Can You Go To Jail For Not Filing Tax Returns? Beware this can happen to you.

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Can You Go To Jail For Not Filing Tax Returns? Beware this can happen to you.

A man who did not file tax returns for 8 year in a row pleaded guilty before a Federal District Court Judge to evading his income taxes and now must serve 57 months in jail.

As reported by the Department Of Justice in a press release, from 2009 through 2016 Daryl Brown received taxable income, but did not file tax returns reporting his income or pay the taxes he owed.  To evade his taxes, Mr. Brown opened bank accounts and lines of credit in nominee names and used credit and debit cards from those accounts to pay for personal expenses.  He also bought money orders with cash, directed others to buy money orders for him, and structured his purchase of money orders–sometimes from several locations on the same day–to avoid triggering reporting requirements that would have flagged his activity to the IRS.  Court documents showed Mr. Brown’s conduct caused a tax loss of more than $250,000 to the IRS.

The Department Of Justice in a follow-up press release reported that on June 7, 2021 U.S. District Judge Timothy S. Black in the Southern District of Ohio sentenced Mr. Brown to 57 months in prison for tax evasion and ordered him to serve 3 years of supervised release and pay restitution to the IRS in the amount of $377,240.

An Opportunity To “Get Back Into The System” And Be Compliant.

Our tax system relies on initial voluntary compliance where taxpayers each year file a tax return; however, there are millions of Americans who fail to file a tax return and what’s worse is that these failures are not limited to just one year. Taxpayers who either have never filed a tax return or those who were once compliant but stopped filing a tax return for a period of time, face the same penalties.  Additionally, if the IRS chooses to pursue criminal prosecution and proves that the failure was willful, a taxpayer can be sentenced to prison.  So it is important to engage a tax attorney to come up with a plan to mitigate criminal exposure and establish an arrangement or settlement on the resulting tax liabilities.

An Opportunity For Taxpayers Who Owe The IRS.

As a prerequisite to any proposal (including but not limited to, an Offer In Compromise, payment plan or being put into “uncollectible status”) 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. Since we are in summer of 2023, taxpayers who expect to owe for 2022 should have their 2022 income tax returns as soon as possible so that the 2022 liability can be rolled over into any proposal.  Unfortunately, your obligation to make estimated tax payments for 2023 cannot be included in your proposal and the IRS will require as a prerequisite that you are current on these payments (1st quarter 2023 was due April 17, 2023 and 2nd quarter was due June 15, 2023).

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.

Also, the IRS will continue to take steps where necessary to protect all applicable statutes of limitations. In instances where statute expirations might be jeopardized during this period and a taxpayer is not agreeing to extend such, the IRS will issue Notices of Deficiency and pursue other similar actions to protect the interests of the government in preserving such statute.

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), Los Angeles (including 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 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.

 

IRS Looking For Taxpayers To Report Gig Economy Income, Virtual Currency Transactions, And Foreign Source Income And Assets

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IRS Looking For Taxpayers To Report Gig Economy Income, Virtual Currency Transactions, And Foreign Source Income And Assets

Chances are you are involved in one of these areas –

  1. Income from the Gig Economy,
  2. Dealing with Virtual Currency, or
  3. Having Foreign Source Income And Assets.

If so, pay particular attention to what the IRS will be looking for on your 2022 income tax return.

Gig economy earnings are taxable

Generally, income earned from the gig economy is taxable and must be reported to the IRS. The gig economy is activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website. Taxpayers must report income earned from the gig economy on a tax return, even if the income is:

  • From part-time, temporary or side work,
  • Not reported on an information return form – like a Form 1099-K, 1099-MISC, W-2 or other income statement or
  • Paid in any form, including cash, property, goods or virtual currency.

TAX TIP – If you incurred expenses to produce this income, those expenses should be reported on your tax return so you do not pay more in tax than what the law requires.

Virtual currency reporting and tax requirements

Again for 2022, there is a question at the top of Form 1040 and Form 1040-SR asking about virtual currency transactions. All taxpayers filing these forms must check the box indicating either “yes” or “no.” A transaction involving virtual currency includes, but is not limited to:

  • The receipt of virtual currency as payment for goods or services provided;
  • The receipt or transfer of virtual currency for free (without providing any consideration) that does not qualify as a bona fide gift;
  • The receipt of new virtual currency as a result of mining and staking activities;
  • The receipt of virtual currency as a result of a hard fork;
  • An exchange of virtual currency for property, goods or services;
  • An exchange/trade of virtual currency for another virtual currency;
  • A sale of virtual currency; and
  • Any other disposition of a financial interest in virtual currency.

If an individual disposed of any virtual currency that was held as a capital asset through a sale, exchange or transfer, they should check “Yes” and use Form 8949 to figure their capital gain or loss and report it on Schedule D (Form 1040).

If they received any virtual currency as compensation for services or disposed of any virtual currency they held for sale to customers in a trade or business, they must report the income as they would report other income of the same type (for example, W-2 wages on Form 1040 or 1040-SR, line 1, or inventory or services from Schedule C on Schedule 1).

TAX TIP – Make sure to report the basis of any virtual currency disposed of which will reduce your gain so you do not pay more in tax than what the law requires.

Reporting Foreign Source Income

A U.S. citizen or resident alien’s worldwide income is generally subject to U.S. income tax, regardless of where they live. They’re also subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States.

U.S. citizens and resident aliens must report unearned income, such as interest, dividends, and pensions, from sources outside the United States unless exempt by law or a tax treaty. They must also report earned income, such as wages and tips, from sources outside the United States. An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income Exclusion or the Foreign Tax Credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.

TAX TIP – Make sure you file a tax return on a timely basis to claim these benefits. If both your tax home and abode are outside the United States and Puerto Rico, you have until June 15, 2023 to file your tax return or file an extension (to October 16, 2023).  Those serving in the military outside the U.S. and Puerto Rico on the regular due date of their tax return also have until June 15, 2023 to file your tax return or file an extension (to October 16, 2023).

Reporting required for foreign accounts and assets

Federal law requires U.S. citizens and resident aliens to report their worldwide income, including income from foreign trusts and foreign bank and other financial accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.

Further, separate from reporting specified foreign financial assets on their tax return, taxpayers with an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2020, must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-filing System website.

TAX TIP – The deadline for filing the annual Report of Foreign Bank and Financial Accounts (FBAR) is the same as that of Form 1040. FinCEN grants filers who missed the original deadline an automatic extension until October 16, 2023, to file the FBAR. There is no need to request this extension.

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?

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.

Current State Of Tax Enforcement On Cannabis Businesses

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If you are conducting business in cannabis in the State of California, there are several taxing authorities that have interest in your business, specifically: Internal Revenue Service (IRS), Franchise Tax Board (FTB), California Department Of Tax & Fee Administration (CDTFA) and your local jurisdiction (municipality).  Additionally, if your business has workers, the Employment Development Department (EDD) will also be scrutinizing your business.

Each of these agencies believes that cannabis businesses are doing well and are “cash-cows”.  Truth is many now are struggling to survive due to different reasons including oversupply of product, lack of access to financing markets, saturation of competing businesses and extensive regulatory procedures.

IRS

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).

FTB

Assembly Bill 37 passed in 2019 (which is effective for tax years starting January 1, 2020 through December 31, 2024) provides that IRC Section 280E no longer applies to licensed individual taxpayers operating under the personal income tax law.

CDTFA

Assembly Bill 195 passed in 2022 made substantial changes to cannabis taxes.

Cannabis Excise Tax – Cannabis retailers are now responsible for reporting and paying the cannabis excise tax to the CDTFA for retail sales of cannabis or cannabis products made beginning January 1, 2023. The first cannabis retailer excise tax return and payment of the cannabis excise tax are due by May 1, 2023.

Cultivation Tax – Beginning July 1, 2022, the cultivation tax no longer applies to harvested cannabis from licensed growers entering the commercial market. To penalize unlicensed cultivators, Cannabis Tax Section 34015.1(a)(1) imposes a tax liability on the unlicensed person required to be licensed with the Department Of Cannabis Control (DCC) who possesses, keeps, stores, or retains for the purpose of sale, or sells or offers to sell any cannabis or cannabis products.  Section 34015.1(a)(2)(A) requires the department to ascertain “as best it may” the category and amount of the harvested cannabis deemed as having entered the commercial market, and the average market price or gross receipts, based on any information within the department’s possession or that may come into its possession, of the retail sale of the cannabis or cannabis product deemed as purchased from a cannabis retailer. Section 34015.1(a)(2)(A) provides that if a penalty is to be imposed, the  penalty shall be 25% of the amount of tax or $500.00, whichever is greater.

Local Jurisdiction (municipality)

Depending on the type of cannabis business being conducted (i.e., Cultivation, Manufacturing, Retail, etc.), specific local taxes will apply.  It is important to check the local ordinances to see how these taxes are calculated and when reported and paid.

Closing Your Cannabis Business Does Not Automatically Insulate You From Liability

Don’t think that just because you close your cannabis business, you will not have personal exposure for outstanding tax liabilities.  The sales and excise taxes collected when product is sold is deemed by the CDTFA to be a “trust fund liability” meaning that because the business is collecting the tax on each sale to then remit to the State, the failure to remit these funds will not only rest on the business but also its responsible persons (business owners, officers, etc.).

Municipalities which also tax cannabis businesses in the form of a “gross receipts tax” may also recognize this concept in their ordinances and thus impose liability to responsible persons as well.

What Should You Do?

  1. Have The Proper Legal Structure In Place

Different business types have specific tax requirements. The business type (entity type) you choose impacts the types of deductions and credits you can take.

  1. Maintain Good Books & Records

You must keep accurate and complete records to support your income and deductions for your income tax returns. This includes sales and purchase records, invoices, receipts, and other books related to your income and expense transactions.

  1. Have Tax Counsel Assure That All Taxes Are Being Accounted For In Each Sale

Ignorance is not a defense.  If you were supposed to charge a tax on the sale and you do not, the tax is still due to the taxing authority which now the business must pay.

  1. Have Tax Counsel Establish An Accounting System To Maximize Deductible Expenses

Cannabis businesses at both the Federal and State level may deduct Cost Of Goods Sold which should include not only direct costs but also indirect costs.  Additionally, licensed cannabis business can deduct ordinary and necessary business expenses on their California returns. Unlicensed cannabis businesses taxed under personal income tax law may only deduct cost of goods sold.

  1. Make Sure All Tax Returns Are Prepared Accordingly And Timely Filed

Late-filed tax returns will be subject to late-filing penalties and where applicable late-payment penalties and interest.

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.  So it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

If You Can’t Beat Them, Join Them – Minnesota Legalizes Adult-Use Cannabis!

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On May 30, 2023, Minnesota Governor Tim Walz (D) signed a bill into law legalizing recreational marijuana use in the state, this making Minnesota the 23rd state to legalize cannabis for adult-use (previously Minnesota legalized only medical cannabis).

Under the measure, Minnesota residents who are 21 years and older will be able to possess up to two ounces of marijuana flower in public and two pounds at home starting August 1, 2023. It also gives people with marijuana convictions a chance to clear their records by automatically expunging low-level convictions and establishing a review board to determine eligibility for higher-level offenses.

Additionally, the legislation sets up an Office of Cannabis Management, which will oversee the regulation and sale of cannabis products in the state.

The Growing Trend In Legalizing Cannabis – Current Standings:

Medical marijuana is legal in 38 states.

The medical use of cannabis is legal (with a doctor’s recommendation) in 38 states and Washington DC. Those 38 states being Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 23 states.

Twenty-three states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those 23 states being Alaska, Arizona, California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont, Virginia and Washington and the territories of the Northern Mariana Islands and Guam.

Recreational marijuana is legal in 6 tribal nations.

Six Tribal nations have legalized marijuana for recreational use.  Those 6 tribes being the Flandreau Santee Sioux Tribe (South Dakota), Oglala Lakota Sioux Tribe (South Dakota), Suquamish Tribe (Washington state), Squaxin Island Tribe (Washington State), Eastern Band of Cherokee Indians (North Carolina) and St. Regis Mohawk Tribe (New York).

Conflict With Federal Law.

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.

Higher Taxes Still Remain

While the developments listed above are favorable for cannabis business, it still remains to be seen whether the Federal government will respond favorably and 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.  So it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

 

California Resident Taxpayers Have Extended Period Of Time To File And Pay In 2023.

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California Resident Taxpayers Have Extended Period Of Time To File And Pay In 2023.

The IRS and Franchise Tax Board (“FTB”) may grant individuals and businesses additional time to file or pay when a major disaster in their area is declared by the federal or state government. California generally follows the IRS extended deadlines to file and pay taxes. Impacted taxpayers may also be eligible to claim a disaster loss on their tax return.

IRS Tax Relief For California Taxpayers

The IRS announced on January 10, 2023 that California storm victims have until May 15, 2023 to file various federal individual and business tax returns and make tax payments. Then on February 24, 2023 the IRS announced that their extended deadline for eligible California storm victims would now be extended to October 16, 2023.

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance.

For California – Currently, relief is available to affected taxpayers who live or have a business anywhere in Colusa, El Dorado, Glenn, Humboldt, Los Angeles, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Bernardino, San Diego, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Ventura, Yolo, and Yuba counties.

FTB Tax Relief For California Resident Taxpayers

On January 13, 2023 the FTB announced that California storm victims also have until May 15, 2023 to file various California individual and business tax returns and make tax payments.  Then on March 10, 2023 the FTB announced that it too would follow IRS allowing taxpayers impacted by 2022-23 winter storms to have an extension to October 16, 2023 to file individual and business tax returns and make certain tax payments.

The FTB extension includes:

  • Individuals whose tax returns and payments are due on April 18, 2023.
  • Quarterly estimated tax payments due January 17, 2023, March 15, 2023, April 18, 2023, June 15, 2023, and September 15, 2023.
  • Business entities whose tax returns are normally due on March 15 and April 18.
  • Pass-through entity (PTE) elective tax payments due on March 15, 2023 and June 15, 2023.

However, the postponement of time to file and pay does not apply to residents and businesses located in the following 2 counties: Lassen and Shasta.

Residents and businesses located in the above 2 counties must file and pay by the normal established deadlines. This includes:

  • Individuals whose tax returns and payments are due on April 18, 2023.
  • Quarterly estimated tax payments due January 17, 2023, March 15, 2023, April 18, 2023, June 15, 2023, and September 15, 2023.
  • Business entities whose tax returns are normally due on March 15 and April 18.
  • PTE elective Tax payments due on March 15, 2023, and June 15, 2023.

Additionally, this extension by the FTB is only available to resident taxpayers.  Non-resident taxpayers must still file and pay under the normal filing deadlines.

Tax Planning Tip

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2023 return normally filed next year), or the return for the current year (2022).

Be sure to write the FEMA declaration number on any return claiming a loss.  That number being: “FEMA-3591-DR” for California.

When filing a California return claiming a loss, be sure to write the name of the disaster in blue or black ink at the top of your tax return to alert the FTB.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Tips On Reconstructing Records

Reconstructing records after a disaster is important for several reasons including insurance reimbursement and taxes. Most importantly, records can help people prove their disaster-related losses. More accurately estimated losses can help people get more recovery assistance like loans or grants.

Whether it’s personal or business property that has been lost or destroyed, here are some steps that can help people reconstruct important records.

Tax records

Get free tax return transcripts immediately using the Get Transcript on IRS.gov or through the IRS2Go app.  Tax return transcripts show line-by-line the entries made on your Federal income tax returns.  The most three recent tax years are available.

Financial statements

People can gather past statements from their credit card company or bank. These records may be available online. People can also contact their bank to get paper copies of these statements.

Property records

  • To get documents related to property, homeowners can contact the title company, escrow company or bank that handled the purchase of their home or other property.
  • Taxpayers who made home improvements can get in touch with the contractors who did the work and ask for statements to verify the work and cost. They can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, taxpayers can contact the attorney who handled the trust.
  • When no other records are available, people should check the county assessor’s office for old records that might address the value of the property.
  • Car owners can research the current fair-market value for most vehicles. Resources are available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association and Edmunds.

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

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 a cannabis tax attorney can do for you.  And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

How To Know When You May Be A Target In An IRS Criminal Investigation

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How To Know When You May Be A Target In An IRS Criminal Investigation

A simple mistake, oversight, or your accountant’s malpractice may trigger an IRS criminal investigation. Specifically, unreported income, mismatch of information on a tax return versus third-party reporting information, a false statement, the use of an impermissible accounting or banking service, or declaring too many deductions are things that could initiate an audit, which could then rise to the level of an IRS criminal investigation.

The IRS is the world’s most powerful collection agency, with tremendous resources, and its Criminal Investigation Division (CID) is ruthless. CID conducts criminal investigations regarding alleged violations of the Internal Revenue Code, the Bank Secrecy Act and various money laundering statutes. The findings of these investigations are referred to the Department of Justice (DOJ) for recommended prosecution.

A criminal investigation differs from an audit. With an audit, the IRS attempts to determine whether you have calculated your tax liability correctly. With a criminal investigation, the IRS seeks to mount a case against you (the “target”) so that the DOJ can prosecute you and hold you out as an example to others as to what will happen if you cheat the government.

The IRS Criminal Investigation Process

The IRS criminal investigation process is serious business. CID is composed of federal agents (called “Special Agents”), who are highly trained financial investigators that carry a gun and wear a badge. Unlike your typical police department, CID conducts a very thorough investigation which may last years while they interview a target’s family, friends, co-workers, employees, and business associates, and bankers, among others, to acquire evidence as to the extent of the tax evasion or tax fraud that may have occurred by the target.

When the Special Agents come to interview a target’s family, friends, co-workers, employees, and business associates, and bankers, etc., they likely consider you to be a “witness” and they are merely looking for information that would be useful in their investigation of the target.  Seems not concerning, but if your actions or position helped the target commit an alleged tax crime or it turns out that you as a witness have your own tax exposure, you now could be designated as an additional target by the Special Agents.

Special agents analyze information to determine if criminal tax fraud or some other financial crime may have occurred. Relevant information is evaluated. This preliminary process is called a “primary investigation”. The special agent’s front line supervisor reviews the preliminary information and makes the determination to approve or decline the further development of the information. If the supervisor approves, approval is obtained from the head of the office, the special agent in charge, to initiate a “subject criminal investigation”.

After all the evidence is gathered and analyzed, if the special agent and his or her supervisor determine that the evidence is sufficient to support the recommendation of prosecution, the agent proceeds with the preparation of a written report detailing the findings of violation of the law and recommending prosecution.  The report is then forwarded to DOJ who if the case is accepted will initiate criminal prosecution to ultimately get a conviction.

A criminal tax violation conviction results in severe consequences, and in addition to monstrous fines, including the cost of prosecution and jail time.  Each count can result in five years in jail and it could spell financial, personal and social ruin. Compounding the situation is that often a taxpayer will not know when he is subject to an IRS criminal investigation until it is in its late stages at which time they surely have made incriminating admissions if they were not represented by competent counsel.

 Signs that You May Be A Target in an IRS Criminal Investigation –

(1) An IRS Revenue Officer abruptly stops pursuing you after he has been requesting you to pay your IRS tax debt, and now does not return your calls. The agent might be getting ready to refer your case to the CID to investigate previous or current tax evasion or crimes you may have committed within the collection process. (i.e., making false statements, hiding income or assets).

(2) An IRS Revenue agent has been auditing you and now disappears for days or even weeks at a time. After a case is referred to the CID, both the Collection and Examination Divisions put things on “pause” because they do not want to jeopardize a successful criminal prosecution. CID is incredibly resourceful and tactful. To better position yourself against them, it is best to obtain an experienced IRS tax attorney as early as possible where criminal tax exposure is apparent in your fact pattern (like where you know you cheated on the return that is under audit). This is true even if your case is only at the civil investigation stage.

(3) Your bank informs you that your records have been summoned by the CID or subpoenaed by the U.S. Attorney’s Office.

(4) Your accountant is contacted by Special Agents, or has been subpoenaed to appear before a grand jury and told to bring your tax records. Unfortunately, the “accountant-client privilege” simply does not protect you in a criminal case and any statements made to your accountant can be used against you in a criminal investigation, either through the “discovery” process leading to trial or where the accountant is called as a witness during criminal tax trial.

What Should You Do?

Whether and when to answer questions from the IRS, or whether to stand on your 5th Amendment rights, are questions that only a tax fraud lawyer can help you answer. Your financial well being, as well as your personal freedom may depend on the right answers. If you or your accountant even suspects that you might be subject to a criminal or civil tax fraud penalty, you should seek help immediately.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles (including 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 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.

Why It Is Important To Tell The Difference Between A Hobby And A Business For Tax Purposes

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Why It Is Important To Tell The Difference Between A Hobby And A Business For Tax Purposes

Your “hobby business” could land you in Tax Court – avoid IRS pitfalls by how you structure your small business.

Knowing the difference between having a hobby and running a business is important because hobbies and businesses are treated differently when it’s time to file a tax return.

A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business with the intention of making a profit.  Many enterprising people successfully develop a hobby into a going concern and actually receive income from it. If that person accepts more than $600 for goods and services using online marketplaces or payment apps, they could receive a Form 1099-K.

The income from that activity, regardless of whether it is from your hobby or you running a business, must always be reported on your income tax return.  If you leave that activity as a hobby, under the tax law, generally you are not allowed to deduct any of the losses incurred by activity in that hobby; but any income from a hobby must be reported on Schedule 1, Form 1040, line 8. That is the reason most people turn their hobbies into businesses once they start making money.

Factors To Consider When Determining Whether An Activity Is A Business Or A Hobby.

The IRS considers the following factors to make this determination:

  • The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
  • The taxpayer puts time and effort into the activity to show they intend to make it profitable.
  • The taxpayer depends on income from the activity for their livelihood.
  • The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
  • The taxpayer has enough income from other sources to fund the activity.
  • Losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
  • There is a change to methods of operation to improve profitability.
  • Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
  • The taxpayer was successful in making a profit in similar activities in the past.
  • Activity makes a profit in some years and how much profit it makes.
  • The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.

All factors, facts, and circumstances with respect to the activity must be considered. No one factor is more important than another.

Exception When Hobby Losses Are Deductible.

By showing that your pursuit of your “hobby” is an activity engaged in for profit, you may be able to deduct those years where you incurred losses if you meet certain presumptions.

For activities not involving the breeding, training, showing, or racing of horses, the presumption is that you business is an activity engaged in for profit where you show annual net income from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the most recent taxable year.  So if for the first three years your activity has incurred losses, you must show net income in years four and five (even if only $1.00 in each year) in order to still be able to deduct the first three years of losses.

For activities involving the breeding, training, showing, or racing of horses, the presumption will work in the same fashion except you must show annual net income from an activity for 2 or more of the taxable years in the period of 7 consecutive taxable years which ends with the most recent taxable year.

Challenges In U.S. Tax Court.

Despite these presumptions, the IRS does not always see your hobby as a viable business, and that is where tax difficulties arise. There are a number of court cases where the question of hobby or business has been decided for the particular business by the IRS, and under challenge, the cases end up in Tax Court. Here are five cases that landed in Tax Court worth discussing.

  1. Fishing: In Busbee v. Commissioner, T.C. Memo 2000-182, this taxpayer decided to hold fishing tournaments. These tournaments required him to promote the activity through flyers, speaking engagements, and other marketing efforts. He had to recruit participants and sponsors. He intended his hobby of fishing tournaments to supplement his retirement income as he developed it into a business. Through the process, he became an expert in bass fishing. The Tax Court considered all of this, and allowed his business.  In Peacock v. Commissioner, T.C. Memo 2002-122, this taxpayer began tournament fishing in his retirement. Sailing everywhere on his personal yacht, he and his wife fished specifically for the pleasure of participating in the tournament, especially when these tournaments were in exotic locales. In this case, the Tax Court decided this was not a business but a hobby for the activity was not “motivated primarily by the pursuit of profit”.  What probably hurt their case, even subtly, was the fact that they had just sold a business and were now millionaires.
  2. Golfing: In William James Courville v. Commissioner, T.C. Memo 1996-134, an optical engineer, after 30 years of employment, was laid off. He decided to become a professional golfer, but took only 4 golf lessons while a “professional”. He did not qualify for the senior tour, and ended up with no income from this activity. However, he did submit a Schedule C, listing expenses totaling over $16,000. The Tax Court declared that he “failed to establish that his golfing activity was carried on with the actual and honest objective of making a profit”.
  3. Track and field coaching: In Parks v. Commissioner, T.C. Memo 2012-105, the taxpayer began his professional career as a writer of freelance articles on the sport of track and field. Over a number of years, he owned a track and field magazine, coached at a number of different locations, studied with one of the foremost experts in the industry, then basically tried to establish himself and his trainees as credible within the field. By 2006, this man had a winning contestant who qualified for the Olympic trials, and by 2009, that contestant signed the taxpayer coach to a lucrative contract as his exclusive coach, and things only got better for the taxpayer. However, in a tax period of 9 years, the coach showed only a $43 profit, so the IRS claimed hobby not business. The Tax Court considered the case in great detail and decided primarily (although not all points) for the taxpayer, saying his income was growing and he had great potential for success. They did not see track and field as a typical hobby, and that did work to the taxpayer’s benefit.
  4. Writing: There is an infamous case which always gives people a chuckle, and that is the man who decided to write about prostitution. Vitale v. Commissioner, T.C. Memo 1999-131. Ralph Louis Vitale, Jr., in 1999, claimed on his tax return that he was in the business of writing about prostitution. When this taxpayer began his “research” four years before his retirement, he was still a full-time employee. Over the course of time, he visited a large number of brothels doing his “research” and always paying for services in cash (no records kept). He did keep a journal detailing each of his visits and expenses, and eventually developed a manuscript from his notes. Vitale submitted his manuscript to a vanity publisher, paying $4,375 to publish it. All tolled, after he received $2,600 in royalties, the publisher went bankrupt. Subsequently, the book rights were returned to him, and he again began marketing his book throughout the industry. The IRS said this was just a hobby and disallowed Vitale’s deductions. So Vitale went to Tax Court.  At first, the Tax Court felt that the taxpayer had a profit motive and overruled the IRS, even though the court also made comments about the “recreational” qualities of the contents of his book. The court did like his record-keeping and marketing and felt it showed his professionalism. But then the Tax Court disallowed all of his deductions, for the taxpayer could prove none of them (remember the cash payments?).  Nevertheless, the court did not penalize this taxpayer in any way, saying that he had made a reasonable attempt to comply with the law.

The U.S. Tax Court weighs “profit motive” most heavily in each of their decisions. Profit is a key decider when considering whether an activity is hobby or business. Is your hobby truly for profit or only for pleasure? That is foremost and basic premise that the Tax Court considers.

What Should You Do?

There seem to be two “hobbies” that trigger audits most frequently and those are horses or yachts. Both are money pits, and so if people can figure out a way to make a business out of them, that will provide either tax deductions and/or income to cover the high expenses of each. The IRS knows this, and is very strict when applying the rules to these activities. When structuring these, pay very close attention to business start-up details.

Regardless, if you follow good business practices when converting your hobby into a business, you have a greater chance of convincing the IRS it is a real business. Your business records must be up-to-date and accurate, and your business plan must lay out a course for creating profit from your activity in the future. That written business plan can be a real asset if you end up in Tax Court versus the IRS.

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

Protect yourself. 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 Diego County (Carlsbad) 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. Additionally, 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.

IRS providing tax relief for victims of severe Florida storms

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IRS providing tax relief for victims of severe Florida storms

The IRS announced on May 2, 2023 that April 12 to 14 Storm victims in parts of Florida now have until August 15, 2023 to file various federal individual and business tax returns and make tax payments.

Other Areas Having Extended Deadlines:

The IRS announced on April 3, 2023 that March 31 Storm victims in parts of Arkansas now have until July 31, 2023 to file various federal individual and business tax returns and make tax payments.

The IRS announced on January 10, 2023 that California storm victims have until May 15, 2023 to file various federal individual and business tax returns and make tax payments. Subsequently on January 13, 2023 the California Franchise Tax Board (“FTB”) announced that California storm victims also have until May 15, 2023 to file various California individual and business tax returns and make tax payments.  Then on February 24, 2023 the IRS announced that their extended deadline for eligible California storm victims would now be extended to October 16, 2023.

The IRS announced on January 19, 2023 that Storm victims in parts of Georgia and Alabama now have until May 15, 2023 to file various federal individual and business tax returns and make tax payments.

The IRS announced on March 24, 2023 that the December 23 to December 28, 2022 Storm victims in parts of New York now have until May 15, 2023 to file various federal individual and business tax returns and make tax payments.

The IRS announced on March 28, 2023 that March 24 and 25 Storm victims in parts of Mississippi now have until July 31, 2023 to file various federal individual and business tax returns and make tax payments.

The IRS announced on April 10, 2023 that March 31 Storm victims in parts of Tennessee now have until July 31, 2023 to file various federal individual and business tax returns and make tax payments.

The IRS announced on April 18, 2023 that March 31/April 1 Storm victims in parts of Indiana now have until July 31, 2023 to file various federal individual and business tax returns and make tax payments.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance.

For California – Currently, relief is available to affected taxpayers who live or have a business anywhere in Colusa, El Dorado, Glenn, Humboldt, Los Angeles, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Bernardino, San Diego, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Ventura, Yolo, and Yuba counties.

For Georgia – Currently, relief is available to affected taxpayers who live or have a business anywhere in Butts, Henry, Jasper, Meriwether, Newton, Spalding and Troup counties in Georgia.

For Alabama – Currently, relief is available to affected taxpayers who live or have a business anywhere in Autauga and Dallas counties in Alabama.

For New York – Currently, relief is available to affected taxpayers who live or have a business anywhere in Erie, Genesee, Niagara, St. Lawrence and Suffolk counties in New York.

For Mississippi – Currently, relief is available to affected taxpayers who live or have a business anywhere in Carroll, Humphreys, Monroe and Sharkey counties in Mississippi.

For Arkansas – Currently, relief is available to affected taxpayers who live or have a business anywhere in Cross, Lonoke and Pulaski counties in Arkansas.

For Tennessee – Currently, relief is available to affected taxpayers who live or have a business anywhere in Cannon, Hardeman, Hardin, Haywood, Lewis, Macon, McNairy, Rutherford, Tipton and Wayne counties in Tennessee.

For Indiana – Currently, relief is available to affected taxpayers who live or have a business anywhere in Allen, Benton, Clinton, Grant, Howard, Johnson, Lake, Monroe, Morgan, Owen, Sullivan and White counties in Indiana.

For Florida – Currently, relief is available to affected taxpayers who live or have a business anywhere in Broward county in Florida.

The current list of eligible localities is always available on the disaster relief page on IRS.gov.  The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area.

The additional relief postpones until May 15, 2023 (Georgia, Alabama and New York) or October 16, 2023 (California) or July 31, 2023 (Mississippi, Arkansas, Tennessee and Indiana) or August 15, 2023 (Florida), various tax filing and payment deadlines, including those for most calendar-year 2022 individual and business returns. This includes: individual income tax returns, originally due on April 18, 2023 (May 15, 2023 per the previous IRS announcement); various business returns, normally due on March 15th and April 18th of 2023; and returns of tax-exempt organizations, normally due on May 15, 2023.

Among other things, this means that eligible taxpayers will also have until May 15, 2023 (Georgia, Alabama and New York) or October 16, 2023 (California) or July 31, 2023 (Mississippi, Arkansas, Tennessee and Indiana) or August 15, 2023 (Florida) to make 2022 contributions to their IRAs and health savings accounts.

In addition, farmers who choose to forgo making estimated tax payments and normally file their returns by March 1, 2023 (May 15, 2023 per the previous IRS announcement) will now have until May 15, 2023 (Georgia, Alabama and New York) or October 16, 2023 (California) or July 31, 2023 (Mississippi, Arkansas, Tennessee and Indiana) or August 15, 2023 (Florida), to file their 2022 return and pay any tax due.

The May 15, 2023 (Georgia, Alabama and New York) or October 16, 2023 (California) or July 31, 2023 (Mississippi, Arkansas, Tennessee and Indiana) deadline also applies to the estimated tax payment for the fourth quarter of 2022, originally due on January 17, 2023. This means that taxpayers can skip making this payment and instead include it with the 2022 return they file, on or before May 15, 2023 (Georgia, Alabama and New York) or October 16, 2023 (California).

The May 15, 2023 (Georgia, Alabama and New York) or October 16, 2023 (California) or July 31, 2023 (Mississippi, Arkansas, Tennessee and Indiana) or August 15, 2023 (Florida) deadline also applies to 2023 estimated tax payments, normally due on April 18th, June 15th and September 15th of 2023. It also applies to the quarterly payroll and excise tax returns normally due on January 31st, April 30th and July 31st of 2023.

FTB Tax Relief Details

On March 10, 2023 the FTB announced that it too would follow IRS allowing taxpayers impacted by 2022-23 winter storms to have an extension to October 16, 2023 to file individual and business tax returns and make certain tax payments.  This includes:

  • Individuals whose tax returns and payments are due on April 18, 2023.
  • Quarterly estimated tax payments due January 17, 2023, March 15, 2023, April 18, 2023, June 15, 2023, and September 15, 2023.
  • Business entities whose tax returns are normally due on March 15 and April 18.
  • Pass-through entity (PTE) elective tax payments due on March 15, 2023 and June 15, 2023.

However, the postponement of time to file and pay does not apply to residents and businesses located in the following 7 counties: Imperial, Kern, Lassen, Modoc, Plumas, Shasta, and Sierra.

Residents and businesses located in the above 7 counties must file and pay by the normal established deadlines. This includes:

  • Individuals whose tax returns and payments are due on April 18, 2023.
  • Quarterly estimated tax payments due January 17, 2023, March 15, 2023, April 18, 2023, June 15, 2023, and September 15, 2023.
  • Business entities whose tax returns are normally due on March 15 and April 18.
  • PTE elective Tax payments due on March 15, 2023, and June 15, 2023.

Tax Planning Tip

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2023 return normally filed next year), or the return for the current year (2022).

Be sure to write the FEMA declaration number on any return claiming a loss.  That number being: “FEMA-3591-DR” for California or “FEMA 4685-DR” for Georgia or “FEMA 4684-DR” for Alabama or “FEMA “4694-DR” for New York or “4697-DR” for Mississippi or “4698-DR” for Arkansas or “4701-DR” for Tennessee or “4704-DR” for Indiana or “4709-DR” for Florida.

When filing a California return claiming a loss, be sure to write the name of the disaster in blue or black ink at the top of your tax return to alert FTB.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Tips On Reconstructing Records

Reconstructing records after a disaster is important for several reasons including insurance reimbursement and taxes. Most importantly, records can help people prove their disaster-related losses. More accurately estimated losses can help people get more recovery assistance like loans or grants.

Whether it’s personal or business property that has been lost or destroyed, here are some steps that can help people reconstruct important records.

Tax records

Get free tax return transcripts immediately using the Get Transcript on IRS.gov or through the IRS2Go app.  Tax return transcripts show line-by-line the entries made on your Federal income tax returns.  The most three recent tax years are available.

Financial statements

People can gather past statements from their credit card company or bank. These records may be available online. People can also contact their bank to get paper copies of these statements.

Property records

  • To get documents related to property, homeowners can contact the title company, escrow company or bank that handled the purchase of their home or other property.
  • Taxpayers who made home improvements can get in touch with the contractors who did the work and ask for statements to verify the work and cost. They can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, taxpayers can contact the attorney who handled the trust.
  • When no other records are available, people should check the county assessor’s office for old records that might address the value of the property.
  • Car owners can research the current fair-market value for most vehicles. Resources are available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association and Edmunds.

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

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 a cannabis tax attorney can do for you.  And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

 

IRS Issues Notice Updating Prior Guidance On Taxation Of Cryptocurrency

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IRS Issues Notice Updating Prior Guidance On Taxation Of Cryptocurrency

On April 24, 2023 the IRS issued Notice 2023-34 as an update to its previous Notice 2014-21 governing taxation of cryptocurrency.

The IRS in 2014 issued Notice 2014-21 stating that it treats crypto currency as property for tax purposes. At the time this Notice was issued, the IRS recognized that in no legal jurisdiction were digital currencies accepted as legal tender.  However, since then foreign jurisdictions have enacted laws that characterize Bitcoin as legal tender. Thus, the sentence in the Background section of Notice 2014-21 stating that virtual currency does not have legal tender status in any jurisdiction is no longer accurate as to Bitcoin.

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.

Despite Bitcoin’s distinction as being legal tender in some jurisdictions, 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. Notice 2014-21 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.

Taxation Of Cryptocurrency

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

  • Trading cryptocurrencies produces capital gains or losses, with the latter being able to offset gains and reduce tax.
  • Exchanging one cryptocurrency 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 cryptocurrency 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 cryptocurrency 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 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 cryptocurrency can defer gains and minimize taxes. That is why it is essential you seek qualified tax counsel.

Reporting Cryptocurrency Transactions

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 2022 CRYPTOCURRENCY TRANSCATIONS

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 2022 Form 1040 Makes It Harder For U.S. Taxpayers To Avoid Non-compliance Or Claim Ignorance.

Starting with the 2019 Federal Individual Income Tax Returns, Form includes the following checkbox question:

At any time during 2022, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?   ◊ Yes            ◊ No

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.

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.

If You Can’t Beat Them, Join Them – Delaware Legalizes Adult-Use Cannabis!

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On April 21, 2023, Delaware Governor John Carney (D) announced that he would allow a pair of bills – HB 1 and HB 2 – to become law absent his signature making Delaware the 22nd state to legalize cannabis for adult-use (previously Delaware legalized only medical cannabis).

House Bill 1 eliminates criminal and civil penalties for the possession of personal use quantities of cannabis flower and other products, including marijuana paraphernalia, for those age 21 or older. (Personal use under the law is defined as one ounce or less of cannabis flower, 12 grams or less of cannabis concentrate, or cannabis edible products containing 750 milligrams or less of THC.)

House Bill 2 establishes a licensing system to regulate marijuana production and retail sales. It calls for the issuance of up to 30 initial retail marijuana licenses, 30 manufacturing licenses, 60 cultivation licenses, and five testing licenses.

House Bill 1 became law on April 23, 2023. House Bill 2 takes effect later this week.

The Growing Trend In Legalizing Cannabis – Current Standings:

Medical marijuana is legal in 38 states.

The medical use of cannabis is legal (with a doctor’s recommendation) in 38 states and Washington DC. Those 38 states being Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 22 states.

Twenty-one states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those 21 states being Alaska, Arizona, California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont, Virginia and Washington and the territories of the Northern Mariana Islands and Guam.

Recreational marijuana is legal in 6 tribal nations.

Six Tribal nations have legalized marijuana for recreational use.  Those 6 tribes being the Flandreau Santee Sioux Tribe (South Dakota), Oglala Lakota Sioux Tribe (South Dakota), Suquamish Tribe (Washington state), Squaxin Island Tribe (Washington State), Eastern Band of Cherokee Indians (North Carolina) and St. Regis Mohawk Tribe (New York).

Conflict With Federal Law.

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.

Higher Taxes Still Remain

While the developments listed above are favorable for cannabis business, it still remains to be seen whether the Federal government will respond favorably and 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.  So it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.