IRS Examinations Of Cannabis Businesses Expected To Rise In 2022 – Are You Ready For An I.R.C. § 280E IRS Tax Audit?

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

Taxation Of Cannabis Businesses

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

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

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

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

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

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

Step One: Incurred And Paid The Expense.

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

Step Two: Deductibility Of The Expense.

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

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

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

The “30-day letter”

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

The “Notice Of Deficiency”

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

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

What Should You Do?

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

IRS Criminal Investigation Division Releases Its Top Cases Of 2021

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IRS Criminal Investigation Division Releases Its Top Cases Of 2021

On January 3, 2022 the Internal Revenue Service Criminal Investigation (IRS-CI) began listing he top 10 cases for calendar year 2021 on its Twitter account which are considered to me the agency’s most prominent and high-profile investigations of 2021.

IRS-CI is the criminal investigative arm of the IRS, responsible for conducting financial crime investigations, including tax fraud, narcotics trafficking, money-laundering, public corruption, healthcare fraud, identity theft and more. IRS-CI special agents are the only federal law enforcement agents with investigative jurisdiction over violations of the Internal Revenue Code, boasting a nearly 90% federal conviction rate. The agency has 20 field offices located across the U.S. and 11 attaché posts abroad.

In issuing this list IRS-CI Chief Jim Lee stated: “The investigative work of 2021 has all the makings of a made for TV movie – embezzlement of funds from a nonprofit, a family fraud ring that stole millions in COVID-relief funds and a $1 billion Ponzi scheme used to buy sports teams and luxury vehicles. But this is real life and I’m grateful to our IRS-CI agents for pursuing these leads and ensuring that the perpetrators were prosecuted for their crimes.”

Here are the cases of 2021 that made the top 10 of IRS-CI cases in countdown order:

  1. Albuquerque couple sentenced to federal prison in Ayudando Guardians case
    Susan Harris and William Harris were sentenced to 47 and 15 years in federal prison, respectively. They stole funds from Ayudando Guardians Inc., a nonprofit organization that provided guardianship, conservatorship and financial management to hundreds of people with special needs.
  2. Rochester man going to prison and ordered to pay millions in restitution for his role in Ponzi scheme that bilked investors out of millions of dollars
    John Piccarreto Jr. was sentenced to 84 months in federal prison and ordered to pay restitution totaling $19,842,613.66 after he was convicted of conspiracy to commit mail fraud and filing a false tax return. He conspired with others to obtain money through an investment fraud Ponzi scheme.
  3. Orlando sisters sentenced in $25 million tax fraud scheme
    Petra Gomez and her co-conspirator, her sister, Jakeline Lumucso, were sentenced to eight and four years in federal prison, respectively. They operated a tax preparation business with five locations in central Florida that filed more than 16,000 false tax returns for clients from 2012 to 2016 with a total estimated loss to the IRS of $25 million.
  4. Russian bank founder sentenced for evading exit tax upon renouncing U.S. citizenship
    Oleg Tinkov, aka Oleg Tinkoff, was ordered to pay more than $248 million in taxes and sentenced to time-served and one year of supervised release after he renounced his U.S. citizenship in an effort to conceal large stock gains that were reportable to the IRS after the company he founded became a multibillion dollar, publicly traded company.
  5. Ontario man who ran multimillion-dollar unlicensed bitcoin exchange business sentenced to 3 years in federal prison
    Hugo Sergio Mejia was sentenced to three years in federal prison and required to forfeit all assets derived from running an unlicensed business that exchanged at least $13 million in Bitcoin and cash, and vice versa, often for drug traffickers. He charged commissions for the transactions and established separate companies to mask his true activity.
  6. Owner of bitcoin exchange sentenced to prison for money laundering
    Rossen G. Iossifov, a Bulgarian national, was sentenced to 121 months in federal prison for participating in a scheme where popular online auction and sales websites — such as Craigslist and eBay — falsely advertised high-cost goods (typically vehicles) that did not actually exist. Once victims sent payment for the goods, the conspiracy engaged in a complicated money laundering scheme where U.S.-based associates would accept victim funds, convert these funds to cryptocurrency, and transfer the cryptocurrency to foreign-based money launderers.
  7. Ex-pastor of Orange County church sentenced to 14 years in federal prison for orchestrating $33 million con that defrauded investors
    Kent R.E. Whitney, the ex-pastor of the Church of the Health Self, was sentenced to 14 years in federal prison and ordered to pay $22.66 million in restitution to victims after defrauding investors of $33 million by orchestrating a church-based investment scam. At his direction, church representatives appeared on television and at live seminars to make false and misleading claims to lure investors to invest in church entities. Victims sent more than $33 million to the church and received fabricated monthly statements reassuring them that their funds had been invested, when in reality, little to no money ever was.
  8. Prairie Village Man Sentenced to 12 Years for $7.3 Million Dollar Payday Loan Fraud, $8 Million Tax Evasion
    Joel Tucker was sentenced to 12 years and six months in federal prison and ordered to pay over $8 million in restitution to the IRS after selling false information or fictitious debts to payday loan businesses and not filing federal tax returns – for himself or his businesses – with the IRS for multiple years.
  9. DC Solar owner sentenced to 30 years in prison for billion dollar Ponzi scheme
    Jeff Carpoff, the owner of California-based DC Solar, was sentenced to 30 years in federal prison and forfeited $120 million in assets to the U.S. government for victim restitution after creating a Ponzi-scheme that involved the sale of thousands of manufactured mobile solar generator units (MSGs) that didn’t exist. He committed account and lease revenue fraud and purchased a sports team, luxury vehicles, real estate and a NASCAR team with the proceeds.
  10. San Fernando Valley family members sentenced to years in prison for fraudulently obtaining tens of millions of dollars in COVID relief
    The Ayvazyan family received sentences ranging from 17.5 years in prison to 10 months of probation for crimes ranging from bank and wire fraud to aggravated identity theft. The family used stolen and fictitious identities to submit 150 fraudulent applications for COVID-relief funds based on phony payroll records and tax documents to the Small Business Administration, and then used the funds they received to purchase luxury homes, gold coins, jewelry designer handbags and more. Richard Ayvazyan and his wife Terabelian cut their ankle monitoring devices and absconded prior to their sentencing hearing; they are currently fugitives.

IRS-CI reported that the agency initiated over 2,500 cases in fiscal year 2021 (up from 1,598 in the previous fiscal year), applying approximately 72% of its time to tax related investigations.

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

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

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

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

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

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

Two Special Programs Run By IRS-CI

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

What Should You Do?

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

IRS Expands Its Wave Of Tax Relief To Victims Of Hurricane Ida

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IRS Expands Its Wave Of Tax Relief To Victims Of Hurricane Ida

Hurricane Ida tax relief extended to February 15, 2022 for part or all of six qualifying states.

The IRS announced on December 22, 2021 that victims of Hurricane Ida in six states now have until February 15, 2022, extended from January 3, 2022, to file various individual and business tax returns and make tax payments.

Following the decisions by the Federal Emergency Management Agency (FEMA) declaring areas of disaster, the updated relief covers the entire states of Louisiana and Mississippi, as well as parts of New York, New Jersey, Connecticut and Pennsylvania. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

The updated relief postpones various tax filing and payment deadlines that occurred starting on dates that vary by state:

  • August 26, 2021 for Louisiana,
  • August 28, 2021 for Mississippi,
  • August 31, 2021 for Pennsylvania and
  • September 1, 2021 for New York, New Jersey and Connecticut.

IRS Tax Relief Details

Affected individuals and businesses will have until February 15, 2022, to file returns and pay any taxes that were originally due during this period. This means individuals who had a valid extension to file their 2020 return that ran out on October 15, 2021, will now have until February 15, 2022, to file.  However, because tax payments related to these 2020 returns were due on May 17, 2021, those payments are not eligible for this relief.

The February 15, 2022 extended deadline also applies to quarterly estimated income tax payments that were due on September 15, 2021, and January 18, 2022. This means that taxpayers in these areas can now skip making their estimated tax payments for both the third and fourth quarters of 2021 and instead include them when they file their 2021 return.

The February 15, 2022 deadline also applies to the quarterly payroll and excise tax returns normally due on November 1, 2021, and January 31, 2022. Businesses with an original or extended due date also have the additional time including, among others, calendar-year partnerships and S corporations whose 2020 extensions ran out on September 15, 2021, and calendar-year corporations whose 2020 extensions ran out on October 15, 2021. It also applies to calendar-year tax-exempt organizations whose 2020 extensions ran out on November 15, 2021.

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 2021 return normally filed next year), or the return for the prior year (2020). Be sure to write the appropriate FEMA declaration number on any return claiming a loss.

Here are the applicable FEMA declaration numbers to use:

FEMA declaration number – DR-4618 for Pennsylvania

FEMA declaration number – 4611 for Hurricane Ida in Louisiana

FEMA declaration number – 4614 for Hurricane Ida in New Jersey

FEMA declaration number – 4615 for Hurricane Ida in New York

FEMA declaration number – EM-3569 (first designation) or EM-4626 (second designation) for Hurricane Ida in Mississippi

FEMA declaration number – DR-4629 for Hurricane Ida in Connecticut

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), 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.  You can also check out the KahnTaxLaw Coronavirus Resource Center.  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.

affected by tornado damage tax relief

IRS Provides Expanded Tax Relief For Victims Of December 2021 Tornados

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IRS Provides Expanded Tax Relief For Victims Of December 2021 Tornados

The IRS announced on December 20, 2021 that victims of this month’s tornados in parts of Illinois and Tennessee now have until May 16, 2022 to file various individual and business tax returns and make tax payments.  This follows the announcement on December 14, 2021 that victims of the previous weekend’s tornados in Kentucky now have until May 16, 2022 to file various 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. Currently, relief is available to affected taxpayers who live or have a business in Bond, Cass, Coles, Effingham, Fayette, Jersey, Macoupin, Madison, Montgomery, Morgan, Moultrie, Pike and Shelby counties in Illinois; and Cheatham, Decatur, Dickson, Dyer, Gibson, Lake, Obion, Stewart, and Weakley counties in Tennessee; and affected Kentucky taxpayers who live or have a business in Caldwell, Fulton, Graves, Hopkins, Marshall, Muhlenberg, Taylor and Warren counties. The IRS will provide the same relief to any other localities designated by FEMA in neighboring areas and states.  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 tax relief postpones various tax filing and payment deadlines that occurred starting on December 10, 2021. As a result, affected individuals and businesses will have until May 16, 2022 to file returns and pay any taxes that were originally due during this period. This includes 2021 individual income tax returns due on April 18, 2022, as well as various 2021 business returns normally due on March 15, 2022 and April 18, 2022. Among other things, this means that affected taxpayers will have until May 16, 2022 to make 2021 IRA contributions.

In addition, farmers who choose to forgo making estimated tax payments and normally file their returns by March 1, 2022 will now have until May 16, 2022 to file their 2021 return and pay any tax due.

The May 16, 2022 deadline also applies to quarterly estimated income tax payments due on January 18, 2022 and April 18, 2022. Among other things, this means that individual taxpayers can skip making the fourth quarter estimated tax payment, normally due January 18, 2022, and instead include it with the 2021 return they file, on or before May 16, 2022. In addition, the quarterly payroll and excise tax returns normally due on January 31, 2022 and May 2, 2022 are also now due on May 16, 2022.

In addition, penalties on payroll and excise tax deposits due on or after December 10, 2021 and before December 27, 2021 will be abated as long as the deposits are made by December 27, 2021.

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 2021 return normally filed next year), or the return for the prior year (2020).

Be sure to write the FEMA declaration number on any return claiming a loss.

– 4630DR – for Tornados in Kentucky

– 3577EM – for Tornados in Illinois

– 3576EM – for Tornados in Tennessee

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.  You can also check out the KahnTaxLaw Coronavirus Resource Center.  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 Provides Tax Relief For Victims Of Kentucky Tornados

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IRS Provides Tax Relief For Victims Of Kentucky Tornados

The IRS announced on December 14, 2021 that victims of last weekend’s tornados in Kentucky now have until May 16, 2022 to file various 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. Currently, relief is available to affected taxpayers who live or have a business in Caldwell, Fulton, Graves, Hopkins, Marshall, Muhlenberg, Taylor and Warren counties. The IRS will provide the same relief to any other localities designated by FEMA in Kentucky or neighboring states.  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 tax relief postpones various tax filing and payment deadlines that occurred starting on December 10, 2021. As a result, affected individuals and businesses will have until May 16, 2022 to file returns and pay any taxes that were originally due during this period. This includes 2021 individual income tax returns due on April 18, 2022, as well as various 2021 business returns normally due on March 15, 2022 and April 18, 2022. Among other things, this means that affected taxpayers will have until May 16, 2022 to make 2021 IRA contributions.

In addition, farmers who choose to forgo making estimated tax payments and normally file their returns by March 1, 2022 will now have until May 16, 2022 to file their 2021 return and pay any tax due.

The May 16, 2022 deadline also applies to quarterly estimated income tax payments due on January 18, 2022 and April 18, 2022. Among other things, this means that individual taxpayers can skip making the fourth quarter estimated tax payment, normally due January 18, 2022, and instead include it with the 2021 return they file, on or before May 16, 2022. In addition, the quarterly payroll and excise tax returns normally due on January 31, 2022 and May 2, 2022 are also now due on May 16, 2022.

In addition, penalties on payroll and excise tax deposits due on or after December 10, 2021 and before December 27, 2021 will be abated as long as the deposits are made by December 27, 2021.

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 2021 return normally filed next year), or the return for the prior year (2020). Be sure to write the FEMA declaration number – 4630DR − for Tornados in Kentucky on any return claiming a loss.

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 activities.

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.  You can also check out the KahnTaxLaw Coronavirus Resource Center.  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 Expands Its Wave Of Tax Relief To More Victims Of Hurricane Ida

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IRS Expands Its Wave Of Tax Relief To More Victims Of Hurricane Ida

All of Mississippi now qualifies for expanded Hurricane Ida relief.

Following the recent decision by the Federal Emergency Management Agency (FEMA) to add 63 counties to its October 22, 2021 disaster declaration, the IRS announced on November 17, 2021 that it is offering this expanded relief to these newly-designated localities, as well as the 19 counties listed in the original FEMA declaration.

This announcement follows several prior announcements covering other areas of the country impacted by Hurricane Ida.  The IRS announced on August 31, 2021 that victims of Hurricane Ida that began on August 26, 2021 now have until January 3, 2022 to file various individual and business tax returns and make tax payments.  This relief was announced with a focus on taxpayers in Louisiana.  Then the IRS announced on September 8, 2021 that victims of Hurricane Ida in parts of New York and New Jersey that also get comparable relief.  In its continued effort to help taxpayers, the IRS announced on September 9, 2021 and on October 27, 2021 that victims of Hurricane Ida in Mississippi now have until January 3, 2022, to file various individual and business tax returns and make tax payments; and the IRS announced on September 13, 2021 that victims of Hurricane Ida in parts of Pennsylvania now have until January 3, 2022, to file various individual and business tax returns and make tax payments.

Following the October 30, 2021 disaster declaration by the Federal Emergency Management Agency (FEMA), victims of Hurricane Ida in parts of Connecticut now have additional time-until January 3, 2022 to file various individual and business tax returns and make tax payments. Currently, the expanded relief applies to Fairfield and New London counties, including the Mashantucket Pequot Tribal Nation and the Mohegan Tribal Nation. Any jurisdiction added to the October 30th FEMA declaration will automatically receive the expanded IRS relief.  Previously, the IRS had provided special relief to the entire state of Mississippi, generally postponing various tax-filing and tax-payment deadlines until November 1, 2021.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by FEMA, as qualifying for individual assistance. This includes the following Pennsylvania counties of Bucks, Chester, Delaware, Montgomery, Philadelphia and York.  In Louisiana relief extends to the entire state.  In New York, this currently includes Bronx, Kings, New York, Queens, Richmond and Westchester counties, and in New Jersey, it includes Bergen, Gloucester, Hunterdon, Middlesex, Passaic and Somerset counties. In Mississippi it includes the entire State and the Mississippi Choctaw Indian Reservation. Taxpayers in Ida-impacted localities designated by FEMA in other parts of New York and New Jersey and neighboring states will automatically receive the same filing and payment relief. 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 tax relief postpones various tax filing and payment deadlines that occurred staring on August 31, 2021 for Pennsylvania victims, starting on August 26, 2021 for Louisiana victims, starting on August 28, 2021 for Mississippi victims, and starting on September 1, 2021 for New York, New Jersey and Connecticut victims. As a result, affected individuals and businesses in Mississippi, Pennsylvania, Louisiana, New York, New Jersey and Connecticut will have until January 3, 2022 to file returns and pay any taxes that were originally due during this period.  This means individuals who had a valid extension to file their 2020 return due to run out on October 15, 2021, will now have until January 3, 2022, to file.  However, any tax payments related to these 2020 returns that were due on May 17, 2021 are not eligible for this relief.

The January 3, 2022 deadline also applies to quarterly estimated income tax payments due on September 15, 2021, and the quarterly payroll and excise tax returns normally due on November 1, 2021. It also applies to tax-exempt organizations, operating on a calendar-year basis that had a valid extension due to run out on November 15, 2021. Businesses with extensions also have the additional time including, among others, calendar-year corporations whose 2020 extensions run out on October 15, 2021.

In addition, for Pennsylvania victims penalties on payroll and excise tax deposits due on or after August 31, 2021 and before September 15, 2021, will be abated as long as the deposits are made by September 15, 2021.   For Louisiana victims penalties on payroll and excise tax deposits due on or after August 26, 2021 and before September 10, 2021 will be abated as long as the deposits were made by September 10, 2021.  For New York and New Jersey victims penalties on payroll and excise tax deposits due on or after September 1, 2021 and before September 16, 2021 will be abated as long as the deposits were made by September 16, 2021.  For Mississippi victims penalties on payroll and excise tax deposits due on or after August 28, 2021 and before September 13, 2021 will be abated as long as the deposits were made by September 13, 2021.  For Connecticut victims penalties on payroll and excise tax deposits due on or after September 1, 2021 and before September 16, 2021 will be abated as long as the deposits were made by September 16, 2021.

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 2021 return normally filed next year), or the return for the prior year (2020). Be sure to write the appropriate FEMA declaration number on any return claiming a loss.

Here are the applicable FEMA declaration numbers to use:

FEMA declaration number – DR-4618 for Pennsylvania

FEMA declaration number – 4611 for Hurricane Ida in Louisiana

FEMA declaration number – 4614 for Hurricane Ida in New Jersey

FEMA declaration number – 4615 for Hurricane Ida in New York

FEMA declaration number – EM-3569 (first designation) or EM-4626 (second designation) for Hurricane Ida in Mississippi

FEMA declaration number – DR-4629 for Hurricane Ida in Connecticut

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), 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.  You can also check out the KahnTaxLaw Coronavirus Resource Center.  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.

Beware Of New Tax Rule Affecting People Who Use Venmo, Paypal Or Other Payment Apps

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Beware Of New Tax Rule Affecting People Who Use Venmo, Paypal Or Other Payment Apps

Why Tax Planning Is More Important If You Earn Income From The Gig Economy.

From renting spare rooms and vacation homes to car rides or using a bike…name a service or a craft & handmade item marketplace and it’s probably available through the gig economy which is proliferating through many digital platforms like Uber, Lyft, Doordash, Postmates, Instacart and Airbnb.

And if you use payment apps like PayPal, Venmo, Square, and other third-party electronic payment networks to pay for goods and services, you should be aware of a tax reporting change that goes into effect in January 2022.

Starting with the 2022 calendar year, payment app providers will have to start reporting to the IRS a user’s business transactions if, in aggregate, they total $600 or more for the year. The reporting form to use is a Form 1099-K.  A business transaction is defined as payment for a good or service.

Prior to this change, app providers only had to send the IRS a Form 1099-K if an individual account had at least 200 business transactions in a year and if those transactions combined resulted in gross payments of at least $20,000.

The expansion of the reporting rule is the result of a provision in the American Rescue Plan, which was signed into law earlier this year. The IRS will be able to use this information to uncover unreported income and recover lost tax revenues.

Federal Government’s Independent Contractor Ruling

The U.S. Department of Labor on January 6, 2021 announced a final rule to define whether workers are employees or independent contractors making it easier for companies to classify workers as independent contractors.

The change bases worker classification on an “economic reality test” focused primarily on whether a worker is economically dependent on an employer. Under the test, individuals are classified as employees if they are economically dependent on the employer; but if an individual is in business for themselves and not economically dependent on someone else’s business, that individual should be classified as an independent contractor.

Independent contractors are not entitled to benefits for companies they render work for and independent contractors are responsible to pay self-employment taxes on their income.

California law updated in 2020 to expand independent contractor status

California Assembly Bill (“AB”) 5 codified the California Supreme Court holding in Dynamex Operations West, Inc. v. Superior Court and adopted the “ABC” test to determine whether independent contractors should be treated as employees with various exceptions.  Effective January 1, 2020 under the “ABC” test, workers are presumed to be employees unless they satisfy three conditions:

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

Under AB 5, certain occupations were excluded from the ABC test, including doctors, lawyers, dentists, licensed insurance agents, accountants, architects and engineers, private investigators, real estate agents, and hairstylists.

Since the enactment of AB 5, the California Legislature introduced subsequent legislation (AB 257) to allow more workers to be treated as independent contractors by increasing the availability of exemptions to the ABC test as follows:

  • Translators, appraisers, home inspectors and registered foresters.
  • For the entertainment industry to include recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers, musicians, vocalists, music album photographers, independent radio promoters, and certain publicists.
  • For referral agencies to include consulting, youth sports coaching, caddying, wedding and event planning, and interpreting services.

Lastly, in November 2020, California voters passed Proposition 22 which allows workers in the gig economy that serve as app-based drivers to be treated as independent contractors.

Four tips you should know about how the gig economy might affect your taxes:

 1.  The activity is taxable.

If you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you do it as a side job or just as a part time business and even if you are paid in cash and to minimize how much you need to pay in taxes, it is imperative that you keep track of your business expenses.

2.  Some expenses are deductible.

The tax code allows you to deduct certain costs of doing business from gross income. For example, a taxpayer who uses their car for business may qualify to claim the standard mileage rate, which is 56 cents per mile for 2021. Generally, you cannot deduct personal, living or family expenses. You can deduct the business part only, such as supplies, cell phones, auto expenses, food and drinks for passengers, car washes, parking fees, tolls, roadside assistance plans, taxes, and incentives associated with certain electric and hybrid vehicles.

Example: You used your car only for personal purposes during the first 6 months of the year. During the last 6 months of the year, you drove the car a total of 15,000 miles of which 12,000 miles were driven to provide transportation services through a company that provides such services through requests to its app. This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Your business use for the year is 40% (80% × 6/12).

Example: You use your car both for personal purposes and to provide transportation arranged through a company that provides transportation service through its app. You must divide your personal and business expenses based on actual mileage. You can deduct the business part of these actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Depending on the facts and circumstances, you may be providing the services either in a self-employed capacity or as an employee. If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate.

3.  You Could Be Subject To Self Employment Tax

The net income from your service-related activity with the sharing economy facilitator is subject to Self-Employment taxes, (Social Security and Medicare), at a 15.3% rate.  Now you will get to deduct one-half of these Self Employment taxes on your Form 1040 but if you consider that you still have income taxes to pay as well, the effective tax rate can easily exceed 30% and you will also have your state’s income tax on top of that.

So whether you are using your personal car for business or part of your residence as a home office, you will need to have good personal records of your expenses. In a situation where you are using your personal car for business you typically can deduct either “actual” costs for the percentage of business use, (though cell phone and food probably are not pertinent) or you can deduct mileage at a standard rate for business use. If you go the “simple” route and deduct mileage instead of “actual” expenses your Schedule C would consist of exactly 2 lines so it’s not very hard – but you will lose out on a lot of deductions and pay a lot more in taxes.

4.  Beware Of Requirement To Make Estimated Tax Payments.

Remember you are not an “employee” of the sharing economy facilitators; you are an “independent contractor”.  As such, there is no withholding of any taxes from your checks; you are responsible for all taxes – Self Employment taxes and income taxes – on your net earnings.  The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year. These payments are due on April 15, June 15, September 15 and January 15 (of the next year). Taxpayers use Form 1040-ES to figure these payments.

Why The IRS Likes The Gig Economy.

Unlike traditional transactions where two parties directly deal with each other and nothing is reported to the IRS, gig economy facilitators who connect the two parties, collect the money from the paying party and transmit the revenue to the service provider will report the sale to IRS using Form 1099. The IRS now has a tool by which they can match up the amount of income you report on your tax return and if the Form 1099 amount is greater, you can be sure that the IRS will catch this and send you a tax bill.

What Should You Do?

As the gig economy continues to grow, so do the associated tax problems. The IRS obviously is interested in folks who earn money using their autos as on-call car services or rent their homes to out-of-towners. That is why it’s important to keep good records. Choose a recordkeeping system suited to your business that clearly shows your income and expenses. The business you’re in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions. Your records must also show your gross income, as well as your deductions and credits. Federal law sets statutes of limitations that can affect how long you need to keep tax records.

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.

 

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

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With the proliferation of licensed cannabis businesses sprouting in the State Of California and a growing number of States, a lot of cannabis business will be filing tax returns with the IRS for the first time. But beware, the IRS is well aware that successful cannabis businesses don’t just sprout overnight and now that your business is on the radar screen you can bet that the IRS will be inquiring how you accumulated all that cash before 2021. We refer to this accumulation of cash as “legacy cash”.

The Internal Revenue Service released updated guidance on tax policy for the cannabis industry.  The new guidance briefly covers the rules for income reporting, cash payment options, estimating tax payments and keeping financial records.

The IRS guidance states “A key component in promoting the highest degree of voluntary compliance on the part of taxpayers is helping them understand and meet their tax responsibilities while also enforcing the law with integrity and fairness to all.”

This update appears to be in response to a Treasury Department report that was released in April 2020 where the Treasury Department’s Inspector General For Tax Administration had criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publicize guidance specific to the marijuana industry.”

Legacy Cash Is A Big Problem For Successful Cannabis Businesses

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

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

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

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

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

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

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

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

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

Step One: Incurred And Paid The Expense.

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

Step Two: Deductibility Of The Expense.

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

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

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

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

The “30-day letter”

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

The “Notice Of Deficiency”

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

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

What Should You Do?

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

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.

The U.S. 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 usually 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 that stack up quickly.  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. Fortunately, as we are now towards the end of 2021, taxpayers who expect to owe for 2021 should have their 2021 income tax returns as soon as possible in 2022 so that the 2021 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2022.

Remember that COVID-19 does not alter 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.

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. You can also check out the KahnTaxLaw Coronavirus Resource Center.  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 Expands Its Wave Of Tax Relief To More Victims Of Hurricane Ida

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IRS Expands Its Wave Of Tax Relief To More Victims Of Hurricane Ida

The IRS announced on August 31, 2021 that victims of Hurricane Ida that began on August 26, 2021 now have until January 3, 2022 to file various individual and business tax returns and make tax payments.  This relief was announced with a focus on taxpayers in Louisiana.  Then the IRS announced on September 8, 2021 that victims of Hurricane Ida in parts of New York and New Jersey that also get comparable relief.  In its continued effort to help taxpayers, the IRS announced on September 9, 2021 that victims of Hurricane Ida in Mississippi now have until November 1, 2021, to file various individual and business tax returns and make tax payments; and the IRS announced on September 13, 2021 that victims of Hurricane Ida in parts of Pennsylvania now have until January 3, 2022, to file various individual and business tax returns and make tax payments.

Following the October 22, 2021 disaster declaration by the Federal Emergency Management Agency (FEMA), victims of Hurricane Ida in parts of Mississippi now have additional time-until January 3, 2022 to file various individual and business tax returns and make tax payments. Currently, the expanded relief applies to Amite, Claiborne, Copiah, Covington, Franklin, Georgia, Hancock, Harrison, Jackson, Jefferson, Jefferson Davis, Lawrence, Lincoln, Pearl River, Pike, Simpson, Walthall, Wayne and Wilkinson counties. Any jurisdiction added to the October 22nd FEMA declaration will automatically receive the expanded IRS relief.  Previously, the IRS had provided special relief to the entire state of Mississippi, generally postponing various tax-filing and tax-payment deadlines until November 1, 2021.

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. This includes the following Pennsylvania counties of Bucks, Chester, Delaware, Montgomery, Philadelphia and York.  In Louisiana relief extends to the entire state.  In New York, this currently includes Bronx, Kings, New York, Queens, Richmond and Westchester counties, and in New Jersey, it includes Bergen, Gloucester, Hunterdon, Middlesex, Passaic and Somerset counties. In Mississippi it includes the entire State and the Mississippi Choctaw Indian Reservation. Taxpayers in Ida-impacted localities designated by FEMA in other parts of New York and New Jersey and neighboring states will automatically receive the same filing and payment relief. 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 tax relief postpones various tax filing and payment deadlines that occurred staring on August 31, 2021 for Pennsylvania victims, starting on August 26, 2021 for Louisiana victims, starting on August 28, 2021 for Mississippi victims, and starting on September 1, 2021 for New York and New Jersey victims. As a result, affected individuals and businesses in Mississippi, Pennsylvania, Louisiana, New York and New Jersey will have until January 3, 2022 to file returns and pay any taxes that were originally due during this period.  This means individuals who had a valid extension to file their 2020 return due to run out on October 15, 2021, will now have until January 3, 2022, to file.  However, any tax payments related to these 2020 returns that were due on May 17, 2021 are not eligible for this relief.

The January 3, 2022 deadline also applies to quarterly estimated income tax payments due on September 15, 2021, and the quarterly payroll and excise tax returns normally due on November 1, 2021. It also applies to tax-exempt organizations, operating on a calendar-year basis that had a valid extension due to run out on November 15, 2021. Businesses with extensions also have the additional time including, among others, calendar-year corporations whose 2020 extensions run out on October 15, 2021.

In addition, for Pennsylvania victims penalties on payroll and excise tax deposits due on or after August 31, 2021 and before September 15, 2021, will be abated as long as the deposits are made by September 15, 2021.   For Louisiana victims penalties on payroll and excise tax deposits due on or after August 26, 2021 and before September 10, 2021 will be abated as long as the deposits were made by September 10, 2021.  For New York and New Jersey victims penalties on payroll and excise tax deposits due on or after September 1, 2021 and before September 16, 2021 will be abated as long as the deposits were made by September 16, 2021.  For Mississippi victims penalties on payroll and excise tax deposits due on or after August 28, 2021 and before September 13, 2021 will be abated as long as the deposits were made by September 13, 2021.

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 2021 return normally filed next year), or the return for the prior year (2020). Be sure to write the appropriate FEMA declaration number on any return claiming a loss.

Here are the applicable FEMA declaration numbers to use:

FEMA declaration number – DR-4618 for Pennsylvania

FEMA declaration number – 4611 for Hurricane Ida in Louisiana

FEMA declaration number – 4614 for Hurricane Ida in New Jersey

FEMA declaration number – 4615 for Hurricane Ida in New York

FEMA declaration number – EM-3569 (first designation) or EM-4626 (second designation) for Hurricane Ida in Mississippi

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), 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.  You can also check out the KahnTaxLaw Coronavirus Resource Center.  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.