannabis cultivator, operating under the name of Power Farms LLC, which is located just outside the City of Carpinteria. During this investigation, which spanned two counties and involved three separate search warrants, Detectives discovered one of the owners (whose name is being withheld due to the ongoing investigation) had provided false information during the county cannabis application process and was failing to follow proper shipping and manifest procedures.

The owner’s Los Angeles County home, was served with a search warrant. There, Detectives seized several unregistered firearms, two which were reported stolen, as well as approximately 60 pounds of processed and packaged marijuana taken from Power Farms. They also seized thousands of dollars in cash and other items of evidence.

This investigation culminated in the voluntary surrender of the owner’s state temporary cannabis license, which resulted in detectives from the Cannabis Compliance Team, Special Investigations Bureau, District Attorney’s Office, and Game Wardens from the California Department of Fish and Wildlife, eradicating and removing illegal cannabis from Power Farms as they no longer had a valid state permit to cultivate or possess commercial cannabis. Approximately 22,420 cannabis plants were eradicated from three separate green houses and approximately 1,420 pounds of dried / drying cannabis were seized.

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
  2. 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 like the Santa Barbara County Cannabis Compliance Team which since June 2018 focuses 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 the cannabis 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 other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits.

HR 420 cannabis legalization bill

Senator Introduces Cannabis Legalization Bills – If You Can’t Beat Them, Then Join Them!

/0 Comments/in , /by

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.

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.

Federal Bills Introduced In 2019

Following the filing last month by Congressman Earl Blumenauer (D-OR) of a congressional bill to regulate marijuana like alcohol (click here for more details on H.R. 420), Senator Ron Wyden (D-OR) filed Senate Bill 420 (click here for detail) which would deschedule marijuana by removing it from the Controlled Substances Act (“CSA”), establish a federal excise tax on legal sales and create a system of permits for businesses to engage in cannabis commerce. It would also authorize regulations on packaging and labeling of cannabis products and apply alcohol advertising guidelines to the product.

Senator Wyden also introduced two other pro-cannabis bills:

Senate Bill 421 (click here for details) proposes a number of changes such as exempting state-legal marijuana activity from the CSA, allowing banking access for cannabis companies, eliminating advertising prohibitions, expunging criminal records, shielding immigrants from deportation over marijuana and allowing Department of Veterans Affairs doctors to issue medical cannabis recommendations.

Senate Bill 422 (click here for details), proposes the exemption of state-legal cannabis businesses from Internal Revenue Code §280E, which section prevents them from taking normal business tax deductions that are available to operators in other industries.

But until these bills become law, 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.

Temporary Cannabis Tax Reduction Bill California cannabis

California Cannabis Tax Relief Coming? Check Out Assembly Bill 286 – the Temporary Cannabis Tax Reduction Bill.

/0 Comments/in , , /by

A bill was just re-introduced in the California legislature that would give legal cannabis businesses a tax break to help them thrive and level the playing field with cannabis businesses that continue to operate in the grey and black markets.

Assembly Bill 286 Was First Introduced February 16, 2018

The proposed legislation, which is sponsored by state Treasurer Fiona Ma, follows California’s tax revenue for the cannabis industry coming in $101 million below projections in the first six months of 2018.

This bill which has been kicked around Sacramento for almost a year would wind up reducing the state’s excise tax from 15% to 11% for a period of three years and remove the cultivation tax on growers until 2022. The full text of the Temporary Cannabis Tax Reduction Bill can be viewed here.

Even though 31 states have legalized cannabis for medical or adult use, banks and financial institutions are hesitant to provide services to cannabis businesses because federal law still classifies cannabis as an illegal Schedule 1 drug under the Controlled Substances Act.

Higher Federal Taxes Still Remain

While the developments listed above are favorable for California 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.

Federal 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.

medical marijuana cannabis

Another Medical Cannabis Breakthrough! How Cannabis May Help Relieve Autism Symptoms.

/0 Comments/in /by

Israeli researchers record sharp improvement in measures such as quality of life, ability to dress and shower independently after 6 months of cannabis oil treatmen taccording to an Israeli study published in Nature.

The joint study conducted by Ben Gurion University and Soroka Medical Center in Beer Sheva showed that cannabis oil was an effective treatment for a variety of Autism-related symptoms including seizures, tics, depression, restlessness and rage attacks for patients under the age of 18.The study found that after six months of regular consumption, 30% of patients reported significant improvement, 53.7% reported moderate improvement and only 15% had slight or no change.

The study was funded by Tikun Olam, a medical marijuana firm in Israel.  Israel has been a leader in medical marijuana research and development and the country has established a favorable legal environment for this industry to flourish.  This sharply contrasts with the environment here in the United States.

The Anti-Federal U.S. Climate

The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. Although you can still face federal criminal charges for using, growing, or selling weed in a manner that is completely lawful under California law, the federal authorities in the past have pulled back from targeting individuals and businesses engaged in medical marijuana activities. This pull back came from Department of Justice (“DOJ”) Safe Harbor Guidelines issued in 2013 under what is known as the “Cole Memo”.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

Since 2013, these guidelines provided a level of certainty to the marijuana industry as to what point could you be crossing the line with the Federal government.  But on January 4, 2018, Attorney General Jeff Sessions (who no longer serves as Attorney General) revoked the Cole Memo.  Now U.S. Attorneys in the local offices throughout the country retain broad prosecutorial discretion as to whether to prosecute cannabis businesses under federal law even though the state that these businesses operate in have legalized some form of marijuana.

Joyce-Blumenauer Amendment (previously referred to as the Rohrabacher-Farr Amendment)

Medical marijuana is now legal in 31 states plus the District Of Columbia, Guam, Puerto Rico and Northern Mariana Islands and recreational marijuana is legal in 9 states plus the District Of Columbia and Northern Mariana Islands. Building on the DOJ’s issuance of the Cole Memo, in 2014 the House passed an amendment to the yearly federal appropriations bill that effectively shields medical marijuana businesses from federal prosecution. Proposed by Representatives Rohrabacher and Farr, the amendment forbids federal agencies to spend money on investigating and prosecuting medical marijuana-related activities in states where such activities are legal.

The amendment states that:

“None of the funds made available under this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”

This action by the House is not impacted by former Attorney General Jeff Sessions’ change of position with the DOJ. However, unless this amendment gets included in each succeeding federal appropriations bill, the protection from Federal prosecution of medical marijuana businesses will no longer be in place.

Fortunately for medical marijuana businesses in the last budget extension approved by Congress, this amendment was included. This means that the DOJ is precluded from spending funds to circumvent any of the foregoing states from implementing their medical cannabis laws.

Clearly, to avail yourself of the protections of the amendment, you must be on the medical cannabis side and you must be in complete compliance with your State’s medical cannabis laws and regulations. You may not be covered under the amendment if you are involved in the recreational cannabis side even if legal in the State you are operating.

What Should You Do?

Given the illegal status of cannabis under Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  Although cannabis is legal in California, that is not enough to protect you. 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.

governement shutdown IRS open audit refund impact

Don’t Let The Government Shutdown Give You A False Sense Of Security If You Owe The IRS

/0 Comments/in , /by

Don’t Let The Government Shutdown Give You A False Sense Of Security If You Owe The IRS

With the temporary opening of the Federal government for three weeks announced on January 25, 2019, tax issues that were held in limbo may now see some movement.

Temporary funding for the IRS for fiscal year 2019 expired at midnight on December 21, 2018. We previously reported how the government shutdown is impacting IRS operations – click here. That initial contingency plan contemplated that the shutdown would last no more than 5 days and involved furlough of 88% of the IRS workforce (totals approximately 87,000) leaving only 9,946 that are allowed to continue working.

Under an updated contingency plan covering the upcoming filing season, the IRS will recall 57% of its workforce to handle tax season duties increasing the number of IRS employees to 46,052 that are now allowed to work. The new plan will allow the IRS to process paper and electronic returns and issue refunds to taxpayers and adhere to its commitment that tax season will start on January 28, 2019 despite an ongoing government shutdown.

The Anti-Deficiency Act.

Overriding each Federal agency’s plan is the Anti-Deficiency Act, 31 U.S.C. §1341, which provides that in the absence of appropriated funds no obligation can be incurred except for the protection of life and property, the orderly suspension of operations, or as otherwise authorized by law. This means that absent an appropriation, many Federal employees are prohibited from working, even on a volunteer basis, “except for emergencies involving the safety of human life or the protection of property”. 31 U.S.C. §1342. Accordingly, each Federal agency must designate those employees whose work is necessary to sustain legal operations essential to the safety of human life and the protection of property.

U.S. Tax Court Operations.

The United States Tax Court shut down operations on Friday, December 28, 2018, at 11:59 p.m. If you have a pending case in U.S. Tax Court, here are some key points to keep in mind:

Q: What should I do if a document I mailed or sent to the U.S. Tax Court was returned to me?

A: If a document you sent to the U.S. Tax Court was returned to you, re-mail or re-send the document to the Court with a copy of the envelope or container (with the postmark or proof of mailing date) in which it was first mailed or sent. Retain the original envelope or container.

Q: My case was calendared for trial.  What does the Tax Court’s closure mean for my pending case? 

A: The U.S. Tax Court canceled trial sessions for January 28, 2019 (El Paso, TX; Los Angeles, CA; New York, NY; Philadelphia, PA; San Diego, CA; and Lubbock, TX), February 4, 2019 (Hartford, CT; Houston, TX; San Francisco, CA; Seattle, WA; St. Paul, MN; Washington, DC; and Winston-Salem, NC) and February 11, 2019 (Detroit, MI; Los Angeles, CA; New York, NY; San Diego, CA; and Mobile, AL). The U.S. Tax Court will inform taxpayers who had cases on the canceled trial sessions of their new trial dates.

The U.S. Tax Court will make a decision about the February 25, 2019 trial sessions (Atlanta, GA; Chicago, IL; Dallas, TX; Los Angeles, CA; and Philadelphia, PA) on or before February 7, 2019.  Taxpayers with cases that are scheduled for trial sessions that have not been canceled or that have not yet been scheduled for trial should expect their cases to proceed in the normal course until further notice.

Q: What should I do if I received a bill for the tax liability that is the subject of my Tax Court case? 

A: If you receive a collection notice for the tax that is in dispute in your U.S. Tax Court case, it may be because the IRS has not received your petition and has made a premature assessment.  Once the government reopens, it will be necessary to contact the IRS and request that the IRS abate the premature assessment. 

2019 Filing Season – Key IRS Information for Taxpayers.

The IRS has announced that the 2019 filing season will begin on January 28, 2019, for individual taxpayers. The IRS began accepting business tax returns (non-1040 series) on January 8, 2019.

  • Acceptance Of Tax Returns. The IRS will accept paper and electronic individual income tax returns starting January 28, 2019.
  • Issuance Of Tax Refunds. Refunds will be paid, but tax returns will continue to be subject to refund fraud, identity theft and other internal reviews as in prior years.

IRS Operations Backlogged Or Impacted From The Appropriations Lapse.

Automated applications. IRS.gov and many automated applications remain available, including such things as “Where’s My Refund”, the IRS2go phone app and online payment agreements.

Telephones. Limited live telephone customer service assistance is available. Due to the heavier call volume, taxpayers should be prepared for longer wait times. Automated toll-free telephone applications will remain operational.

In-person service. IRS walk-in taxpayer assistance centers should reopen. This allows taxpayers to make large cash payments or get assistance for identity theft relief.

Taxpayer appointments. People with appointments related to examinations (audits), collection, Appeals or Taxpayer Advocate cases should contact the IRS to see when their cancelled meeting is to be rescheduled or if a pending meeting is to be rescheduled.

Taxpayer correspondence. While able to receive mail, the IRS will be responding to paper correspondence to only a very limited degree during this lapse period. Taxpayers who mail in correspondence to the IRS during this period should expect a lengthy delay for a response after the IRS reopens due to a growing correspondence backlog.

Tax-exempt groups. The IRS will not be processing applications or determinations for tax-exempt status or pension plans. Taxpayers should expect a lengthy delay for a response after the IRS reopens due to a growing correspondence backlog.

An Opportunity For Taxpayers Who Owe The IRS.

Do not think that if you owe the IRS your tax problem will disappear because the IRS is not fully operational. Instead you should be utilizing this valuable time to get yourself prepared so that when IRS re-opens for business, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

As a prerequisite to any proposal to the IRS, you must be in current compliance. That means if you have any outstanding income tax returns, they must be completed and submitted to IRS. Also, if you are required to make estimated tax payments, you must be current in making those payments. Fortunately, as we are now in 2019, taxpayers who expect to owe for 2018 should have their 2018 income tax returns done now so that the 2018 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2019.

Remember that it is the government that was shut down – not the tax laws, so all taxpayers should continue to meet their tax obligations as normal. Individuals and businesses should keep filing their tax returns and making payments and deposits with the IRS, as they are required to do by law. Also, during the shutdown, interest does continue to accrue on all liabilities.

The take away from this – use the Federal government’s downtime to your advantage to prepare for the future.

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), Metropolitan Los Angeles (Long Beach and Ontario) 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 attorneys can do for you.

cannabis legalization

Is The U.S. Attorneys’ Office Poised To Help Support The Cannabis Industry?

/0 Comments/in /by

On January 4, 2018, former U.S. Attorney General Jeff Sessions announced the revocation of what is known in the cannabis industry as the “Cole Memo”. Attorney General Nominee William Barr Appears Committed To Reverse This Stance And Leave State-Legal Marijuana Programs Alone.

In Senate testimony on January 15, 2019, nominee for Attorney General William Barr committed to not use the limited resources of the Department of Justice to prosecute state-regulated and compliant marijuana businesses. His statements came response to questions from Senators Cory Booker (D-NJ) and Kamala Harris (D-CA) — each of whom represent states where marijuana is legally regulated for either medical or recreational purposes.

Thirty-three states, Washington, D.C. and the U.S. territories of Guam, Puerto Rico and Northern Mariana Islands have enacted legislation specific to the medical use of cannabis. Almost one-third of these jurisdictions have also approved that recreational use of marijuana. Just in California alone with the change in law allowing both medical and recreational marijuana, the marijuana industry in California is expected to be a $3.7 billion market in 2018 and could rise to $5.1 billion in 2019 according to the cannabis industry research firm BDS Analytics.

However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal. The DOJ told its prosecutors that prosecuting medical marijuana cases in states where is has been legalized would no longer be a priority.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

Rohrabacher-Blumenauer Amendment (f/k/a Rohrabacher-Farr Amendment)

Building on the DOJ’s issuance of the Cole Memo, in 2014 the House passed an amendment to the yearly federal appropriations bill that effectively shields medical marijuana businesses from federal prosecution. Proposed by Representatives Rohrabacher and Blumenauer, the amendment forbids federal agencies to spend money on investigating and prosecuting medical marijuana-related activities in states where such activities are legal.

The amendment states that:

None of the funds made available under this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.

Although Sessions is gone, his legacy of overriding the Cole Memo still continues and U.S. Attorneys in each Federal district still retain broad prosecutorial discretion as to whether to prosecute cannabis businesses under federal law even though the state that these businesses operate in have legalized some form of marijuana.  Now the Rohrabacher-Blumenauer Amendment still prevents the DOJ from prosecuting state approved medical marijuana businesses but not having safe harbor guidelines in place at a national level adds uncertainty as to how DOJ may come down on your business. So it is essential that you have legal counsel to back you up.

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.

IRS tax forms - Government Shutdown

Despite Continued Government Shutdown, Some IRS Employees Are Being Called Back To Work

/0 Comments/in , /by

Despite Continued Government Shutdown, Some IRS Employees Are Being Called Back To Work

Temporary funding for the IRS for fiscal year 2019 expired at midnight on December 21, 2018. We previously reported how the government shutdown is impacting IRS operations – click here. That initial contingency plan contemplated that the shutdown would last no more than 5 days and involved furlough of 88% of the IRS workforce (totals approximately 87,000) leaving only 9,946 that are allowed to continue working.

Under an updated contingency plan covering the upcoming filing season, the IRS will recall 57% of its workforce to handle tax season duties increasing the number of IRS employees to 46,052 that are now allowed to work. The new plan will allow the IRS to process paper and electronic returns and issue refunds to taxpayers and adhere to its commitment that tax season will start on January 28, 2019 despite an ongoing government shutdown.

The date when funding will be restored by Congress has not been established but under plans established by each Federal agency, as the lapse in funding continues more Federal government functions will be shutdown.

The Anti-Deficiency Act.

Overriding each Federal agency’s plan is the Anti-Deficiency Act, 31 U.S.C. §1341, which provides that in the absence of appropriated funds no obligation can be incurred except for the protection of life and property, the orderly suspension of operations, or as otherwise authorized by law. This means that absent an appropriation, many Federal employees are prohibited from working, even on a volunteer basis, “except for emergencies involving the safety of human life or the protection of property”. 31 U.S.C. §1342. Accordingly, each Federal agency must designate those employees whose work is necessary to sustain legal operations essential to the safety of human life and the protection of property.

Department Of Justice’s Contingency Plan.

The Department of Justice has issued guidance, which gives priority to continuing work on criminal cases. Consequently, no employees in the Tax Division of the Department Of Justice will be authorized to work on CIVIL MATTERS during a lapse in appropriations.

Updated Contingency Plan Of The IRS.

The following activities of IRS that will continue which are necessary for safety of human life or protection of government property that continue to be operational at IRS are:

  • Continuing to complete and test upcoming filing year programs
  • Processing electronic returns, up to the point of refund
  • Processing paper tax returns through “batching”
  • Processing remittances; and
  • Maintaining criminal law enforcement operations.

The IRS will also be opening its call sites and responding to taxpayer questions; however, all IRS audit and examination functions and nonautomated collections will continue to be put on hold during the shutdown.

When funds are appropriated to the IRS, furloughed employees will return to work (they are expected to return within four hours after the reactivation is announced if it occurs on a scheduled work day).

An Opportunity For Taxpayers Who Owe The IRS.

Do not think that if you owe the IRS your tax problem will disappear because the IRS is not fully operational. Instead you should be utilizing this valuable time to get yourself prepared so that when IRS re-opens for business, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

As a prerequisite to any proposal to the IRS, you must be in current compliance. That means if you have any outstanding income tax returns, they must be completed and submitted to IRS. Also, if you are required to make estimated tax payments, you must be current in making those payments. Fortunately, as we are now in 2019, taxpayers who expect to owe for 2018 should have their 2018 income tax returns done now so that the 2018 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2019.

The take away from this – use the Federal government’s downtime to your advantage to prepare for the future.

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), Metropolitan Los Angeles (Long Beach and Ontario) 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 attorneys can do for you.

1099 filing deadline 199A IRS tax deduction

January 31 Deadline Looms for Forms W-2 and 1099-MISC

/0 Comments/in , /by

January 31 Deadline Looms for Forms W-2 and 1099-MISC

The possibility that the government shutdown will continue into next month resulting in many IRS employees not working to process Forms W-2 and Forms 1099-MISC has no impact on the January 31 deadline for filing these forms.

Filing Deadlines for Forms W-2 and Forms 1099-MISC

The 2018 Forms W-2 must be filed with the Social Security Administration (SSA) by January 31, 2019. Form 1099-MISC must be filed with the IRS by January 31st if non-employee compensation (NEC) is being reported on the form. If a Form 1099-MISC is not reporting NEC and is filed on paper, the filing deadline is February 28, 2019. If the Form 1099-MISC is not reporting NEC and is filed electronically, the deadline is March 31, 2019.

Regardless of the deadlines above, all of these forms must be given to taxpayers no later than January 31st. This filing deadline was made uniform under The Protecting Americans from Tax Hikes (PATH) Act. Prior law required that only W-2’s had to be provided to employees no later than January 31st with all other reporting forms (including the copies to IRS) due by the end of February. Failure to file these forms correctly and timely may result in penalties to the employer or payor.

Extensions of time to file Form W-2 may be requested. One 30-day extension to file Form W-2 may be requested by submitting a complete application on Form 8809, Application for Extension of Time to File Information Returns. Form 8809 must include a detailed explanation of why the additional time is needed and be signed under penalties of perjury. The IRS states that extensions are granted only in extraordinary circumstances or catastrophe.

Penalties for Failing to File Correct and Timely Forms 1099s

Information reporting penalties apply if a payer fails to timely file an information return, fails to include all information required to be shown on the return, or includes incorrect information on the return. The penalties apply to all variations of Form 1099. The amount of the penalty is based on when the correct information return is filed.

For returns required to be filed for the 2018 tax year, the penalty is:

  • $50 per information return for returns filed correctly within 30 days after the due date, with a maximum penalty of $545,500 a year ($191,000 for certain small businesses);
  •  $100 per information return for returns filed more than 30 days after the due date but by August 1, with a maximum penalty of $1,637,500 a year ($545,500 for certain small businesses); and
  • $270 per information return for returns filed after August 1st or not filed at all, with a maximum penalty of $3,275,500 a year for most businesses, but $1,091,500 for certain small businesses.

For purposes of the lower penalty, a business is a small business for any calendar year if its average annual gross receipts for the three most recent tax years (or for the period it was in existence, if shorter) ending before the calendar year do not exceed $5 million.

Persons who are required to file information returns electronically but who fail to do so (without an approved waiver) are treated as having failed to file the return unless the person shows reasonable cause for the failure. However, they can file up to 250 returns on paper; those returns will not be subject to a penalty for failure to file electronically. The penalty applies separately to original returns and corrected returns.

The penalty also applies if a person reports an incorrect taxpayer identification number (TIN) or fails to report a TIN, or fails to file paper forms that are machine readable.

The penalty for failure to include the correct information on a return does not apply to a de minimis number of information returns with such failures if the failures are corrected by August 1st of the calendar year in which the due date occurs. The number of returns to which this exception applies cannot be more than the greater of 10 returns or 0.5 percent of the total number of information returns required to be filed for the year.

If a failure to file a correct information return is due to an intentional disregard of one of the requirements (i.e., it is a knowing or willing failure), the penalty is the greater of $530 per return or the statutory percentage of the aggregate dollar amount of the items required to be reported (the statutory percentage depends on the type of information return at issue). In addition, in the case of intentional disregard of the requirements, the $5 million limitation does not apply.

Under IRS Notice 2017-9, a safe harbor from penalties has been established for failure to file correct information returns and failure to furnish correct payee statements for certain de minimis errors. Under the safe harbor, an error on an information return or payee statement is not required to be corrected, and no penalty is imposed, if the error relates to an incorrect dollar amount and the error differs from the correct amount by no more than $100 ($25 in the case of an error with respect to an amount of tax withheld).

Automated Substitute For Return Program

When a taxpayer does not file and the IRS has information statements indicating a filing requirement, the IRS uses the data to file a return on behalf of the taxpayer if there is a projected balance owed. In 2012, the IRS used information statements to file 803,000 returns for taxpayers, totaling $6.7 billion in additional taxes owed. And the sad thing about this is in just about every case, the amount actually owed when a tax return is filed by the taxpayer is much lower than what the IRS says a non-filer taxpayer owes. We even had cases where the IRS ended up owing our clients money.

The Stakes Are High!

A recent U.S. Government Accountability Office study showed that the IRS spends $267 million on underreporter matching programs, compared with the $4.2 billion it spends on audits. But automated information-matching programs return almost six times more revenue than audits. You can see why with fewer IRS agents and reduced budgets, the IRS will increasingly rely on technology-driven matching programs to bring in more tax dollars.

What Should You Do?

So if you receive one of these audit notices or the IRS is looking to assert penalties on late or incomplete 1099 filings, it is important that you don’t ignore it. Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California defend you from the IRS. If you are involved in cannabis, check out what our cannabis tax attorneys can do for you.

I need to report foreign income? FBAR

Federal Court Of Appeals For The Third Circuit Clarifies Standard for Proving a “Willful” FBAR Violation

/0 Comments/in , /by

Federal Court Of Appeals For The Third Circuit Clarifies Standard for Proving a “Willful” FBAR Violation

Not much has come out of the Courts defining that line between nonwillful and willful when it comes to not filing Foreign Bank and Financial Accounts Reports (“FBAR”) but now we have a recent U.S. Federal Circuit Of Appeals case out of the Third District which has vast repercussions on anyone who has undisclosed foreign bank accounts regardless of whether they came forward in a Voluntary Disclosure Program or the Streamlined Procedures.

Bedrosian v. U.S.

In December 2018 the Federal Circuit Court Of Appeals for the Third District (the “Appeals Court”), Bedrosian v. U.S., 2018 PTC 427 (3rd Cir. 2018), on an appeal by the IRS issued its opinion determining that the taxpayer’s failure to timely file an FBAR was nonwillful. The tax law provides that U.S. citizens with accounts outside the U.S. must disclose those accounts on an FBAR if the aggregate amount is at least $10,000. 31 U.S.C. 5314. The reason the term “willful” is important is that if the failure is not willful, the penalty is set at $10,000 per violation but if the failure to disclose is considered “willful”, the penalty goes up to the greater of $100,000 or 50% of the highest account value for the year.

In the case of Arthur Bedrosian the IRS in January 2015 assessed a willful FBAR penalty for tax year 2007 of approximately $975,000, which was 50% of the undisclosed account. Mr. Bedrosian paid 1% of the penalty and then sued in Federal District Court to recover the payment as an unlawful exaction. The government counterclaimed for the full penalty amount plus interest and a late payment penalty.

Facts

Mr. Bedrosian worked in the pharmaceutical industry eventually rising to the level of CEO at Lannett Company, Inc., a company that manufactures generic medications. He had to travel abroad for business and so for convenience by 1973 had established a bank account with Swiss Credit Corporation in Switzerland (now UBS) by which he could access funds instead of paying for expenses with traveler’s checks. Eventually he started using it as a savings account and in 2005 he was approached by the bank representatives who offered him 750,000 Swiss Francs if he converts his account into an investment account. Mr. Bedrosian agreed and as a result of this transaction, another account was created under his name.

It was not until tax year 2007 that Mr. Bedrosian included, for the first time, an affirmative answer to the question on his Form 1040 Schedule B asking whether “[a]t any time during 2007, [he had] an interest in or signature or other authority over a financial account in a foreign country.” He listed Switzerland as the country. He also filed an FBAR for the first time in which he reported the existence of one of the two UBS accounts.

The IRS notified Mr. Bedrosian in April 2011 that it would be auditing his returns and he was cooperative and forthcoming in his dealings with the IRS. In the results of the audit, the IRS assessed a willful FBAR penalty for tax year 2007 of just under $1 million.

When the case was first heard by the Federal District Court, the only disputed issue was whether Mr. Bedrosian’s failure to disclose his $2 million UBS account was willful. In that case as reported in Bedrosian v. U.S., 2017 PTC 431 (E.D. Pa. 2017), the district court concluded that the IRS had failed to establish Mr. Bedrosian’s willfulness. The government appealed to the Third Circuit, arguing that the district court used an incorrect legal standard for willfulness, placed too much weight on Mr. Bedrosian’s subjective motivations, and erred in finding that Mr. Bedrosian did not know he owned a second foreign bank account.

Court’s Analysis

The Court Of Appeals stated that to prove a “willful” violation with respect to the filing of an FBAR, the IRS must satisfy the civil willfulness standard, which includes both knowing and reckless conduct.

In its analysis of “willfulness,” the court considered the taxpayers’ behaviors in U.S. v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012), and U.S. v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012). The court noted that unlike those taxpayers, who continued to submit inaccurate FBARs even after being targets of government investigation, or who repeatedly lied and refused to produce requested documents, Mr. Bedrosian was cooperative with the IRS during the audit process.

Upon the IRS’ urging to consider “willfulness” outside of the FBAR context, the court also reviewed Greenberg vs. U.S., 46 F.3d 239 (3d Cir. 1994). There the court had considered whether a party had willfully failed to pay certain employer withholding taxes. It was determined that willfulness depended on the individual’s knowledge that his company had not paid the taxes at the time he paid company funds to the employees and other suppliers.

Although the court here agreed that Mr. Bedrosian should have been more careful about reviewing the 2007 FBAR and in being aware of the fact that he had not one but two accounts at UBS, the court determined that it was not apparent that he submitted it knowing that it omitted the second UBS account.

Significantly, the court summarized that the only evidence supporting a finding that Mr. Bedrosian’s violation was “willful” was: (1) the inaccurate form itself, lacking reference to the second account, (2) the fact that he may have learned of the second account’s existence at one of his meetings with a UBS representative, (3) his sophistication as a businessman, and (4) his accountant’s statement to him in the mid-1990s that he was breaking the law. The court concluded that “none of these indicate ‘conduct meant to conceal or mislead’ or a ‘conscious effort to avoid learning about reporting requirements,’ even if they may show negligence”.

Accordingly the Third Circuit then remanded the case for the district court affirming that Mr. Bedrosian did not act willfully in failing to disclose the second UBS account in his 2007 FBAR filing.

What Should You Do?

Taxpayers who have entered into the Streamlined Program whose case is weak on showing nonwilfullness have a huge risk of being picked by IRS and losing the favorable status offered by the Streamlined Procedures where the IRS feels that the non-willful standard is not met.  Such taxpayers will not then be able to enter into a voluntary disclosure program and can face the same battle as Mr. Bedrosian.  Likewise, anyone who has not come forward in voluntary disclosure and the issue of nonwilfullness is questionable would still have the opportunity to come forward under a voluntary disclosure program.  Keep in mind that any submission must be complete or else like Mr. Bedrosian, the IRS will reject the settlement and look to assess the full penalties provided by law. 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) and offices elsewhere in California get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. Also, if you are involved in cannabis, check out how our cannabis tax attorneys can help you.

bitcoin-cryptocurrency law attorney

What You Need To Know If Buying And Selling Crypto Currencies

/0 Comments/in /by

What You Need To Know If Buying And Selling Crypto Currencies

It is getting easier for people to buy or acquire crypto currency because more and more exchanges are being created and different methods of purchase (besides cash and money orders) are now available using credit and debit cards, Paypal, and barter arrangements.

Storing Your Crypto Currency – The Non-Custodial Wallet

After choosing a crypto currency to acquire, you should get a noncustodial wallet so you can store the crypto currency in a safe place. Keep in mind that your wallet must be compatible with the crypto currency that is going into it – for example, an ETH wallet will not work with BCH and vice versa. If you do not have a wallet, your crypto currency will be left on an exchange which leaves your crypto currency vulnerable to the risk of theft.

Methods Of Acquiring Crypto Currency

After obtaining a wallet which can be accessed from your mobile phone or desktop, you then can proceed to purchase crypto currency. The three primary ways are:

  • An exchange,
  • A crypto currency ATM, or
  • A peer-to-peer service.

Exchange

Exchanges are trading platforms that let you buy and sell cryptocurrencies for other digital assets or fiat. An exchange is a quick way to obtain crypto currency but because you will need an on-line means of payment, you will not be able to use cash. Trading platforms allow you to pay using a credit card, Paypal or bank wire. Keep in mind that you will first need to verify your identity and validate a payment system with the exchange before you can start purchasing.

Crypto Currency Automated Teller Machine (ATM)

There are more than 4,000 digital asset dispensing devices all over the world. In order to locate a machine in your local area, check out Coinatmradar.com. Expect to pay a transaction fee of 6 to10 percent per transaction.

Peer-to-Peer Service

The last method for acquiring cryptocurrency is in a peer-to-peer fashion. In other words, you can buy coins from a friend who already has digital currencies or you can opt to use a service that will act as an intermediary for the transaction. Services available include: Openbazaar.org, Localbitcoincash.org, Bitquick, Paxful, or Localbitcoins.com. These services allow anyone to buy from a person selling coins either in person or online by using an escrow system to keep the trades fair.

Taxation of Crypto Currency.

While buying a digital currency is straightforward, the tax rules that apply can get pretty tricky. Notice 2014-21 provides these tax rules:

  • Trading cryptocurrencies produces capital gains or losses, with the latter being able to offset gains and reduce tax.
  • Exchanging one token 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 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 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 cryptocurrency 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 coins is considered ordinary income equal to the fair market value of the coin the day it was successfully mined.
  • Initial coin offerings do not fall under the IRS’s tax-free treatment for raising capital. Thus, they produce ordinary income to individuals and businesses alike.

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!

Voluntary Disclosure – The Way To Avoid Criminal Fines & Punishment

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.

What Should You Do?

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.  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 set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. Also, if you are involved in cannabis, check out how our cannabis tax attorneys can help you.