Did You Receive Funds From The Employee Retention Credit Program That You Were Not Eligible To Receive? Here are the five new red flags that IRS is looking for.

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IRS opens second Employee Retention Credit Voluntary Disclosure Program sending up to 30,000 letters to address more than $1 billion in errant claims

Thousands of new recapture letters going out for improper ERC claims made for Tax Year 2021, some Tax Year 2020.

As part of ongoing compliance work, the IRS announced on August 15, 2024 plans to mail thousands of additional letters reversing or recapturing improperly paid ERC claims. The IRS currently anticipates this round of mailings could reach up to 30,000 letters this fall. These “clawback” notices potentially represent more than $1 billion in claims from Tax Year 2021 and some additional, later-filed Tax Year 2020 claims. These letters notify taxpayers that the IRS is reversing or recapturing their previous credit. Several thousand of the letters have been mailed, with more coming in upcoming weeks and into the fall.

This is the second round of these letters. Previously, the IRS determined that more than 12,000 entities filed claims that were improper for Tax Year 2020, resulting in $572 million in assessments.

The latest letters generally involve larger claims than earlier letters regarding 2020 because Congress increased the maximum ERC in 2021. Congress increased the maximum ERC from $5,000 per employee per year in 2020 to $7,000 per employee for each quarter of the year in 2021.

“This new round of letters serves as another incentive for businesses that believe they received an erroneous Employee Retention Credit payment to come forward and participate in the disclosure program and resolve the matter on more favorable terms,” IRS Commissioner Danny Werfel said. “The disclosure program provides a limited, unique opportunity to avoid future IRS compliance problems as well as sidestep a significant repayment fee with penalties and interest.”

Red Flags The IRS Is Looking For –

When the IRS identifies an employer that has received excessive or erroneous ERC, the agency will reclaim that ERC through normal tax assessment and collection procedures.

The five new red flags cover these areas:

  • Essential businesses during the pandemic that could fully operate and didn’t have a decline in gross receipts.Promoters convinced many essential businesses to claim the ERC when, in many instances, essential businesses weren’t eligible because their operations weren’t fully or partially suspended by a qualifying government order.
  • Businesses unable to support how a government order fully or partially suspended business operations.Whether a business was fully or partially suspended depends on its specific situation. When asked for proof on how the government order suspended more than a nominal portion of their business operations, many businesses haven’t provided enough information to confirm eligibility.
  • Businesses reporting family members’ wages as qualified wages.If business owners claimed the ERC using wages paid to related individuals, those claims are likely for the wrong amount or ineligible.
  • Businesses using wages already used for Paycheck Protection Program loan forgiveness.Businesses can’t claim the ERC on wages that they reported as payroll costs to get PPP loan forgiveness.
  • Large employers claiming wages for employees who provided services.Large eligible employers can only claim wages paid to employees who were not providing services. Many large employers’ claims incorrectly included wages for employees who were providing services during these periods.

The IRS previously issued warnings involving these seven areas:

  • Too many quarters being claimed.
  • Government orders that don’t qualify.
  • Too many employees and wrong calculations.
  • Businesses citing supply chain issues.
  • Businesses claiming ERC for too much of a tax period.
  • Businesses didn’t pay wages or didn’t exist during eligibility period.
  • Promoter says there’s nothing to lose.

Reopening Of ERC-VDP.

If you claimed and received funds from the Employee Retention Credit (“ERC”) Program and now realize that you were not entitled to receive those funds, you should consider entering into the Employee Retention Credit Voluntary Disclosure Program (“ERC-VDP”). The IRS believes that there are taxpayers who were lured by promoters to apply to the IRS to get funds from the ERC Program even though the promoters knew that the taxpayer did not qualify to get funds from the ERC Program.  If such a taxpayer is selected for examination by the IRS and the IRS determines that the ERC claim is erroneous, such taxpayer will be required to repay the ERC funds with penalties and interest.  Criminal prosecution is also possible where egregious circumstances and willful intent are present.

Criminal exposure and a reduced amount of payback is available by entering into ERC-VDP.  The SECOND ERC-VDP allows filers of erroneous ERC claims to voluntarily disclose ERC claims made in error and pay only 85% of the amount received without any worry of criminal exposure.  The FIRST ERC-VDP which required an 80% payback had a deadline of March 22, 2024 to file for participation.  Even though the SECOND ERC-VDP provides a slightly higher payback than the FIRST ERC-VDP, the SECOND ERC-VDP can still protect businesses from potential costly compliance action in the future, such as audits, full repayment, penalties and interest.

Details Of The Second ERC-VDP.

The program requires you to:

  • Voluntarily pay back the ERC funds received, minus 15%,
  • Cooperate with any requests from the IRS for more information, and
  • Sign a closing agreement.

Benefits Of ERC-VDP.

There are several benefits to using the ERC-VDP if you received the ERC funds but were not entitled to them.

  • You need to repay only 85% of the ERC funds (the First ERC-VDP was 80%) you received as a credit on your return or as a refund.
  • You do not need to repay any interest you received on your ERC refund.
  • You do not have to amend income tax returns to reduce wage expense.
  • The 15% retention of ERC funds (the First ERC-VDP was 20%) is not taxable as income.
  • The IRS will not charge penalties or interest on the claimed ERC amount if you pay it in full (claimed ERC minus 15% under the Second ERC-VCP) by the time you return your signed closing agreement to IRS.
  • The IRS will not examine ERC on your employment tax return for tax period(s) resolved within the terms of ERC-VDP.

Who can apply to the ERC-VDP.

Businesses, tax-exempt organizations, and government entities are eligible to apply for the ERC-VDP for each tax period that meets all the following requirements:

  • Your ERC claimed on an employment tax return has been processed and paid as a refund, which you have cashed or deposited, or paid in the form of a credit applied to the tax period or another tax period.
  • You now think that you were entitled to $0 ERC.
  • You are not under employment tax examination (audit) by the IRS.
  • You are not under criminal investigation by the IRS.
  • The IRS has not reversed or notified you of intent to reverse your ERC to $0. For example, you received a letter or notice from the IRS disallowing your ERC.

If you used a third-party payer to file your employment tax returns or claim your ERC, you cannot apply to the ERC-VDP yourself. You must contact the third-party payer to apply.  Also, if you have applied for ERC and have yet to receive the ERC funds, you cannot participate in ERC-VDP.  Instead you would need to pursue the ERC claim withdrawal process.

How to apply to ERC Voluntary Disclosure Program.

The submission of Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, will start the process which must be filed no later than November 22, 2024.  Additionally, if your application includes tax periods ending in 2020, you must include ERC-VDP Form SS-10. By utilizing qualified tax counsel, you should have the greatest likelihood of meeting the ERC-VDP requirements and thus securing all the program’s benefits.

IMPORTANT NOTE – Any taxpayer receiving a recapture letter from IRS before applying will be ineligible to participate in the Voluntary Disclosure Program for the calendar quarter that the letter covers. SO DON’T DELAY.

What Should You Do?

We encourage taxpayers who are concerned about their ERC funding awards to come in voluntarily before the IRS commences any examination or investigation.  By then, it will be too late to avoid the risk of returning all ERC funds awarded plus interest and penalties.

Let the tax attorneys of the  Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California can help you with your ERC-VDP application, give advice about this process, or advice on the ERC. 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. Tax problems are usually a serious matter and must be handled appropriately so it is important to that you have hired the best lawyer for your situation. We are experts in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Did You Receive Funds From The Employee Retention Credit Program That You Were Not Eligible To Receive?

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Did You Receive Funds From The Employee Retention Credit Program That You Were Not Eligible To Receive?

Time is running out to participate in the Employee Retention Credit Voluntary Disclosure Program, which ends on March 22, 2024.

If you claimed and received funds from the Employee Retention Credit (“ERC”) Program and now realize that you were not entitled to receive those funds, you should consider entering into the Employee Retention Credit Voluntary Disclosure Program (“ERC-VDP”). The IRS believes that there are taxpayers who were lured by promoters to apply to the IRS to get funds from the ERC Program even though the promoters knew that the taxpayer did not qualify to get funds from the ERC Program.  If such a taxpayer is selected for examination by the IRS and the IRS determines that the ERC claim is erroneous, such taxpayer will be required to repay the ERC funds with penalties and interest.  Criminal prosecution is also possible where egregious circumstances and willful intent are present.

Criminal exposure and a reduced amount of payback is available by entering into ERC-VDP.  The ERC-VDP allows filers of erroneous ERC claims to voluntarily disclose ERC claims made in error and pay only 80% of the amount received without any worry of criminal exposure.  But the deadline to apply for ERC-VDP is quickly approaching – you only have through March 22, 2024 to apply.

Details Of ERC-VDP.

The program requires you to:

  • Voluntarily pay back the ERC funds received, minus 20%,
  • Cooperate with any requests from the IRS for more information, and
  • Sign a closing agreement.

Benefits Of ERC-VDP.

There are several benefits to using the ERC-VDP if you received the ERC funds but were not entitled to them.

  • You need to repay only 80% of the ERC funds you received as a credit on your return or as a refund.
  • You do not need to repay any interest you received on your ERC refund.
  • You do not have to amend income tax returns to reduce wage expense.
  • The 20% retention of ERC funds is not taxable as income.
  • The IRS will not charge penalties or interest on the claimed ERC amount if you pay it in full (claimed ERC minus 20%) by the time you return your signed closing agreement to IRS.
  • The IRS will not examine ERC on your employment tax return for tax period(s) resolved within the terms of ERC-VDP.

Who can apply to the ERC-VDP.

Businesses, tax-exempt organizations, and government entities are eligible to apply for the ERC-VDP for each tax period that meets all the following requirements:

  • Your ERC claimed on an employment tax return has been processed and paid as a refund, which you have cashed or deposited, or paid in the form of a credit applied to the tax period or another tax period.
  • You now think that you were entitled to $0 ERC.
  • You are not under employment tax examination (audit) by the IRS.
  • You are not under criminal investigation by the IRS.
  • The IRS has not reversed or notified you of intent to reverse your ERC to $0. For example, you received a letter or notice from the IRS disallowing your ERC.

If you used a third-party payer to file your employment tax returns or claim your ERC, you cannot apply to the ERC-VDP yourself. You must contact the third-party payer to apply.  Also, if you have applied for ERC and have yet to receive the ERC funds, you cannot participate in ERC-VDP.  Instead you would need to pursue the ERC claim withdrawal process.

How to apply to ERC Voluntary Disclosure Program.

The submission of Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, will start the process which must be filed no later than March 22, 2024.  Additionally, if your application includes tax periods ending in 2020, you must include ERC-VDP Form SS-10. By utilizing qualified tax counsel, you should have the greatest likelihood of meeting the ERC-VDP requirements and thus securing all the program’s benefits.

What Should You Do?

We encourage taxpayers who are concerned about their ERC funding awards to come in voluntarily before the IRS commences any examination or investigation.  By then, it will be too late to avoid the risk of returning all ERC funds awarded plus interest and penalties.

Let the tax attorneys of the  Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California can help you with your ERC-VDP application, give advice about this process, or advice on the ERC. 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. Tax problems are usually a serious matter and must be handled appropriately so it is important to that you have hired the best lawyer for your situation. We are experts in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Why Taxpayers Involved In Offshore Accounts, Cryptocurrency Or Cannabis Should Be Filing An Extension For Their 2021 Income Tax Returns.

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Why Taxpayers Involved In Offshore Accounts, Cryptocurrency Or Cannabis Should Be Filing An Extension For Their 2021 Income Tax Returns.

If you did not report your offshore accounts, cryptocurrency income or cannabis income earned before 2021, you should hold off on filing your 2021 taxes and instead file an extension.

An extension is your way of asking the IRS for additional time to file your tax return. The IRS will automatically grant you an additional time to file your return. While State Tax Agencies will also provide the same extension period, you need to check with your State to see if an extension must be filed with the State as well.  For example, California does not require that a State extension be filed as long as you timely file the Federal extension AND you will not owe any money to the State.

The deadline to file your 2021 federal individual income tax returns or request an extension of time to file the tax return is Monday, April 18, 2022 (normally would have been April 15th but for the observance of the Emancipation Day holiday in the District of Columbia).  Taxpayers in Maine or Massachusetts have until April 19, 2022, to file their returns due to the observance of the Patriots’ Day holiday in those states. A timely filed extension will extend the filing deadline to Monday, October 17, 2022 thus giving you an extra six months to meet with tax counsel and determine how to address your pre-2021 tax reporting delinquencies and/or exposure and how to present your situation on your 2021 tax return.

While an extension gives you extra time to file your return, an extension does not give you extra time to pay your tax and if you do not pay what you owe with the extension, you will still be ultimately charged with late payment penalties when you file your tax return.

Offshore Accounts

Where a taxpayer does not come forward voluntarily though a Voluntary Disclosure Program and has now been targeted by IRS for failing to file the Foreign Bank Account Reports (FBAR), the IRS may now assert FBAR penalties that could be either non-willful or willful.  Both types have varying upper limits, but no floor.  The first type is the non-willful FBAR penalty.  The maximum non-willful FBAR penalty is $10,000.  The second type is the willful FBAR penalty.  The maximum willful FBAR penalty is the greater of (a) $100,000 or (b) 50% of the total balance of the foreign account.  In addition, the IRS can pursue criminal charges with the willful FBAR penalty.  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).

For the non-willful penalty, all the IRS has to show is that an FBAR was not filed.  Whether the taxpayer knew or did not know about the filing of this form is irrelevant.  The non-willful FBAR penalty is $10,000 per account, per year and so a taxpayer with multiple accounts over multiple years can end up with a huge penalty.

Since 2009, the IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.

Cryptocurrency

Many taxpayers think that their crypto transactions would remain a secret forever.  Digital exchanges are not broker-regulated by the IRS. Digital exchanges are not obligated to issue a 1099 form, nor are they obligated to report to the IRS calculate gains or cost basis for the trader. But that is now all changing sooner than you think!

As of March 16, 2018, the IRS has received information from Coinbase located in San Francisco which is the largest cryptocurrency exchange in the United States disclosing the names, addresses and tax identification numbers on 14,355 account holders. Coinbase pursuant to a Court Order issued by a Federal Magistrate Judge (United States v. Coinbase, Inc., United States District Court, Northern District Of California, Case No.17-cv-01431) had to produce the following customer information over the period of 2013 to 2015: (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).

Furthermore, Coinbase starting with the 2017 tax years will be issuing 1099-K tax forms for some of its U.S. clients.  The IRS will receive copies of these forms.

Following the success of the results of a John Doe Summons issued to Coinbase, Inc. as I previously reported, on April 1, 2021 the U.S. Department Of Justice announced that a federal court in the District of Massachusetts entered an order today authorizing the IRS to serve a John Doe summons on Circle Internet Financial Inc., or its predecessors, subsidiaries, divisions, and affiliates, including Poloniex LLC (collectively “Circle”), seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020. The IRS is seeking the records of Americans who engaged in business with or through Circle, a digital currency exchanger headquartered in Boston.

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

Cannabis

Over 300,000 Americans now work in the legal cannabis industry – these workers were declared “essential” during the COVID emergency. In the past few weeks, three more states have legalized bringing the total number of adult-use states to 18, along with the 37 medical states and the District of Columbia.  There are also 6 tribal nations and most of the U.S. territories that have legalized cannabis.  With the proliferation of licensed cannabis businesses sprouting across the country, a continued stream of cannabis business will be filing tax returns with the IRS.  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.

Cannabis is categorized as a Schedule I substance under the Controlled Substances Act. While more than half of the states in the U.S. have legalized some form of medicinal marijuana, and several others have passed laws permitting recreational cannabis use, under federal drug laws the sale of cannabis remains illegal.

Despite the disparity and Federal and State law, marijuana businesses still have to pay taxes.

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

A cannabis business that has not properly reported its income and expenses and not engaged in the planning to minimize income taxes can face a large liability proposed by IRS reflected on a Notice Of Deficiency or tax bill.  Likewise, where a taxpayer over the years has accumulated cash from cannabis sales and never reported any income to the IRS, you are looking at a serious problem.

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

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

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

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

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

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

What Should You Do?

Individual taxpayers can file an extension using Form 4868. Extensions can also be filed online, which has the benefit that you’ll receive a confirmation code from the IRS notifying you that your extension was received.  Then you should promptly contact tax counsel.  Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and offices elsewhere in California get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. If you are involved in cannabis, check out what else a cannabis tax attorney can do for you. Also, if you are involved in crypto currency, check out what a Bitcoin tax attorney can do for you.

IRS Making It Easier For Taxpayers To Come Into The Voluntary Disclosure Program

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IRS Making It Easier For Taxpayers To Come Into The Voluntary Disclosure Program

A tax crime is complete on the day the false return was filed.

It is a federal crime for anyone to knowingly and willfully file an income tax return that he or she knows to be false in some material way. 26 U.S.C. § 7207 provides:

Any person who willfully delivers or discloses to the Secretary any list, return, account, statement, or other document, known by him to be fraudulent or to be false as to any material matter, shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both. Any person required pursuant to section 6047 (b), section 6104(d), or subsection (i) or (j) of section 527 to furnish any information to the Secretary or any other person who willfully furnishes to the Secretary or such other person any information known by him to be fraudulent or to be false as to any material matter shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both.

In filing false tax return cases, the Government does not need to prove that it has been deprived of any tax by reason of such filing of the false return; even if it is shown that additional taxes may be due, the person can still be held accountable because they willfully filed a false tax return.

Avoiding Criminal Prosecution By Submitting To Voluntary Disclosure

The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal Investigation of taking timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted.  It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution.  When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.  However, if the IRS has initiated a civil examination, regardless of whether it relates to undisclosed foreign accounts or undisclosed foreign entities, the taxpayer will not be eligible to come in under the IRS’s Voluntary Disclosure Practice.

Required Elements Of A Qualified Disclosure

IRS administrative practice recognizes that a taxpayer may still avoid prosecution by voluntarily disclosing a tax violation, provided that there is a qualifying disclosure that is (1) timely and (2) voluntary. A disclosure within the meaning of the practice means a communication that is truthful and complete, and the taxpayer cooperates with IRS personnel in determining the correct tax liability. Cooperation also includes making good faith arrangements to pay the unpaid tax and penalties “to the extent of the taxpayer’s actual ability to pay”.

Timely.

A disclosure is timely if it is received before the IRS has begun an inquiry that is (1) “likely to lead to the taxpayer” and (2) the taxpayer is reasonably thought to be aware” of that inquiry; or the disclosure is received before some triggering or prompting event has occurred (1) that is known by the taxpayer and (2) that triggering event is likely to cause an audit into the taxpayer’s liabilities.

Voluntary.

Voluntari­ness is tested by the following factors: (1) how far the IRS has gone in determin­ing the tax investigation potential of the taxpayer; (2) the extent of the taxpayer’s knowledge or awareness of the Service’s interest; and (3) what part the triggering event played in prompting the disclosure (where the disclosure is prompted by fear of a triggering event, it is not truly a voluntary disclosure).

No voluntary disclosure can be made by a taxpayer if an investigation by the Service has already begun. Therefore, once a taxpayer has been contacted by any Service function (whether it be the Service center, office examiner, revenue agent, or a special agent), the taxpayer cannot make a qualifying voluntary dis­closure under IRS practice.

A voluntary disclosure can be made even if the taxpayer does not know that the Service has selected the return for examination or investigation may be too restrictive. Consequently, if there is no indi­cation that the Service has started an examination or investigation, Tax Counsel may send a letter to the Service stating that tax returns of the taxpayer have been found to be incorrect and that amended returns will be filed as soon as they can be accurately and correctly prepared. This approach has the advantage of putting the taxpayer on record as making a voluntary dis­closure at a time when no known investigation is pending. However, neither the taxpayer nor the lawyer can be completely certain that the volun­tary disclosure will prevent the recommendation of criminal prosecution.

Form 14457, Voluntary Disclosure Practice Preclearance Request and Application

Form 14457 has been revised by IRS permitting taxpayers who may face criminal prosecution for willful violation of tax law to voluntarily disclose information to the IRS that they failed to previously disclose.

Updates and additions to this form include:

  • IRS Criminal Investigation now accepts photocopies, facsimiles and scans of taxpayer signatures. Previously, Part II of Form 14457 had to be mailed.
  • An expanded section for reporting virtual currency.
  • A penalty structure for employment tax and estate and gift issues.
  • A check-box for inability to pay in full.

Doug O’Donnell, Deputy Commissioner Services and Enforcement stated “This is an important form and process for people who recognize it’s better to step forward and address their tax situations head-on, before facing IRS enforcement action.  The revised form includes a number of updates, and we encourage people to review the guidelines and consult a trusted tax professional.”

“Quiet Disclosure”

Where no IRS examination or investigation is pending a taxpayer’s alternative is the preparation and filing of delinquent or amended returns. Such action is called a “Quiet Disclosure”.  The advantage of filing delinquent or amended returns without a communication drawing attention to them is that the returns may not even be examined after being received at the Service Center. In such an event, the taxpayer not only will have made a voluntary disclosure but will have avoided an examination as well. The disadvantage is that during the time the returns are being prepared, the taxpayer may be contacted by the Service and a voluntary disclosure prevented.  Another disadvantage is that the IRS could use the filed amended income tax returns to constitute an admission that the correct income and tax were willfully not reported and institute criminal prosecution.

What Should You Do?

There is no set formula as to whether a taxpayer should pursue a Voluntary Disclosure or Quiet Disclosure.  It really depends on a case by case basis which is why you are best served by consulting with a criminal tax attorney expert in evaluating these matters.  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, tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California can determine how to respond to these inquiries and formulate an effective strategy.  Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you.  Additionally, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.Top of Form

 

Why Taxpayers Involved In Offshore Accounts, Cryptocurrency Or Cannabis Should Be Filing An Extension For Their 2020 Income Tax Returns.

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Why Taxpayers Involved In Offshore Accounts, Cryptocurrency Or Cannabis Should Be Filing An Extension For Their 2020 Income Tax Returns.

If you did not report your offshore accounts, cryptocurrency income or cannabis income earned before 2020, you should hold off on filing your 2020 taxes and instead file an extension.

An extension is your way of asking the IRS for additional time to file your tax return. The IRS will automatically grant you an additional time to file your return. While State Tax Agencies will also provide the same extension period, you need to check with your State to see if an extension must be filed with the State as well.  For example, California does not require that a State extension be filed as long as you timely file the Federal extension AND you will not owe any money to the State.

The deadline to file your 2020 federal individual income tax returns or request an extension of time to file the tax return is Monday, May 17, 2021 (normally would have been April 15th but extended due to COVID-19).  A timely filed extension will extend the filing deadline to Friday, October 15, 2021 thus giving you an extra five months to meet with tax counsel and determine how to address your pre-2020 tax reporting delinquencies and/or exposure and how to present your situation on your 2020 tax return.

While an extension gives you extra time to file your return, an extension does not give you extra time to pay your tax and if you do not pay what you owe with the extension, you will still be ultimately charged with late payment penalties when you file your tax return.

Offshore Accounts

Where a taxpayer does not come forward voluntarily though a Voluntary Disclosure Program and has now been targeted by IRS for failing to file the Foreign Bank Account Reports (FBAR), the IRS may now assert FBAR penalties that could be either non-willful or willful.  Both types have varying upper limits, but no floor.  The first type is the non-willful FBAR penalty.  The maximum non-willful FBAR penalty is $10,000.  The second type is the willful FBAR penalty.  The maximum willful FBAR penalty is the greater of (a) $100,000 or (b) 50% of the total balance of the foreign account.  In addition, the IRS can pursue criminal charges with the willful FBAR penalty.  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).

For the non-willful penalty, all the IRS has to show is that an FBAR was not filed.  Whether the taxpayer knew or did not know about the filing of this form is irrelevant.  The non-willful FBAR penalty is $10,000 per account, per year and so a taxpayer with multiple accounts over multiple years can end up with a huge penalty.

Since 2009, the IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.

Cryptocurrency

Many taxpayers think that their crypto transactions would remain a secret forever.  Digital exchanges are not broker-regulated by the IRS. Digital exchanges are not obligated to issue a 1099 form, nor are they obligated to report to the IRS calculate gains or cost basis for the trader. But that is now all changing sooner than you think!

As of March 16, 2018, the IRS has received information from Coinbase located in San Francisco which is the largest cryptocurrency exchange in the United States disclosing the names, addresses and tax identification numbers on 14,355 account holders. Coinbase pursuant to a Court Order issued by a Federal Magistrate Judge (United States v. Coinbase, Inc., United States District Court, Northern District Of California, Case No.17-cv-01431) had to produce the following customer information over the period of 2013 to 2015: (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).

Furthermore, Coinbase starting with the 2017 tax years will be issuing 1099-K tax forms for some of its U.S. clients.  The IRS will receive copies of these forms.

Following the success of the results of a John Doe Summons issued to Coinbase, Inc. as I previously reported, on April 1, 2021 the U.S. Department Of Justice announced that a federal court in the District of Massachusetts entered an order today authorizing the IRS to serve a John Doe summons on Circle Internet Financial Inc., or its predecessors, subsidiaries, divisions, and affiliates, including Poloniex LLC (collectively “Circle”), seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020. The IRS is seeking the records of Americans who engaged in business with or through Circle, a digital currency exchanger headquartered in Boston.

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

Cannabis

Over 300,000 Americans now work in the legal cannabis industry – these workers were declared “essential” during the COVID emergency. In the past few weeks, three more states have legalized bringing the total number of adult-use states to 18, along with the 35 medical states and the District of Columbia.  With the proliferation of licensed cannabis businesses sprouting across the country, a continued stream of cannabis business will be filing tax returns with the IRS.  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 2020.

Cannabis is categorized as a Schedule I substance under the Controlled Substances Act. While more than half of the states in the U.S. have legalized some form of medicinal marijuana, and several others have passed laws permitting recreational cannabis use, under federal drug laws the sale of cannabis remains illegal.

Despite the disparity and Federal and State law, marijuana businesses still have to pay taxes.

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

A cannabis business that has not properly reported its income and expenses and not engaged in the planning to minimize income taxes can face a large liability proposed by IRS reflected on a Notice Of Deficiency or tax bill.  Likewise, where a taxpayer over the years has accumulated cash from cannabis sales and never reported any income to the IRS, you are looking at a serious problem.

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

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

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

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

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

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

What Should You Do?

Individual taxpayers can file an extension using Form 4868. Extensions can also be filed online, which has the benefit that you’ll receive a confirmation code from the IRS notifying you that your extension was received.  Then you should promptly contact tax counsel.  Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and offices elsewhere in California get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. If you are involved in cannabis, check out what else a cannabis tax attorney can do for you. Also, if you are involved in crypto currency, check out what a Bitcoin tax attorney can do for you.

First It Was Coinbase, Now It Is Poloniex – Court Authorizes Service of John Doe Summons Seeking Identities of U.S. Taxpayers Who Have Used Cryptocurrency

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First It Was Coinbase, Now It Is Poloniex – Court Authorizes Service of John Doe Summons Seeking Identities of U.S. Taxpayers Who Have Used Cryptocurrency

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 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.

Following the success of the results of a John Doe Summons issued to Coinbase, Inc. as I previously reported, on April 1, 2021 the U.S. Department Of Justice announced that a federal court in the District of Massachusetts entered an order today authorizing the IRS to serve a John Doe summons on Circle Internet Financial Inc., or its predecessors, subsidiaries, divisions, and affiliates, including Poloniex LLC (collectively “Circle”), seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020. The IRS is seeking the records of Americans who engaged in business with or through Circle, a digital currency exchanger headquartered in Boston.

Under the order, Circle will be required to turn over the names, addresses and tax identification numbers on its account holders. The Court has ordered Circle 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).

“Those who transact with cryptocurrency must meet their tax obligations like any other taxpayer,” said Acting Assistant Attorney General David A. Hubbert of the Justice Department’s Tax Division. “The Department of Justice will continue to work with the IRS to ensure that cryptocurrency owners are paying their fair share of taxes.”

“Tools like the John Doe summons authorized today send the clear message to U.S. taxpayers that the IRS is working to ensure that they are fully compliant in their use of virtual currency,” said IRS Commissioner Chuck Rettig. “The John Doe summons is a step to enable the IRS to uncover those who are failing to properly report their virtual currency transactions. We will enforce the law where we find systemic noncompliance or fraud.”

Cryptocurrency, as generally defined, is a digital representation of value. Because transactions in cryptocurrencies can be difficult to trace and have an inherently pseudo-anonymous aspect, taxpayers may be using them to hide taxable income from the IRS. In the court’s order, U.S. Judge Richard G. Stearns found that there is a reasonable basis for believing that cryptocurrency users may have failed to comply with federal tax laws.

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

Since 2019, Form 1040, Schedule1, Additional Income and Adjustments to Income, now includes the following checkbox question:

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

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

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

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

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

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

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

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

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

Voluntary Disclosure – The Way To Avoid Criminal Fines & Punishment

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

What Should You Do?

With only several hundred people reporting their crypto gains each year since bitcoin’s launch, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns.  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), San Francisco Bay Area (including Walnut Creek and San Jose) 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.

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10,000 Cryptocurrency Owners Will Receive Warning Letters From The IRS

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10,000 Cryptocurrency Owners Will Receive 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. Of all the notices, Letter 6173 requires a signature from the recipient under perjury that they are compliant with the U.S. tax code.

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.

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

Last year 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.

Taxation Of Cryptocurrency

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

The IRS in 2014 issued Notice 2014-21 stating that it treats crypto currency as property for tax purposes. Therefore, selling, spending and even exchanging crypto for other tokens all likely have capital gain implications. Likewise, receiving it as compensation or by other means will be ordinary income.

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

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

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

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

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

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

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

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

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

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

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

What Should You Do?

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

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

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

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Do You Have A Business That Involves Transactions In Cash? Beware Of IRS Required Filings That If Not Followed Could Lead To Penalties And Jail-time.

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While there is no law making it illegal to transact business with cash, the IRS has an interest in requiring parties to report cash transactions to deter those who evade taxes, profit from the drug trade and engage in terrorist financing and other criminal activities. The government can often trace money from these illegal activities through the payments reported on this and other cash reporting forms.  This is particularly true as more and more states are allowing the sale of cannabis at the medical and/or recreational level.

Bank Secrecy Act – Reporting Of Cash Payments.

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

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

Electronic Filing Of Form 8300, Report of Cash Payments Over $10,000.

Although businesses have the option of filing Form 8300, Report of Cash Payments Over $10,000, on paper, there is the option to e-filing this form especially since the deadline to file the form is 15 days after a reportable cash transaction occurs.Businesses that file Form 8300 electronically get free, automatic acknowledgment of receipt when they file and since the reporting involves no IRS personnel interaction, it could arguably lower scrutiny by the IRS. To file Form 8300 electronically, a business must first set up an account with the Financial Crimes Enforcement Network’s BSA E-Filing System.

For more information about the reporting requirement, you can check out the fact sheet put out by IRS atFS-2019-1 which among other things includes reporting scenarios for specific businesses, such as automobile dealerships, taxi companies, landlords, colleges and universities, homebuilders and bail-bonding agents.

Financial Crimes Enforcement Network (“FinCEN”).

FinCEN is a bureau of the U.S. Department of the Treasury. The Director of FinCEN is appointed by the Secretary of the Treasury and reports to the Treasury Under-Secretary for Terrorism and Financial Intelligence. FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.

FinCEN carries out its mission by receiving and maintaining financial transactions data; analyzing and disseminating that data for law enforcement purposes; and building global cooperation with counterpart organizations in other countries and with international bodies.

FinCEN exercises regulatory functions primarily under the Currency and Financial Transactions Reporting Act of 1970, as amended by Title III of the USA PATRIOT Act of 2001. Under this authority the Secretary of the Treasury is to issue regulations requiring banks and other financial institutions to take a number of precautions against financial crime, including the establishment of AML programs and the filing of reports that have been determined to have a high degree of usefulness in criminal, tax, and regulatory investigations and proceedings, and certain intelligence and counter-terrorism matters. This authority has been delegated to FinCEN.

The basic concept underlying FinCEN’s core activities is “follow the money.” As FinCEN believes that the primary motive of criminals is financial gain, and they leave financial trails as they try to launder the proceeds of crimes or attempt to spend their ill-gotten profits. FinCEN shares the information it receives and analyzes with other law enforcement agencies to investigate and hold accountable a broad range of criminals, including perpetrators of fraud, tax evaders, and narcotics traffickers. More recently, the techniques used to follow money trails also have been applied to investigating and disrupting terrorist groups, which often depend on financial and other support networks.

What Should You Do?

The IRS scrutinizes in any cash-based business the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash.  However, this should not undermine the importance that the proper facilities and procedures be set up to maintain an adequate system of books and records which even in an environment of running a business without a traditional bank is possible.

If your business activities involve transactions in cash you need to protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits.

IRS Voluntary Disclosure Program – It’s Not Just For Undisclosed Foreign Bank Accounts.

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A tax crime is complete on the day the false return was filed.

It is a federal crime for anyone to knowingly and willfully file an income tax return that he or she knows to be false in some material way. 26 U.S.C. § 7207 provides:

Any person who willfully delivers or discloses to the Secretary any list, return, account, statement, or other document, known by him to be fraudulent or to be false as to any material matter, shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both. Any person required pursuant to section 6047 (b), section 6104(d), or subsection (i) or (j) of section 527 to furnish any information to the Secretary or any other person who willfully furnishes to the Secretary or such other person any information known by him to be fraudulent or to be false as to any material matter shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both.

In filing false tax return cases, the Government does not need to prove that it has been deprived of any tax by reason of such filing of the false return; even if it is shown that additional taxes may be due, the person can still be held accountable because they willfully filed a false tax return.

Avoiding Criminal Prosecution By Submitting To Voluntary Disclosure

The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal Investigation of taking timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted.  It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution.  When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice. However, if the IRS has initiated a civil examination, regardless of whether it relates to undisclosed foreign accounts or undisclosed foreign entities, the taxpayer will not be eligible to come in under the IRS’s Voluntary Disclosure Practice.

Required Elements Of A Qualified Disclosure

IRS administrative practice recognizes that a taxpayer may still avoid prosecution by voluntarily disclosing a tax violation, provided that there is a qualifying disclosure that is (1) timely and (2) voluntary. A disclosure within the meaning of the practice means a communication that is truthful and complete, and the taxpayer cooperates with IRS personnel in determining the correct tax liability. Cooperation also includes making good faith arrangements to pay the unpaid tax and penalties “to the extent of the taxpayer’s actual ability to pay”.

Timely.

A disclosure is timely if it is received before the IRS has begun an inquiry that is (1) “likely to lead to the taxpayer” and (2) the taxpayer is reasonably thought to be aware” of that inquiry; or the disclosure is received before some triggering or prompting event has occurred (1) that is known by the taxpayer and (2) that triggering event is likely to cause an audit into the taxpayer’s liabilities.

Voluntary.

Voluntari­ness is tested by the following factors: (1) how far the IRS has gone in determin­ing the tax investigation potential of the taxpayer; (2) the extent of the taxpayer’s knowledge or awareness of the Service’s interest; and (3) what part the triggering event played in prompting the disclosure (where the disclosure is prompted by fear of a triggering event, it is not truly a voluntary disclosure).

No voluntary disclosure can be made by a taxpayer if an investigation by the Service has already begun. Therefore, once a taxpayer has been contacted by any Service function (whether it be the Service center, office examiner, revenue agent, or a special agent), the taxpayer cannot make a qualifying voluntary dis­closure under IRS practice.

A voluntary disclosure can be made even if the taxpayer does not know that the Service has selected the return for examination or investigation may be too restrictive. Consequently, if there is no indi­cation that the Service has started an examination or investigation, Tax Counsel may send a letter to the Service stating that tax returns of the taxpayer have been found to be incorrect and that amended returns will be filed as soon as they can be accurately and correctly prepared. This approach has the advantage of putting the taxpayer on record as making a voluntary dis­closure at a time when no known investigation is pending. However, neither the taxpayer nor the lawyer can be completely certain that the volun­tary disclosure will prevent the recommendation of criminal prosecution.

“Quiet Disclosure”.

Where no IRS examination or investigation is pending a taxpayer’s alternative is the preparation and filing of delinquent or amended returns. Such action is called a “Quiet Disclosure”. The advantage of filing delinquent or amended returns without a communication drawing attention to them is that the returns may not even be examined after being received at the Service Center. In such an event, the taxpayer not only will have made a voluntary disclosure but will have avoided an examination as well. The disadvantage is that during the time the returns are being prepared, the taxpayer may be contacted by the Service and a voluntary disclosure prevented. Another disadvantage is that the IRS could use the filed amended income tax returns to constitute an admission that the correct income and tax were willfully not reported and institute criminal prosecution.

What Should You Do?

There is no set formula as to whether a taxpayer should pursue a Voluntary Disclosure or Quiet Disclosure. It really depends on a case by case basis which is why you are best served by consulting with a criminal tax attorney expert in evaluating these matters. 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, the experienced tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco and San Diego and elsewhere in California can determine how to respond to these inquiries and formulate an effective strategy.

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