California Putting Pressure On Delinquent Taxpayers To Pay

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California Putting Pressure On Delinquent Taxpayers To Pay

Don’t think that you can avoid California tax enforcement action just because we are in a pandemic.  California is unique in the structure of its tax system. Most States operate under a single tax agency. The Federal government uses a single tax agency called the IRS. But California has three tax agencies! They are the Franchise Tax Board (“FTB”), California Department Of Tax And Fee Administration (“CDTFA”) and the Employment Development Department (“EDD”).

What does FTB cover?

The FTB administers the income tax. This tax applies not only to individuals, but also to sole proprietorships, partnerships, estates, and trusts. In addition, the income “passed through” to individuals by Subchapter S corporations and certain other entities is subject to State Personal Income Taxation. The tax is applied to all sources of income unless specifically excluded, including wages and salaries, interest, dividends, business-related income, and capital gains.

What does CDTFA cover?

The CDTFA administers the Sales and Use Tax. The tax in a specific California location has three parts: the state tax rate, the local tax rate and any district tax rate that may be in effect. Sales and Use Tax is the second largest source of tax revenue in California and is assessed at both the state and local levels.

What does EDD cover?

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

The California Tax Agencies can go way beyond liens and levies to enforce collection and put pressure on taxpayers.

The FTB publishes Top 500 Delinquent Taxpayers (one list for personal and one for corporate) twice a year in April and October. The FTB is required by law to post this information at least twice annually. California Revenue & Taxation Code § 19195.  Since the list’s inception in October 2007, FTB has collected more than $1 billion from delinquent taxpayers through the program.

The FTB will notify each taxpayer by certified mail 30 days before they post their information.

  • As cases are resolved, those taxpayers are removed from the list, reducing the total number of listings from the original 500.
  • Your occupational and professional licenses, including your driver’s license may be suspended under Business and Professions Code §494.5.
  • State agencies will not enter into contracts for the acquisition of goods and services with you under Public Contract Code §10295.4.

The CDTFA has a similar list of the state’s top sales and use tax debtors, which is updated quarterly.

The CDFTA will revoke your seller’s permit. If your seller’s permit is revoked, you cannot sell your goods. Also, as a corporate director, officer, member, manager, or other person having control or supervision of the filing of returns or payments of taxes, you may become personally liable for any unpaid sales and use taxes, interest, and penalties. Such personal liability for any unpaid taxes and interest and penalties on those taxes is triggered upon termination, dissolution, or abandonment of a corporate business or limited liability company, any officer, member, manager, or other person having control or supervision of, or who is charged with the responsibility for the filing of returns or the payment of tax, or who is under a duty to act for the corporation or limited liability company in complying with any requirement of this part. Section 6829 of the Revenue and Taxation Code.

The IRS has the Trust Fund Recovery Penalty (also known as the 100-percent penalty). The EDD has something similar referred to as “CUIC 1735”. But CUIC goes way beyond the IRS’ version. Not only does the EDD assert a full 100-percent exposure of the employees tax withholdings AND the employer’s share of payroll taxes to targeted responsible individuals but also a 10% nonabatable assessment penalty (it should be noted that the IRS version is limited only to the employee’s share of FICA and withheld federal income taxes, roughly 60% of the corporate employer’s overall liability). The two key elements of CUIC 1735 are responsibility and willfulness. The EDD must have both elements before they can make the 100% assessment stick. Any officer, major stockholder, or other person in charge of the affairs of the business can be held responsible. Before the assessment can become final, the targeted responsible person must be given notice, an opportunity for an administrative hearing, and an appeal. If the targeted individual loses his or her administrative hearing and appeal, and does not pay within 10 days after assessment, her or she will be penalized a further 10% pursuant to CUIC 1135.

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

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

Getting Ready For Tax Season 2022 – What You Need To Know About Reporting Economic Impact Payments

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Getting Ready For Tax Season 2022 – What You Need To Know About Reporting Economic Impact Payments

The third round of the Recovery Rebate Credit is authorized by the American Rescue Plan Act (ARPA) of 2021 which expanded the Child Tax Credit (CTC) for tax year 2021 only. Generally, this credit will increase the amount of your tax refund or decrease the amount of the tax you owe.

For tax year 2021, the Child Tax Credit is increased from $2,000 per qualifying child to:

  • $3,600 for children ages 5 and under at the end of 2021; and
  • $3,000 for children ages 6 through 17 at the end of 2021.

Who can claim the Recovery Rebate Credit?

Eligible individuals who did not receive the full amount of the Economic Impact Payments may claim the Recovery Rebate Credit on their 2021 Form 1040 or 1040-SR. To determine whether you are an eligible individual or the amount of your Recovery Rebate Credit, complete the Recovery Rebate Credit Worksheet in the Instructions for Form 1040 and Form 1040-SR.

Generally, you are eligible to claim the Recovery Rebate Credit if you were a U.S. citizen or U.S. resident alien in 2021, cannot be claimed as a dependent of another taxpayer for tax year 2021, and have a Social Security number valid for employment that is issued before the due date of your 2021 tax return (including extensions).

You must file Form 1040 or Form 1040-SR to claim the Recovery Rebate Credit even if you are normally not required to file a tax return.

Be On The Look0Out For CTC Letter From IRS

To help taxpayers reconcile and receive all of the Child Tax Credits to which they are entitled, the IRS will send Letter 6419, 2021 advance CTC, starting late December, 2021 and continuing into January 2022. The letter will include the total amount of advance Child Tax Credit payments taxpayers received in 2021 and the number of qualifying children used to calculate the advance payments. Taxpayers should provide this letter to their tax preparer along with their 2021 tax documents.

Families who received advance payments will need to file a 2021 tax return and compare the advance Child Tax Credit payments they received in 2021 with the amount of the Child Tax Credit they can properly claim on their 2021 tax return.

Eligible families who did not receive any advance Child Tax Credit payments can claim the full amount of the Child Tax Credit on their 2021 federal tax return, filed in 2022. This includes families who don’t normally need to file a tax return.

Your Recovery Rebate Credit amount will be phased out if your adjusted gross income for 2021 exceeds:

  • $150,000 if you are married filing a joint return or filing as a qualifying widow or widower,
  • $112,500 if you are using the head of household filing status, or
  • $75,000 if you are using any other filing status.

What If I Received More Than What I Was Entitled To?

If you received more than you were entitled to, the IRS does not require you to pay the money back nor is any such ineligible amount added on to your 2021 taxes.  Taxpayers whose incomes increased in 2021 compared with their earlier tax returns which the IRS relied on to determine whether they qualified for the payments, may be in this situation.

Will I owe taxes on the stimulus checks?

No, because the stimulus checks are not considered income by the IRS but instead are prepaid tax credits for your 2021 tax return, authorized by the ARPA of 2021.

Beware Of New IRS Scam!

You get a call from someone claiming to be working for the IRS claiming:

 “We need your personal information in order for you to claim the coronavirus stimulus money.”

This appears to be an identity theft scheme to obtain recipients’ personal and financial information so the scammers can provide the IRS with their banking information to get your economic impact payment deposited into their account.  In reality, the IRS WILL NOT CALL YOU! Federal aid will either be deposited via account information the IRS already has from your tax filings or they will send you a check.

Where can I get more information?

The IRS has established a special section focused on steps to help taxpayers, businesses and others affected by the coronavirus and as information becomes available, the IRS will be updating this special page on its website.  You can also check out the KahnTaxLaw Coronavirus Resource Center.

An Opportunity For Taxpayers Who Owe The IRS

Do not think that if you owe the IRS your tax problem will disappear because of the measures being considered by the government. Instead you should be utilizing this valuable time to get yourself prepared so that when activity in this nation regains momentum, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

As a prerequisite to any proposal to the IRS, you must be in current compliance. That means if you have any outstanding income tax returns, they must be completed and submitted to IRS.

Also, if you are required to make estimated tax payments, you must be current in making those payments. With the passing of 2021, taxpayers who expect to owe for 2021 should have their 2021 income tax returns done as early 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 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. 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 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.

 

California Raising Cannabis Taxes In 2022

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The California Department Of Tax And Fee Administration (CDTFA) which oversees the reporting and collection of taxes for the California cannabis industry under Emergency Regulation 3700 established a new category and tax rate for the cannabis cultivation tax that took effect January 1, 2018, along with the other existing cultivation tax rates. Every six months the CDTFA re-determines the cannabis markup rate. An analysis of statewide market data is used to determine the average mark-up rate between the wholesale cost and the retail selling price of cannabis and cannabis products. The CDTFA set the mark-up rate at 80% starting, January 1, 2020, and the CDTFA announced on May 13, 2020 that the mark-up rate for the last six months of 2020 shall remain unchanged at 80%.

Governor Newsom Signed AB 1872 Insuring No Tax Increases In 2021

On September 18, 2020 California Governor Gavin Newsom signed Assembly Bill 1872 (Committee on Budget). Specifically, AB 1872 suspends for one year, beginning January 1, 2021, the California Department of Tax and Fee Administration’s (CDTFA) authority to raise the cannabis cultivation tax and the wholesale mark-up rate for purposes of calculating the excise tax. Considering the fact that cannabis businesses don’t qualify for federal relief like other businesses have been able to secure during the COVID-19 pandemic, this tax relief should be welcomed by the industry.  But now that we are heading into 2022 tax rates are increasing.

Cannabis Cultivation Tax

As required by the Cannabis Tax Law, effective January 1, 2020, the cultivation tax rates reflect an adjustment for inflation. The adjusted rates for each category shown below will be reflected on the monthly and quarterly cannabis tax returns beginning January 1, 2022.

Cannabis Category 2021 Rate [follows 2020] 2022 Rate
Flower per dry-weight ounce $9.65 $10.08
Leaves per dry-weight ounce $2.87 $3.00
Fresh cannabis plant per ounce $1.35 $1.41
  • The 2022 rates apply to cannabis that a cultivator sells or transfers to a manufacturer or distributor on or after January 1, 2022. A cultivator’s cannabis sales or transfers made prior to January 1, 2022, will use the 2021 Rate.
  • All fresh cannabis plants must be weighed within two hours of harvesting.

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

Cannabis Excise Tax

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

Invoice Requirements

Retailers are required to provide purchasers with a receipt or other similar document that includes the following statement – “The cannabis excise taxes are included in the total amount of this invoice.”

Recordkeeping

Every sale or transport of cannabis or cannabis products must be recorded on an invoice or receipt. Cannabis licensees are required to keep invoices for a minimum of seven years.

Distributors (or in some cases manufacturers) are responsible for collecting the cannabis cultivation and excise taxes, and the invoices they provide must include, among other specified requirements, the amount of tax collected.

Retailers, cultivators, and manufacturers must keep these invoices as verification that the appropriate tax was paid.

How This Impacts The Black Market

Legal California cannabis businesses have been complaining about taxes, which in parts of the state are among the highest in the nation. Many believe that these taxes on compliant cannabis operators while still mandating compliance with State and local regulations will widen the price disparity gap between cannabis products sold in the black market vs. cannabis products sold in the legal market. But with the State stepping up its enforcement efforts to uncover and prosecute illegal cannabis operators, the State is hoping to eliminate this discrepancy by eradicating non-compliant operators.

What Should You Do?

Start your cannabis business on the right track.  Protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

IRS Criminal Investigation Division Releases Its 2021 Annual Report

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IRS Criminal Investigation Division Releases Its 2021 Annual Report

On November 18, 2021 the IRS released the Criminal Investigation Division’s (CI) annual report, highlighting significant successes and criminal enforcement actions taken in fiscal year ending September 30, 2021.  The IRS noted that a key achievement was the identification of over $10 billion in tax fraud and other financial crimes.

In issuing this report IRS Commissioner Chuck Rettig stated:  IRS-CI agents are the only federal law enforcement officers with the authority to investigate criminal violations of the U.S. tax code. Their work reinforces the backbone of our voluntary compliance tax system — a system that funds services and benefits for our nation, including defense, infrastructure and education.”

According to the report, CI 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. CI is the only federal law enforcement agency with jurisdiction over federal tax crimes achieving a conviction rate of over 90% in fiscal year 2021.

IRS Criminal Investigation Division Expands Its International Network

The report states that in the last fiscal year IRS-CI built upon its existing network of U.S. field offices and international attachés to combat financial crimes across the globe through the agency’s alliance with the Joint Chiefs of Global Tax Enforcement (J5) and public-private partnerships with financial institutions and the Fin-Tech industry to deter and identify criminal activity. Additionally, IRS-CI established its first cyber attaché in The Hague, Netherlands, to proactively support cyber investigative needs in coordination with Europol.

IRS-CI Chief Jim Lee stated “IRS-CI continues to lead tax and financial investigations here in the U.S. and across the globe. In fiscal year 2021, as we faced the second year of a global pandemic, our team of agents continued to overcome personal and professional challenges to target criminals who exploited the U.S. tax and financial systems for personal gain.”

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

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

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

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

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

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

Two Special Programs Run By CI

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

What Should You Do?

Very quickly a criminal investigation can turn to the worst for a targeted taxpayer so you should promptly seek tax counsel who can act proactively before the IRS does. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), 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.

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.

Infrastructure Bill Tax Provisions Include Increased Reporting Requirements For Cryptocurrency Transactions

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Infrastructure Bill Tax Provisions Include Increased Reporting Requirements For Cryptocurrency Transactions

Section 80603 of the bill imposes new crypto-assets information reporting requirements on brokers.

Cryptocurrency / Bitcoin – Is this the 21st century answer to hiding assets in Swiss bank accounts? 

The IRS thinks this is the case which is why the IRS has stepped up its investigation efforts to uncover non-compliant taxpayers just like the IRS successfully did in its investigation of the Swiss banks leading Congress to enact the Foreign Account Tax Compliance Act (“FATCA”).  FATCA forces foreign banks to disclose information on U.S. account holders which the IRS receives and matches the information reported by U.S. taxpayers.  No longer can taxpayers avoid reporting income on their foreign bank accounts.  No longer can taxpayers avoid disclosing their foreign bank accounts.

With more businesses willing to accept and transact in cryptocurrencies, the absence of specific rules related to the reporting of business income from cryptocurrency transactions has created a “tax gap” that the IRS intends to close.

The IRS has one of the most extensive data collections in the world. Traditionally its power to enforce has come through the matching of data. For example, you received a W-2 Form from your employer showing how much you earned. That same form is submitted by your employer to the IRS. Now the IRS can match your return to that form to make sure you are reporting the income. The same thing goes for 1099 forms showing your earnings from miscellaneous income, gambling winnings, interest and dividend income, sales of assets, deductions, and so on.

But with Bitcoin and other cryptocurrencies, there was no such third-party reporting.  Digital exchanges were not broker-regulated by the IRS. Exchanges did not issue a 1099 form, nor did they calculate gains or cost basis for the trader… until now.

New Reporting Requirements For Cryptocurrency Transactions

On August 10, 2021, H.R. 3684, known as the Infrastructure Investment and Jobs Act, was passed by the Senate on August 10, 2021 and having passed the House Of Representatives on November 5, 2021 it is headed to President Joe Biden’s desk to be signed into law.  This bill includes a provision that would require broker reporting of crypto-asset transfers.

Section 80603 of the bill imposes new crypto-assets information reporting requirements on brokers.

The Sec. 6045(c)(1) definition of “broker” is expanded to include anyone who for consideration effectuates “transfers of digital assets on behalf of another person”.  For these purposes, “digital asset” is defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology.”  Furthermore, the bill would amend Sec. 6045A to require brokers to provide information returns reporting any transfers of digital assets to accounts that are not maintained by a broker.

But the IRS does not stop there …

Chainalysis Reactor Software

The IRS and other federal agencies want to catch up on, and make sense of, the worldwide web of bitcoin and other cryptocurrencies.  Chainalysis is a company that created a cryptocurrency-tracing software dubbed “Reactor” which is being used by at least 10 federal agencies including the IRS.  The IRS Cyber Crimes Unit (CCU), a five-year-old division of its larger Criminal Investigation (CI) wing and the leader in the IRS’ cryptocurrency crimes investigations, uses this software as a tool to help identify taxpayers who could be non-compliant in the tax laws or involved in criminal activity.

Virtual currency is an ongoing focus area for IRS Criminal Investigation.

In 2018 the IRS announced a Virtual Currency Compliance Campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers. The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.

IRS Access To Cryptocurrency Transactions.

A John Doe Summons issued by IRS was ruled enforceable by U.S. Magistrate Judge Jacqueline Scott Corley in November 2017 (United States v. Coinbase, Inc., United States District Court, Northern District Of California, Case No.17-cv-01431).  Coinbase located in San Francisco is the largest cryptocurrency exchange in the United States.  Under the order, Coinbase will be required to turn over the names, addresses and tax identification numbers on 14,355 account holders. The Court has ordered Coinbase to produce the following customer information: (1) taxpayer ID number, (2) name, (3) birth date, (4) address, (5) records of account activity, including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and (6) all periodic statements of account or invoices (or the equivalent).

ON MARCH 16, 2018 COINBASE COMPLIED WITH THIS SUMMONS AND TURNED OVER DATA OF 14,355 ACCOUNT HOLDERS TO IRS.

Now while this net may not pick up taxpayers whose accounts have less than $20,000 in any one transaction type (buy, sell, send, or receive) in any one year from 2013 to 2015, it should be clear that this is the first step for the IRS to crush non-compliance for all taxpayers involved with cryptocurrency just like the IRS was successful in battling taxpayers having undisclosed foreign bank accounts.

10,000 Cryptocurrency Owners Receiving Warning Letters From The IRS

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

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

Notices Being Sent To Taxpayers Are The First Step In IRS Enforcement Action

The IRS is using three types of notices to send to more than 10,000 taxpayers by the end of August 2019 – notices 6173, 6174 or 6174-A. All three notices indicate the IRS has information that the taxpayer receiving the notice currently has or has had virtual currency. However, it is Letter 6173 that is most serious as it requires a signature from the recipient under perjury that they are compliant with the U.S. tax code or requiring taxpayers to respond to the IRS and either file delinquent returns for tax years 2013 through 2017 or amend previously filed returns and include the applicable forms or schedules reporting cryptocurrency transactions. If you receive a Letter 6173, it should be a virtual certainty that you will be selected for examination.

If you receive Letter 6173, you should consult with a tax attorney as the submission of a statement signed under penalties of perjury that is false can result in serious consequences including criminal prosecution.

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

Since 2019, Form 1040 includes the following checkbox question:

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

Taxpayers will now be required to check the appropriate box to answer the virtual currency question. 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! And this is why the IRS is first sending Letter 6173 requiring a signature from the recipient under perjury that the taxpayer is compliant with the U.S. tax code BEFORE the IRS then decides to audit the taxpayer.

Voluntary Disclosure – The Way To Avoid Criminal Fines & Punishment

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

What Should You Do?

With only several hundred people reporting their crypto gains each year since bitcoin’s launch, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns.  And now that like-exchange treatment is prohibited on 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 it’s is a routine random audit – it will be too late voluntarily come forward.

Take control of this risk and engage a bitcoin tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Bay Area (San Francisco, San Jose and Walnut Creek) and other California locations.  We can come up with solutions and strategies to these risks and protect you and your business to mitigate criminal prosecution, seek abatement of penalties, and minimize your tax liability.  Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you.

 

Celebrating The 25th Anniversary Of Proposition 215

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California Proposition 215 a/k/a The Compassionate Use Act of 1996, legalized medical cannabis in the state of California. It granted persons with a doctor’s permission access to cannabis from criminal prosecution regarding the possession or cultivation of cannabis. 

California voters approved Proposition 215 in November 1996 which was the start of other states legally allowing some form of cannabis.  The first group of states was Alaska, Oregon and Washington in 1998 to approve legalization of medical cannabis.  Maine, Hawaii, Colorado and Nevada came on board in 2000.

California’s Proposition 215 eventually led to Proposition 64 a/k/a The Adult Use of Marijuana Act of 2016 (AUMA) which expanded the legalization of cannabis to include recreational cannabis.

With about 37 states now legalizing some form of cannabis use, you would think that it is now time for the Federal government to change course.

The Anti-Federal U.S. Climate

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

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

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

Since 2013, these guidelines provided a level of certainty to the marijuana industry as to what point could you be crossing the line with the Federal government.  But on January 4, 2018, then Attorney General Jeff Sessions revoked the Cole Memo.  Now U.S. Attorneys in the local offices throughout the country retain broad prosecutorial discretion as to whether to prosecute cannabis businesses under federal law even though the state that these businesses operate in have legalized some form of marijuana.

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

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

The amendment states that:

NONE OF THE FUNDS MADE AVAILABLE UNDER THIS ACT TO THE DEPARTMENT OF JUSTICE MAY BE USED, WITH RESPECT TO ANY OF THE STATES OF ALABAMA, ALASKA, ARIZONA, ARKANSAS, CALIFORNIA, COLORADO, CONNECTICUT, DELAWARE, FLORIDA, GEORGIA, HAWAII, ILLINOIS, INDIANA, IOWA, KENTUCKY, LOUISIANA, MAINE, MARYLAND, MASSACHUSETTS, MICHIGAN, MINNESOTA, MISSISSIPPI, MISSOURI, MONTANA, NEVADA, NEW HAMPSHIRE, NEW JERSEY, NEW MEXICO, NEW YORK, NORTH CAROLINA, NORTH DAKOTA, OHIO, OKLAHOMA, OREGON, PENNSYLVANIA, RHODE ISLAND, SOUTH CAROLINA, TENNESSEE, TEXAS, UTAH, VERMONT, VIRGINIA, WASHINGTON, WEST VIRGINIA, WISCONSIN, AND WYOMING, OR WITH RESPECT TO THE DISTRICT OF COLUMBIA, GUAM, OR PUERTO RICO, TO PREVENT ANY OF THEM FROM IMPLEMENTING THEIR OWN LAWS THAT AUTHORIZE THE USE, DISTRIBUTION, POSSESSION, OR CULTIVATION OF MEDICAL MARIJUANA.

This action by the House is not impacted by the change of position by the DOJ. However, unless this amendment gets included in each succeeding federal appropriations bill, the protection from Federal prosecution of medical marijuana businesses will no longer be in place.  Fortunately, Congress has included this amendment but yet has changed any of the tax or banking laws that pose challenges to the cannabis industry.

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

What Should You Do?

Given the illegal status of cannabis under Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  Although cannabis is legal in California, that is not enough to protect you. Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, 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 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 your 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.

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. 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.