Beware That Divorce Or Separation May Have An Effect On Your Taxes

Beware That Divorce Or Separation May Have An Effect On Your Taxes

Taxpayers should be aware of tax law changes related to alimony and separation payments. These payments are made after a divorce or separation. The Tax Cuts and Jobs Act changed the rules around them, which will affect certain taxpayers when they file their 2019 tax returns next year.

Old Law Still Applies To Agreements Executed On Or Before December 31, 2018.

Alimony paid to a spouse or a former spouse under a divorce or separation instrument (including a divorce decree, a separate maintenance decree, or a written separation agreement) may be alimony for federal tax purposes. Alimony is deductible by the payer spouse, and the recipient spouse must include it in income.

Alimony Requirements

A payment is alimony only if all the following requirements are met:

  • The spouses don’t file a joint return with each other;
  • The payment is in cash (including checks or money orders);
  • The payment is to or for a spouse or a former spouse made under a divorce or separation instrument;
  • The divorce or separation instrument doesn’t designate the payment as not alimony;
  • The spouses aren’t members of the same household when the payment is made (This requirement applies only if the spouses are legally separated under a decree of divorce or of separate maintenance.);
  • There’s no liability to make the payment (in cash or property) after the death of the recipient spouse; and
  • The payment isn’t treated as child support or a property settlement.

Alimony doesn’t include:

  • Child support,
  • Noncash property settlements, whether in a lump-sum or installments,
  • Payments that are your spouse’s part of community property income,
  • Payments to keep up the payer’s property,
  • Use of the payer’s property, or
  • Voluntary payments (that is, payments not required by a divorce or separation instrument).

New Law Applies To Agreements Executed On Or After January 1, 2019 And Certain Pre-2019 Agreements modified after 2018.

The new law relates to payments under a divorce or separation agreement. This includes divorce decrees, separate maintenance decrees and written separation agreements.

Beginning January 1, 2019, alimony or separate maintenance payments are not deductible from the income of the payer spouse, or includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after December 31, 2018. 

If an agreement was executed on or before December 31, 2018 and then modified after that date, the new law also applies. The new law applies if the modification does these two things:

    • It changes the terms of the alimony or separate maintenance payments.
    • It specifically says that alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.

Agreements executed on or before December 31, 2018 follow the old law. If an agreement was modified after that date, the agreement still follows the previous law as long as the modifications don’t do what’s described above.

Other Rules That Apply Under Both The Old And New Law

Child support is never deductible and isn’t considered income. Additionally, if a divorce or separation instrument provides for alimony and child support, and the payer spouse pays less than the total required, the payments apply to child support first. Only the remaining amount is considered alimony.

Reporting Alimony

If you paid amounts that are considered alimony, you may deduct from income the amount of alimony you paid whether or not you itemize your deductions. Deduct alimony payments on Form 1040, U.S. Individual Income Tax Return and attach Form 1040 Schedule 1, Additional Income and Adjustments to Income. You must enter the social security number (SSN) or individual taxpayer identification number (ITIN) of the spouse or former spouse receiving the payments or your deduction may be disallowed and you may have to pay a $50 penalty.

If you received amounts that are considered alimony, you must include the amount of alimony you received as income. Report alimony received on Form 1040 Schedule 1 or on Form 1040NR Schedule NEC, U.S. Nonresident Alien Income Tax Return. You must provide your SSN or ITIN to the spouse or former spouse making the payments, otherwise you may have to pay a $50 penalty.

What Should You Do?

If you are involved in a divorce, you need to know where you would stand on taxes whether you are paying or receiving party and avoid any potential tax problems from past or future years. 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. And if you are involved in cannabis, check out what a cannabis tax attorney can do for you.

Sonoma County Police Shuts Down Illegal Cannabis Operation

Anyone conducting business in cannabis surely knows that under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. So the risk is apparent that at any time Federal authorities could come and shut you down but don’t think that just because cannabis is legal in California, you do not have to worry about the State.

California law mandates that you can only sell cannabis if you have obtained a license to do so. These licenses being issued by the BCC. If you don’t have a license, then selling cannabis or transporting it in order to sell it is still a crime under H&S Code §11360.

Sonoma County Sheriff’s Department Raids Illegal Cannabis Operation In Santa Rosa

The Sonoma County Sheriff’s Department announced in a press release that on July 12, 2019, the Sonoma County Sheriff’s Department, in conjunction with allied agencies, conducted an operation in Santa Rosa, specific to illegal marijuana cultivation. In addition to the cannabis plants, inspectors also discovered a hash oil lab on the property. The County’s HazMat team arrived to evaluate the scene, and the Sheriff’s Office handled the removal of the cannabis plants.

This enforcement action marks the latest in the Sonoma County’s work to crack down on illegal cannabis activity.  In the last two years Sonoma County authorities has shut down 863 cannabis sites.  In the last two months the department has responded to 115 sites.

In a previous blog we wrote about Governor Gavin Newsom’s promise made in February 2019 to deploy the California National Guard against marijuana grows in California. Multijurisdictional task forces have long been deployed against marijuana grows in California as we noted in the following blogs:

  • Click here on a raid that occurred in the City of Carpinteria in Santa Barbara County.
  • Click here on a raid that occurred in Riverside County.
  • Click here on a raid that occurred in the City of Buellton.

Penalties For Selling Cannabis Without A License.

For most defendants, unlicensed sale or transport for sale of cannabis is a misdemeanor punishable by up to six months in county jail and/or a fine of up to $1,000. For defendants under 18, it is an infraction. Also, giving away or transporting for sale up to 28.5 grams of cannabis without a license is an infraction.

But the sale/transport for sale of cannabis without a license to do so is a felony for the following defendants:

  1. Defendants who have a prior conviction for one of a list of particularly serious violent felonies, including murder, sexually violent offenses, sex crimes against a child under 14, or gross vehicular manslaughter while intoxicated, or a sex crime that requires them to register as a sex offender;
  1. Defendants who have two or more prior convictions for H&S Code §11360 sale/transportation of cannabis; 
  1. Defendants who knowingly sold, attempted to sell, or offered to sell or furnish cannabis to someone under 18; or
  1. Defendants who imported or attempted or offered to import into California, or transported or attempted/offered to transport out of California for sale, more than 28.5 grams of cannabis or more than four grams of concentrated cannabis.

In any of these scenarios, black market sale or transportation for sale of cannabis under H&S Code §11360 is punishable anywhere from two to four years in jail.

Transporting cannabis without intent to sell it, or giving cannabis away, is not a crime in California so long as BOTH of the following are true:

  1. You transport or give away not more than 28.5 grams of cannabis or eight grams of concentrated cannabis, and
  2. Any people you give cannabis to are 21 years of age or older.

What Should You Do?

You can count on other county governments coordinating resources and making comprehensive strikes on unlicensed and illegal cannabis operations for the safety of the public.

Both civil and criminal penalties will apply to unlicensed operators so it is imperative that anyone cultivating, manufacturing or distributing cannabis on a commercial basis in California seeks a local and state license for their operations immediately, if they have not already done so. Protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) 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.

Congressman Emmer Welcomes IRS Response On Guidelines For Reporting Virtual Currency

Congressman Emmer Welcomes IRS Response On Guidelines For Reporting Virtual Currency

On May 20, 2019 Congressman Tom Emmer (MN-R) announced in a press release that the IRS finally responded his letter that along with his fellow co-chairs of the Congressional Blockchain Caucus (current members being: Rep. Tom Emmer, Rep. Bill Foster (IL-D), Rep. David Schweikert (AZ-R) and Rep. Darren Soto (FL-D)), calling on the Internal Revenue Service to issue guidelines for reporting virtual currency on tax day.

Specifically, the response letter from, IRS Commissioner Charles P. Rettig stated, “I share your belief that taxpayers deserve clarity on basic issues related to the taxation of virtual currency transactions and have made it a priority of the IRS to issue guidance.” The letter outlined three areas that the IRS intends to publish guidelines for: acceptable methods for calculating cost basis, acceptable methods of cost basis assignment, and the tax treatment of forks.

Upon receiving this response letter from IRS, Congressman Emmer issued the following statement:

“I am glad to hear of the IRS’ plans to issue guidance on this important issue. Taxpayers deserve clarity on several basic questions regarding federal taxation of these emerging exchanges of value. I look forward to seeing their forthcoming proposal, and working together to serve the American taxpayers”.

Taxation Of Crypto Currency

Crypto currency 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 likeexchange 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 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.

congress cannabis bill

United States Congress Holds Historic Hearing On Cannabis Legalization – If You Can’t Beat Them, Join Them!

On July 10, 2019 the House Judiciary Committee lead by Chairman Jerrold Nadler (D-NY) delivered the following opening remarks during a Subcommittee on Crime, Terrorism, and Homeland Security hearing on “Marijuana Laws in America: Racial Justice and the Need for Reform” which also appears in his press release issued after the hearing:

Marijuana is one of the oldest agricultural commodities not grown for food, and it has been used medicinally all over the world since at least 2700 B.C., but its criminalization is a relatively recent phenomenon.

The use of marijuana, which most likely originated in Asia, later spread to Europe, and made its way to the Americas when the Jamestown settlers brought it with them across the Atlantic.  The cannabis plant has been widely grown in the United States and was used as a component in fabrics during the middle of the 19th century.  During that time period, cannabis was also listed in the United States Pharmacopeia as a treatment for a multitude of ailments, including muscle spasms, headaches, cramps, asthma, and diabetes.

It was only in the early part of the 20th century that marijuana began to be criminalized—mainly because of misinformation and hysteria, based at least in part on racially biased stereotypes connecting marijuana use and minorities, particularly African Americans and Latinos.  Unfortunately, the same racial animus motivating enactment of these laws also led to racially disproportionate enforcement of such laws, which has had a substantial, negative impact on minority communities.

The collateral consequences of conviction for marijuana possession—and even sometimes for a mere arrest—can be devastating.  For those saddled with a criminal conviction, it can be difficult or impossible to vote, to obtain educational loans, to get a job, to maintain a professional license, to secure housing, to receive government assistance, or even to adopt a child.

These exclusions create an often-permanent second-class status for millions of Americans.  This is unacceptable and counterproductive, especially in light of the disproportionate impact that enforcement of marijuana laws has had on communities of color.

It is not surprising, therefore, that over the past two decades, public support for legalizing marijuana has surged.  States have led the way with reforms, and presently, medicinal or recreational marijuana use is legal in 33 states and the District of Columbia.  However, our federal laws have not kept pace with the obvious need for change.

In my view, applying criminal penalties, with their attendant collateral consequences for marijuana offenses is unjust and harmful to our society.  The use of marijuana should be viewed instead as an issue of personal choice and public health.”

Federal Law Makes Marijuana Illegal

Under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

The federal penalties for possession of any amount of marijuana are as follows:

  • First Offense – Misdemeanor involving up to one year of incarceration and $1,000 in fines
  • Second Offense – Misdemeanor punishable by 15 days to 2 years behind bars and $2,500 in fines
  • Third and subsequent offenses – Misdemeanor or felony punishable by 90 days to 3 years of incarceration and fines of up to $5,000.

The penalties for the sale of marijuana depend on the amount of marijuana you have been accused of selling or attempting to sell:

  • Less than 50 kilograms – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 kilograms – Felony punishable by up to 20 years in prison and/or fines of up to $1,000,000
  • 100 to 999 kilograms – Felony involving 5 to 40 years incarceration and/or fines of up to $2,000,000
  • 1000 kg and up – Felony carrying a sentence of 10 years to life in prison and/or up to  $4,000,000 in fines

As for the cultivation of marijuana, the federal authorities punish it on the basis of the number of plants you were caught growing:

  • Less than 50 plants – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 plants – Felony punishable by up to 20 years in prison and/or up to $1,000,000 in fines
  • 100 to 999 plants – Felony carrying a 5 to 40-year prison sentence and/or fines of up to $5,000,000
  • 1,000 plants or more – Felony involving 10 years to life in prison and/or fines of up to $10,000,000

With aggravating factors such as a trafficking activity that results in an injury or death, a sale within 1,000 feet of a school, or a case involving five grams sold to a minor, the above penalties may increase dramatically.

How things have changed –

Medical marijuana is legal in 33 states.

The medical use of cannabis is legal (with a doctor’s recommendation) in 33 states and Washington DC. Those 33 states being Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Maine, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Utah, Vermont, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 10 states.

Ten states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those ten states being Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington and the territory of Guam.

Department Of Justice preferring cannabis legalization.

Attorney General William Barr stated that he would prefer that Congress enact legislation allowing states to legalize marijuana instead of continuing the current approach under which a growing number of states have ended cannabis prohibition in conflict with federal law.

Higher Taxes Still Remain

While the developments listed above are favorable for cannabis business, it still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

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

Reporting Of Cash Payments Still Remain

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

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

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  So it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.

Facts To Know When The IRS Sends A Private Debt Collection Service To Collect On IRS Debt.

Facts To Know When The IRS Sends A Private Debt Collection Service To Collect On IRS Debt.

You would think that with all the fraudulent calls being made by parties presented themselves as working for the IRS to scam taxpayers out of money, the IRS would crackdown on this problem and tighten its reins. But instead the IRS does the opposite and began a new private collection program of certain overdue federal tax debts selecting four contractors to implement it.

IRS Using Private Collection Agencies For the Collection Of Outstanding Inactive Tax Receivables

The new program, authorized under a federal law enacted by Congress, enables these designated contractors to collect, on the government’s behalf, outstanding inactive tax receivables. Authorized under a federal law enacted by Congress in December 2015, Section 32102 of the Fixing America’s Surface Transportation Act (“FAST Act”) requires the IRS to use private collection agencies for the collection of outstanding inactive tax receivables. As a condition of receiving a contract, these agencies must respect taxpayer rights including, among other things, abiding by the consumer protection provisions of the Fair Debt Collection Practices Act.

This is not the first time that Congress has authorized the IRS to out-source its collection functions and each time the IRS has tried to out-source collections they have failed miserably. After all the IRS is the most powerful debt collector in that without formal court action can quickly file tax liens and levy your accounts and garnish your sources of income without any consideration of how much you need to pay bills or obligations.

So this time the IRS says that the type of taxpayer accounts that will be turned over to private collection are those where taxpayers owe money but the IRS is no longer actively working their accounts. Several factors contribute to the IRS assigning these accounts to private collection agencies, including older, overdue tax accounts or lack of resources preventing the IRS from working the cases. So if the really difficult accounts are being turned over for private collection, what tactics do you think that private collectors may take to secure payment from taxpayers and how are taxpayers supposed to know they are dealing with an authorized contacted agent versus a scam artist?

The IRS says it will do everything it can to help taxpayers avoid confusion and understand their rights and tax responsibilities, particularly in light of continual phone scams where callers impersonate IRS agents and request immediate payment. So the IRS will give each taxpayer and their representative written notice that their account is being transferred to a private collection agency. The IRS will then send a second, separate letter to the taxpayer and their representative confirming this transfer. Private collection agencies will be able to identify themselves as contractors of the IRS collecting taxes.

Employees of these collection agencies must follow the provisions of the Fair Debt Collection Practices Act and must be courteous and respect taxpayer rights. Furthermore, private collection agencies will not ask for payment on a prepaid debit card. Taxpayers will also be informed about electronic payment options for taxpayers on IRS.gov/Pay Your Tax Bill. Private collection agencies will not ask for payment on a prepaid debit, iTunes or gift card. Taxpayers will be informed about electronic payment options for taxpayers on IRS.gov/Pay Your Tax Bill. Payment by check should be payable to the U.S. Treasury and sent directly to IRS, not the private collection agency.

Authorized Private Collection Agencies

The IRS has selected the following contractors to carry out this program:

  • CBE
    P.O. Box 2217
    Waterloo, IA 50704
    1-800-910-5837
  • ConServe
    P.O. Box 307
    Fairport, NY 14450-0307
    1-844-853-4875
  • Performant
    P.O. Box 9045
    Pleasanton CA 94566-9045
    1-844-807-9367
  • Pioneer
    PO Box 500
    Horseheads, NY 14845
    1-800-448-3531

Taxpayer Accounts Not Assigned To Private Collection Agencies

The IRS will not assign accounts to private collection agencies involving taxpayers who are:

  • Deceased
  • Under the age of 18
  • In designated combat zones
  • Victims of tax-related identity theft
  • Currently under examination, litigation, criminal investigation or levy
  • Subject to pending or active offers in compromise
  • Subject to an installment agreement
  • Subject to a right of appeal
  • Classified as innocent spouse cases
  • In presidentially declared disaster areas and requesting relief from collection

Private collection agencies will return accounts to the IRS if taxpayers and their accounts fall into any of these 10 situations after assignment to the private collection agencies. 

Opting Out Of Private Collection Agencies

If you do not wish to work with the assigned private collection agency to settle your overdue tax account, you must submit a request in writing to the private collection agency.

What Should You Do?

While I am skeptical that the outcome of this program will be any different than previous collection out-sourcing programs, we see it as an opportunity to provide taxpayers with a chance for a better resolution than what the IRS could offer. The 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 know exactly what to say and how to handle issues with the IRS as well as State Tax Agencies.  Our experience and expertise not only levels the playing field but also puts you in the driver’s seat as we take full control of resolving your tax problems. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you.

U.S. Supreme Court Declines To Hear §280E Cannabis Tax Case

Beware 2019 Could Be A Banner Year For IRS Audits Of Cannabis Businesses.

We previously reported in our blog that the Trump Administration organized a committee of federal agencies from across the government to combat public support for marijuana and cast state legalization measures in a negative light while attempting to portray the drug as a national threat. The IRS appears to be following the agenda of the Trump Administration when it comes to Cannabis and has formed special audit groups that are tasked with conducting cannabis tax audits on medical and recreational cannabis businesses.

How I.R.C. §280E Makes Taxation Related To Cannabis Businesses So Complicated.

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.

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 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 marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in cannabis 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.

U.S. Supreme Court’s Denial To Hear Appeal.

The U.S. Supreme Court declined to review a petition brought by a Colorado medical cannabis dispensary challenging the authority of the Internal Revenue Service on applying I.R.C. §280E to a State-licensed Medical Cannabis Dispensary located in Colorado.

Alpenglow Botanicals, LLC (“Alpenglow”), based in Breckenridge, argued in its petition to the high court that I.R.C. §280E does not empower the IRS to investigate and rule that a marijuana business has violated federal criminal drug laws. Click here to view Alpenglow’s petition.

The Federal government responded that I.R.C. §280E specifies that no tax deduction or credit should be allowed for any expense paid or incurred in carrying out a business that “consists of trafficking in controlled substances”. Click here to view the Federal government’s response.

Both the U.S. District Court in Colorado and the 10th Circuit Court of Appeals in Denver had affirmed the IRS ruling which denied many business deductions that Alpenglow had claimed on the basis that they were not deductible under I.R.C. §280E.

IRS Guidance On Cannabis.

The IRS issued a memo to provide guidance to its agents on conducting audits of cannabis businesses addressing whether an IRS agent can require a taxpayer trafficking in a Schedule 1 controlled substance to change its tax accounting to conform to I.R.C. §280E.

Not surprisingly that the IRS ruled that IRS agents have the authority to change a cannabis business’ method of accounting so that pursuant to I.R.C. §280E costs which should not be included in inventory are not included in Costs Of Goods Sold (“COGS”) and remain non-deductible for income tax purposes.

Cannabis Tax Audits & Litigation.

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. I.R.C. §280E is at the forefront of all IRS cannabis tax audits and enforcement of I.R.C. §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 cannabis businesses this is challenging because of the I.R.C. §280E limitation. Recall that 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. What this means is that dispensaries and other businesses trafficking in cannabis 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 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. Working with a cannabis tax attorney can ensure that you receive the proper treatment of COGS versus ordinary and necessary expenses resulting in the lowest possible income tax liability.

In addition to IRS audits, state cannabis audits are also complex and thorough and generally include all taxes specific and nonspecific to the cannabis business. Potentially at risk is the cannabis license that enables the business to operate. State audits will focus on records regarding sales and use tax, excise taxes, and seed-to-sale tracking records.

Now if your cannabis IRS tax audit is not resolved, the results may be challenged and litigated in the U.S. Tax Court or Federal District Court. The U.S. Tax Court has jurisdiction to hear disputes over federal income taxes before final assessment and collections while the Federal District Court generally requires taxpayers to first pay the liability then seek repayment through a refund request.

What Should You Do?

Ultimately it is the tax risk with IRS that could put any cannabis business “out of business” so 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 (Ontario and Palm Springs) 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.

Santa Barbara County Police Shuts Down Illegal Cannabis Operations

Anyone conducting business in cannabis surely knows that under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. So the risk is apparent that at any time Federal authorities could come and shut you down but don’t think that just because cannabis is legal in California, you do not have to worry about the State.

 

California law mandates that you can only sell cannabis if you have obtained a license to do so. These licenses being issued by the Bureau Of Cannabis Control (“BCC”). If you don’t have a license, then selling cannabis or transporting it in order to sell it is still a crime under H&S Code §11360.

 

California State Authorities Cracking Down On Illegal Cannabis Operations

And so in the month of June 2019 the State authorities have orchestrated their second major raid of an illegal cannabis operation which was operating out of Santa Barbara.  Earlier in the month State authorities raided an illegal cannabis operation in Riverside County which we reported in our blog.

In a previous blog we wrote about Governor Gavin Newsom’s promise made in February 2019 to deploy the California National Guard against marijuana grows in California. Multijurisdictional task forces have long been deployed against marijuana grows in California as we noted in our blog on a raid that occurred in the City of Carpinteria in Santa Barbara County earlier this year.

 

Santa Barbara County Sheriff’s Department Raids Illegal Cannabis Operations In Santa Maria

The Santa Barbara County Sheriff’s Department announced on June, 17, 2019, detectives from the Sheriff’s Cannabis Compliance Team executed four search warrants related to an illegal cannabis cultivation site outside the City of Buellton. These warrants were the culmination of an approximate two-month investigation involving fraudulently obtained State temporary and provisional cannabis licenses and the suspected sales of undocumented cannabis. The search warrants took place in the City of Santa Maria, in San Luis Obispo County and in the 1800 block of West Highway 246, just outside Buellton City limits. The operation involved 35 detectives, investigators and Wildlife Officers from various agencies. These agencies included the Santa Barbara Sheriff’s Cannabis Compliance Team, Special Investigations Bureau, Criminal Investigations Bureau, Santa Barbara County District Attorney’s Office, California Department of Fish and Wildlife and the Army National Guard Counter Drug Task Force.

 

The cultivation area itself was located on a property of approximately 187 acres of agricultural land, with just over 60 acres of it being used for the commercial cultivation of cannabis. From the initial investigation, it appeared the site was used to continually cultivate cannabis throughout the year and at the time of the search, approximately 40 acres was presently growing, with a large amount having been recently harvested. It took a total of four days for the team to seize approximately 20 tons of processed cannabis and eradicate approximately 350,000 cannabis plants, several of which were nearly ready to harvest.

 

This investigation was the result of complaints from the public, tips and information provided to the Sheriff’s Cannabis Compliance Team.  Now the case will be forwarded to the Santa Barbara County District Attorney’s Office for review of criminal charges.

 

Penalties For Selling Cannabis Without A License.

For most defendants, unlicensed sale or transport for sale of cannabis is a misdemeanor punishable by up to six months in county jail and/or a fine of up to $1,000. For defendants under 18, it is an infraction. Also, giving away or transporting for sale up to 28.5 grams of cannabis without a license is an infraction.

But the sale/transport for sale of cannabis without a license to do so is a felony for the following defendants:

 

  1. Defendants who have a prior conviction for one of a list of particularly serious violent felonies, including murder, sexually violent offenses, sex crimes against a child under 14, or gross vehicular manslaughter while intoxicated, or a sex crime that requires them to register as a sex offender;
  1. Defendants who have two or more prior convictions for H&S Code §11360 sale/transportation of cannabis;
  1. Defendants who knowingly sold, attempted to sell, or offered to sell or furnish cannabis to someone under 18; or
  1. Defendants who imported or attempted or offered to import into California, or transported or attempted/offered to transport out of California for sale, more than 28.5 grams of cannabis or more than four grams of concentrated cannabis.

 

In any of these scenarios, black market sale or transportation for sale of cannabis under H&S Code §11360 is punishable anywhere from two to four years in jail.

Transporting cannabis without intent to sell it, or giving cannabis away, is not a crime in California so long as BOTH of the following are true:

 

  1. You transport or give away not more than 28.5 grams of cannabis or eight grams of concentrated cannabis, and
  2. Any people you give cannabis to are 21 years of age or older.

 

What Should You Do?

You can count on other county governments coordinating resources and making comprehensive strikes on unlicensed and illegal cannabis operations for the safety of the public.

Both civil and criminal penalties will apply to unlicensed operators so it is imperative that anyone cultivating, manufacturing or distributing cannabis on a commercial basis in California seeks a local and state license for their operations immediately, if they have not already done so. Protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) 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.

Can Cannabis Help People With Diabetes?

According to the Centers for Disease Control and Prevention (“CDC”), 30.3 million American adults, or about 9.4% of the U.S. adult population have diabetes.

The Journal of Diabetes published data where persons having a history of cannabis use possessed more favorable indices related to diabetic control than do non-users.

Researchers in Quebec, Canada assessed the relationship between cannabis consumption and fasting insulin levels and insulin resistance in a nationally representative sample of over 129,000 adults. They reported that both current and past cannabis use was associated with significant and persistent changes in insulin levels in obese subjects compared to non-users. However, these changes were only evident in overweight subjects so further research is needed as to how this same benefit could be present in lean persons with diabetes.

Developments like this contradict the basis of classification of cannabis under Federal law which makes cannabis illegal.

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, Former 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.

House Appropriations Bill Amendment

The amendment sponsored by Reps. Earl Blumenauer (D-OR), Eleanor Holmes Norton (D-DC) and Tom McClintock (R-CA), states that:

None of the funds made available under this House Appropriations Bill to the Department of Justice may be used to prevent to any State, territory or D.C. from implementing their own laws that authorize the use, distribution, possession, or cultivation of marijuana.

In the past such amendment (starting in 2014) was limited to medical marijuana state-licensed business but this expansion is huge given that nearly one in four Americans reside in a jurisdiction where the adult use of cannabis is legal under state statute.

Provided that the Senate also approves this amendment, to avail yourself of the protections of the amendment, you must be in complete compliance with your State’s cannabis laws and regulations. 

But until Federal law changes, the cannabis industry will still have to bear the followings risks and challenges:

Higher Taxes Still Remain

It still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

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

Reporting Of Cash Payments Still Remain

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

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

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.

The Four Ways That IRS Selects Tax Returns For Examination

The Four Ways That IRS Selects Tax Returns For Examination

I have yet to meet anyone who looks forward to having their tax return be selected for an audit by IRS so you should know the four main ways that the IRS selects returns for examination.

  1. Potential participants in abusive tax avoidance transactions — Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions. Examples include information received from “John Doe” summonses issued to foreign and domestic banks, credit card companies, businesses and participant lists from promoters ordered by the courts to be turned over to the IRS.
  2. Computer Scoring — Some returns are selected for examination on the basis of computer scoring.  Computer programs give each return numeric “scores”. The Discriminant Function System (“DIF”) score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF (“UIDIF”) score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.
  3. Related Examinations — Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination. In examinations that include undisclosed foreign bank accounts, the IRS will look for family relatives who may have the same involvement in foreign accounts and also failed to make the proper disclosures.
  4. Information Matching — Some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return. Starting this year the IRS is getting this same level of information from foreign banks who have U.S. account holders.

Information Matching Most Common Reason Why A Return Is Selected For Audit

When a tax return’s information does not match data reported to the Internal Revenue Service by employers, banks and other third parties, the IRS will send a letter to the taxpayer. The letter is called an IRS Notice CP2000, and it gives detailed information about issues the IRS identified and provides steps taxpayers should take to resolve those issues.

This is not a formal audit notification, but a notice to see if the taxpayer agrees or disagrees with the proposed tax changes. Because this verification process and notice generation is done by IRS computers without the need for an agent to actually work the case, these IRS notices are quite common.

Taxpayers should respond to the CP2000, usually within 30 days from the date printed on the notice.

Consequences Of Failing To Respond To IRS Or If Your Response Is Inadequate

If a timely response to the CP2000 is not made or if the IRS cannot accept the additional information provided, a second IRS notice is generated. That follow-up notice is called an IRS Notice CP3219A or “Statutory Notice of Deficiency”. This notice gives detailed information about why the IRS proposes a tax change and how the agency determined the change. The notice tells taxpayers about their right to challenge the decision in Tax Court by filing a Petition with the Tax Court no later than 90 days from the date of the Statutory Notice of Deficiency.

If a taxpayer timely files a Petition, the additional liability remains “proposed” and cannot be sent to collection enforcement by IRS. Instead the taxpayer will have the opportunity to show that the proposed changes are wrong and if agreement is not reached, it will be the Tax Court judge that will have the ultimate say in this matter.

If a taxpayer does not file a Petition, then the proposed changes become final, a tax bill will be generated by the IRS and the IRS can proceed with collection enforcement.

How Does One Find Out If The IRS Does Select Your Tax Return For Examination?

This is where one must be careful because there are scammers out there who are calling people saying they are the IRS and threatening them with arrest and deportation unless they pay right away. If you are selected for an audit by the IRS, the initial contact will always be in the form of a letter sent by the assigned agent under official IRS letterhead.

An official letter from the IRS will give you the contact information of the agent and what IRS office the agent reports to. The letter will also tell you how the examination is to be conducted – this can be by mail, or through an in-person interview and review of the taxpayer’s records at the agent’s office or outside the agent’s office such as the taxpayer’s business. Finally, the letter will tell you which years are being audited and what records will be needed. Taxpayers may act on their own behalf or have a tax professional represent or accompany them. 

What Should You Do?

Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Los Angeles Area (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. If you are involved in cannabis, check out what our cannabis tax attorney can do for you.