Tax Planning For Marijuana Businesses

Tax Planning For Marijuana Businesses

Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia. In 2000, 70% of Americans believed marijuana should be illegal. Attitudes have since dramatically changed with a complete flip as a 2017 Yahoo News/Marist Poll survey showed that 83% support legalization. Despite this huge turn in public opinion and about 60% of the U.S. population are living in states that have legalized marijuana, marijuana is still designated as a Schedule I controlled substance and therefore is still illegal under Federal law.

Illegal Income Is Still Taxable Income

I.R.C. §61(a) essentially states: “Gross income means all income from whatever source derived”. There is no distinction between legal and illegal income – meaning that if it is income, it is taxable. This concept was affirmed in a U.S. Supreme Court case, James vs. United States, 366 U.S. 213 (1961), where the Court stated that “gains are no less taxable because they have been acquired by illegal methods”.

Deductions Against Illegal Income Are Limited.

I.R.C. §280E states: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedules I and II of the Controlled Substances Act, 21 U.S.C §812) which is prohibited by federal law or the law of any state in which such trade or business is conducted.”

In reading I.R.C. §280E one would think that no deductions are allowed in a marijuana-related business but if that were the case, the U.S. Tax Court has stated that this statute would have been stricken as unconstitutional as the Sixteenth Amendment to the U.S. Constitution prohibits the Federal government from taxing “gross receipts”. Reading vs. Commissioner Of Internal Revenue, 70 T.C. 730 (1978). So the way I.R.C. §280E operates is to allow marijuana-related businesses to deduct Costs Of Good Sold but not “ordinary and necessary” business expenses. This tax treatment prevails regardless that you are conducting a marijuana business that is duly licensed in a State that has legalized marijuana because such business is still illegal under federal law.

It should be apparent that the cost of acquiring the marijuana itself is part of Costs Of Good Sold but what if you produce the marijuana? We advocate that producers can also capitalize the direct material costs (marijuana seeds or plants), direct labor costs (planting, cultivating, harvesting and sorting), and certain indirect costs that include repairs, maintenance, utilities, rent, taxes, depreciation, employee benefits and officer’s salaries). Resellers too should consider a more expansive view of Cost Of Goods Sold that includes capitalizing the costs of transportation and other necessary charges incurred in acquiring possession of the marijuana and maintaining the inventory for resale.

To illustrate the potential tax savings, check out this example of a marijuana-related business with monthly gross receipts of $100,000 ($1,200,000 annually):

With No Tax Planning

With Tax Planning

Gross receipts

$1,200,000

$1,200,000

Cost Of Goods Sold

-0-

$780,000

Gross Profit

$1,200,000

$420,000

Taxes at 35% on Gross Profit

$420,000

$147,000

Ordinary And Necessary Business Expenses

$900,000

$120,000

Your Net Profit <Loss>

<$120,000>

$153,000

You can see how important it is that the business be able to capitalize as much of these expenses into inventory to show a higher Cost Of Goods Sold and hence lower taxes which equates to higher profits.

What Should You Do?

So until the tax code is changed so that marijuana is not subject to the restrictions of I.R.C. §280E, it is important that anyone in the marijuana business seek tax counsel knowledgeable with the strategies associated with I.R.C. §280E and what accounting systems must be in place to legally show the lowest amount of net taxable income as possible. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn P.C. located in Orange County, San Diego County and other locations in California help you meet your challenges minimizing your taxes and conduct business in a manner that avoids prosecution by the Federal authorities and meets California laws and regulations.

Marijuana-Business-Facing-IRS-Audit

Are You A Marijuana Business Owner With Incomplete Books And Records Facing An IRS Audit?

It is common that marijuana businesses operating in States that have legalized marijuana for medical and/or recreational use (Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia) deal in cash and do not maintain accounting systems that are ordinarily established with other businesses. So if your marijuana-related business is selected by the IRS for an audit, do not be so willing to concede disallowance all of your Cost Of Goods Sold expenses due to lack of documentation. Here is a case of a marijuana business owner who prevailed on this issue despite his lack of sufficient receipts and records.

The Olive Case

In 2012 the Tax Court ruled on the case of, Martin Olive vs. Commissioner, 139 T.C. 19 (2012). Mr. Olive established the Vapor Room in San Francisco, California selling medical marijuana which at the time and through the present is legal in California. Mr. Olive was selected for audit by the IRS who asserted that Mr. Olive (1) understated the income of the Vapor Room, (2) overstated the Cost Of Goods Sold, and (3) was not entitled to any operating expenses under I.R.C. §280E. Mr. Olive acknowledged that he did not maintain an adequate system of maintaining books and records. So regarding issue (1), the IRS prevailed with their calculation of gross income. As to issue (3), the IRS prevailed as IRC Section 280E which applies to marijuana-related businesses regardless of such businesses operating in a State where it is legal, that the business is not allowed to deduct operating expenses. So that then leaves issue (2) which is where the Tax Court refused to side with the IRS that Mr. Olive was not entitled to deduct any Cost Of Goods Sold.

Tax Code Requires Substantiation Of Expenses

In the context of businesses that conduct lawful activity, taxpayers bear the burden of proving that claimed business expenses were actually incurred and were “ordinary and necessary”. I.R.C. §162(a). A taxpayer is required to maintain sufficient permanent records to substantiate his business deductions. IRC §6001; Briggs v. Commissioner, T.C. Memo. 2000-380; Income Tax Regs. §1.6001-1(a), (d).

But since marijuana businesses are still illegal under Federal law, taxpayers cannot claim “ordinary and necessary” business expenses pursuant to I.R.C. §280E. This code section states: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedules I and II of the Controlled Substances Act, 21 U.S.C §812) which is prohibited by federal law or the law of any state in which such trade or business is conducted.”

In reading I.R.C. §280E one would think that no deductions are allowed in a marijuana-related business but if that were the case, the U.S. Tax Court has stated that this statute would have been stricken as unconstitutional as the Sixteenth Amendment to the U.S. Constitution prohibits the Federal government from taxing “gross receipts”. Reading vs. Commissioner Of Internal Revenue, 70 T.C. 730 (1978). So the way I.R.C. §280E operates is to allow marijuana-related businesses to deduct Costs Of Good Sold but not “ordinary and necessary” business expenses. This tax treatment prevails regardless that you are conducting a marijuana business that is duly licensed in a State that has legalized marijuana because such business is still illegal under federal law.

But Unsubstantiated Expenses May Still Be Recognized Under The Cohan Rule

If a taxpayer with inadequate business records proves that he incurred certain expenses but cannot substantiate the exact amount, the Court in appropriate circumstances may estimate the amount allowable. George M. Cohan v. Commissioner Of Internal Revenue, 39 F.2d 540, 542-544 (2nd Cir. 1930). Under this so called “Cohan Rule”, the Court “bears heavily…upon the taxpayer whose inexactitude is of his own making.” This means that the taxpayer must provide some reasonable evidentiary basis for the estimate. The Tax Court should then only allow you to deduct the least amount of money that you could have possibly spent. Although this may not be the entire sum you are claiming, it is better to get something than nothing when you do not have the receipts to back up your expenses.

So Back To Mr. Olive’s Case

By applying the Cohan Rule, the Tax Court through the taxpayer’s testimony (or other credible testimony) establishing a reasonable evidentiary basis for estimated Cost Of Goods Sold expenses, can find for the taxpayer deductions which ordinarily would be denied by IRS. A Marijuana industry leader testified at trial that on average, the cost of goods sold of medicinal marijuana facilities were approximately 75.16% of revenue. The Tax Court used this figure applied to the gross revenues that it deemed correct by the IRS’ audit. At trial Mr. Olive testified that he sold to the patrons for cash 93.5% of the marijuana that he received and he gave the rest to patrons (including himself and the other staff members) for free. So the Tax Court then reduced Mr. Olive’s Cost Of Goods Sold by 6.5% to account for the fact that he gave away some of his product for free. The court rightfully justified this reduction on the reasoning that because he gave it away, it wasn’t held for sale and thus couldn’t be included in Cost Of Goods Sold.

The lesson to learn from this is that a taxpayer who maintains adequate books and records should be more successful in asserting his claimed expenses in an IRS audit than one who disregards record keeping.

What Should You Do?

For those marijuana-related businesses that fail to maintain adequate records or whose records got lost or damaged, all hope is still not lost in surviving an IRS audit. Taxpayers who hire an experienced tax attorney in audits and tax appeals who at the earliest opportunity introduces and applies the Cohan Rule should result in the least possible audit adjustments and avoiding costly litigation. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, San Jose and other California locations get you the best possible result.

New January 31st Filing Deadline For Businesses To File All W-2’s And 1099’s

To expedite IRS’ ability to match up W-2’s and 1099’s reported by businesses to the income reported on taxpayers’ tax returns, all these forms must be submitted to IRS and given to taxpayers no later than January 31st. This filing deadline was made uniform under The Protecting Americans from Tax Hikes (PATH) Act. Prior law required that only W-2’s had to be provided to employees no later than January 31st with all other reporting forms (including the copies to IRS) due by the end of February. Failure to file these forms correctly and timely may result in penalties to the employer or payor.

Tips For Businesses To Be Ready And Avoid Penalties.                          

Employers should verify employees’ information. This includes names, addresses, Social Security or individual taxpayer identification numbers. They should also ensure their company’s account information is current and active with the Social Security Administration before January. If paper Forms W-2 are needed, they should be ordered early. There is no automatic extension of time to file Forms W-2.

More Efficiency In Matching Means More IRS Audit Notices Issued Sooner.

According to IRS estimates, in a calendar year employers, businesses, financial institutions, credit card companies and other third party payers will file 2.3 billion information statements. These information statements report income and financial transactions, and can help individuals and businesses prepare accurate tax returns. Using information-matching programs, the IRS compares third-party information statements with taxpayer data, and sends a notice to taxpayers when IRS systems detect inconsistencies.

Individual Automated Underreporter (AUR) Program

This matching program is better known by its primary notice: CP2000, Notice of Proposed Adjustment for Underpayment/Overpayment. IRS systems automatically send this notice when items reported on Form 1040, U.S. Individual Income Tax Return, don’t match information reported to the IRS by employers and other payers. The first round of these notices arrives just after Thanksgiving, and the second round arrives toward the end of the next year’s filing season.

The CP2000 notice has been a mainstay of IRS information reporting for decades. In 2012, the IRS issued more than 4.5 million CP2000 notices, with an average of $1,572 in additional taxes owed.

Form 1099-K merchant card transaction matching program

In 2012, the IRS started receiving from credit card companies, Forms 1099-K, Payment Card and Third Party Network Transactions. With merchant card transactions now being reported to IRS, the IRS quickly began using this information to match against business returns. However, because businesses do not specifically report merchant card transactions as separate line items on business tax returns, the IRS can only infer potential underreporting. For example, if a business has a disproportionate amount of cash to credit/debit card sales, based on its line of business, the IRS may look closer. These kinds of mismatches have led the IRS to develop compliance initiatives, including “soft” notices requesting explanation and mail audits requesting documentation.

The IRS has established a Form 1099-K matching initiative that makes the IRS more efficient in identifying problem tax returns especially where merchant card payments appear to make up the majority or even exceed the total business receipts reported on the return. In these cases, the IRS perceives that the business is underreporting cash sales due to the disproportionate share of merchant card payments. Accrual-basis taxpayers and e-commerce businesses whose receipts do not neatly match merchant card transactions are likely early targets in this program and we have had our share of these cases where that is what happened.

Automated Substitute For Return Program

When a taxpayer does not file and the IRS has information statements indicating a filing requirement, the IRS uses the data to file a return on behalf of the taxpayer if there is a projected balance owed. In 2012, the IRS used information statements to file 803,000 returns for taxpayers, totaling $6.7 billion in additional taxes owed. And the sad thing about this is in just about every case, the amount actually owed when a tax return is filed by the taxpayer is much lower than what the IRS says a non-filer taxpayer owes. We even had cases where the IRS ended up owing our clients money.

The Stakes Are High!

A recent U.S. Government Accountability Office study showed that the IRS spends $267 million on underreporter matching programs, compared with the $4.2 billion it spends on audits. But automated information-matching programs return almost six times more revenue than audits. You can see why with fewer IRS agents and reduced budgets, the IRS will increasingly rely on technology-driven matching programs to bring in more tax dollars.

What Should You Do?

So if you receive one of these audit notices it is important that you don’t ignore it. Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, San Diego County and elsewhere in California defend you from the IRS.

Are You A Business Owner With Incomplete Books And Records Facing An IRS Audit?

Your business records are lost or damaged and now you get selected by IRS for an audit if your income tax returns. Just because you can’t back up all your business expenses with receipts does not mean that you lose deductions. Here is a case of a coin dealer who still prevailed despite his lack of sufficient receipts and records.

The Huzella Case

In a recently published Tax Court case, Thomas R. Huzella v. Commissioner, TC Memo 2017-210 (October 23, 2017), the taxpayer, Mr. Huzella who resided in Virginia, bought and sold coins on eBay. All payments he received for the coin sales were processed through PayPal and those payments were reflected on a Form 1099-K, Payment Card and Third Party Network Transactions, issued by PayPal. This Form 1099-K reported for calendar year 2013 aggregate payments of $37,013 from 399 separate payment transactions during the year.

Mr. Huzella has been collecting coins since 1958. His father also collected coins, and some of those coins eventually were gifted to or inherited by Mr. Huzella. He did not keep any records to establish his basis in any of his coins which the IRS regardless of how and when he acquired them. He also did not keep any of his receipts for his business expenses including internet costs, packaging and shipping costs.

Mr. Huzella’s 2013 income tax return was selected for audit. That audit was likely triggered by the 1099-K income that was reported by PayPal which was not reported on the taxpayer’s return. The IRS auditor increased Mr. Huzella’s gross income by the proceeds of the coin sales and gave no credit for any cost of goods sold or expenses he incurred in this activity. So the taxpayer ultimately appealed to the U.S. Tax Court seeking credit for cost of goods sold and business expenses that were denied.

Tax Code Requires Substantiation Of Expenses

Taxpayers bear the burden of proving that claimed business expenses were actually incurred and were “ordinary and necessary”. IRC Sec. 162(a). Taxpayers also bear the burden of substantiating expenses underlying their claimed deductions by keeping and producing records sufficient to enable IRS to determine the correct tax liability. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Reg. § 1.6001-1(a), Reg. § 1.6001-1(e)). The failure to keep and present such records counts heavily against taxpayers’ attempted proof. John E. Rogers & Frances L. Rodgers v. Commissioner, TC Memo 2014-141.

But Unsubstantiated Expenses May Still Be Recognized Under The Cohan Rule

If a taxpayer with inadequate business records proves that he incurred certain expenses but cannot substantiate the exact amount, the Court in appropriate circumstances may estimate the amount allowable. George M. Cohan v. Commissioner, 39 F.2d 540, 542-544 (2nd Cir. 1930). Under this so called “Cohan Rule”, the Court “bears heavily…upon the taxpayer whose inexactitude is of his own making.” This means that the taxpayer must provide some reasonable evidentiary basis for the estimate. The Tax Court should then only allow you to deduct the least amount of money that you could have possibly spent. Although this may not be the entire sum you are claiming, it is better to get something than nothing when you do not have the receipts to back up your expenses.

Anti-Cohan Rule

But there are some types of business expenses that will not benefit under the Cohan Rule. The “Anti-Cohan Rule” found in IRC Sec. 274(d) requires taxpayers to produce receipts and logs in order to deduct expenses for business use mileage, entertainment and promotion and travel. The government added this provision to require substantiation because of the difficulty to estimate these items and the high level of scrutiny that such expenses include items that are not fully related to the business.

So Back To Mr. Huzella’s Case …

By applying the Cohan Rule, the Tax Court through the taxpayer’s testimony establishing a reasonable evidentiary basis for estimated business expenses, can find for the taxpayer deductions which ordinarily would be denied by IRS.

Mr. Huzella maintained no records of any kind to establish his cost or other bases in the coins that he sold on eBay. At trial he could not present any documentation from eBay to establish his acquisition cost for any of the coins but he was able to submit eBay records of his sales and listing transactions, which provide a detailed description of each item listed for sale. He also submitted coin catalogs from 2011 and 2013 and charts tracking the market prices of silver during 2010 to 2013. He testified that he turned over his inventory fairly quickly and that he had purchased fairly recently on eBay many of the items he sold there. The eBay sales records supported his testimony to some degree.

Evaluating Mr. Huzella’s testimony and the evidence as a whole, the Court found that he substantiated a cost of goods sold of $12,000. Furthermore, the Court also found he was entitled to deductions of $942 for PayPal fees, $2,188 for eBay fees, $600 for internet charges, $600 for postage and $100 for packaging costs.

What Should You Do?

Just because you fail to maintain adequate records or your records got lost or damaged should not mean that your business expenses are disallowed in an IRS audit. Taxpayers who hire an experienced tax attorney in audits and tax appeals who at the earliest opportunity introduces and applies the Cohan Rule should result in the least possible audit adjustments and avoiding costly litigation. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Long Beach and other California locations get you the best possible result in your tax audit.

trump tax reform plan bill

What’s Missing In The Trump Tax Reform Bill?

On November, 2017 the House of Representatives released the first draft of the Trump Tax Reform Bill (the 2017 Tax Cuts And Jobs Act). With much discussion on the touted benefits of the plan, there has been very little discussion on what is missing.

 

What Does Trump’s Tax Reform Bill Offer To Individuals?

Compressed And Lower Income Tax Rates. The draft bill compresses the current seven tiers of tax rates, down to just three: 12%, 25%, and a top rate of 33% that kicks in at $225,000 (for married couples, or $112,500 for individuals). The draft bill would still keep preferential rates for capital gains and qualified dividends. The draft bill would repeal the alternative minimum tax (“AMT”).

Increased Gift and Estate Tax Exemption. Wealthier U.S Taxpayers will benefit from the proposed initial doubling of the estate tax limit from $5,490,000 to $10,980,000 and for the estate tax to be phased out entirely by 2023. 

 

What Is Missing In Trump’s Tax Reform Bill?

U.S. Taxpayers Still Taxed On Worldwide Income. There is no mention in the draft bill of any change to citizen based taxation for U.S. taxpayers. That means that U.S. citizens and resident aliens who are subject to U.S. taxation will still have to report their worldwide income, including income from foreign trusts and foreign bank and securities accounts, on their U.S individual income tax returns. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Repeal Of The Foreign Account Tax Compliance Act (“FATCA”). There is no mention in the draft bill of any repeal of or for that matter any change in FATCA. FATCA was enacted into law in 2010 to impose a reporting obligation by foreign financial institutions to report information on U.S. account holders so that it is received by the IRS. It also mandates that U.S. citizens, resident aliens and certain non-resident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. Reporting thresholds vary based on whether a taxpayer files a joint income tax return or lives abroad. The lowest reporting threshold for Form 8938 is $50,000 but varies by taxpayer.

 

Other Filing Requirements If You Have Foreign Accounts Remain Unchanged.
By law, many U.S. taxpayers with foreign accounts exceeding certain thresholds must file Form 114, Report of Foreign Bank and Financial Accounts, known as the “FBAR.” It is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”).


Taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during a calendar year must file FBARs. It is due by the due date of your Form 1040 and must be filed electronically through the BSA E-Filing System website.

By law, Americans living abroad, as well as many non-U.S. citizens, must file a U.S. income tax return. In addition, key tax benefits, such as the foreign earned income exclusion, are only available to those who file U.S. returns.


Penalties for non-compliance.

Civil Fraud – If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%.

Criminal Fraud – 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)).

Additionally, the penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. For non-willful violations it is $10,000.00 per account per year going back as far as six years. For willful violations the penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

Lastly, failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.


The Solution.

The IRS has special programs for taxpayers to come forward to disclose unreported foreign accounts and unreported foreign income. The main program is called the Offshore Voluntary Disclosure Program (OVDP). OVDP offers taxpayers with undisclosed income from offshore accounts an opportunity to get current with their tax returns and information reporting obligations. The program encourages taxpayers to voluntarily disclose foreign accounts now rather than risk detection by the IRS at a later date and face more severe penalties and possible criminal prosecution.

For taxpayers who willfully did not comply with the U.S. tax laws, we recommend going into the 2014 Offshore Voluntary Disclosure Program (OVDP). Under this program, you can get immunity from criminal prosecution and the one-time penalty is 27.5% of the highest aggregate value of your foreign income producing asset holdings.

For taxpayers who were non-willful, we recommend going into the Streamlined Procedures of OVDP. Under these procedures the penalty rate is 5% and if you are a foreign person, that penalty can be waived. This is a very popular program and we have had much success qualifying taxpayers and demonstrating to the IRS that their non-compliance was not willful.

 

What Should You Do?

Don’t delay because if the government finds out about you first, you will be subject to the maximum civil and maybe criminal penalties under the law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, the Inland Empire and other California locations resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

the paradise papers - offshore banking

Another Leak Of Taxpayers Allegedly Involved In Hiding Assets Offshore – What You Need To Know About The “Paradise Papers”

A compilation based on more than 13.4 million documents dated from 1950 to 2016, uncovers a large number of global corporations, government leaders, and prominent people and their use of offshore accounts to avoid taxes or otherwise hide ownership of assets.

On November 5, 2017 the International Consortium Of Investigative Journalists released what is now dubbed the “Paradise Papers”.  The reporting is similar to the Panama Papers, which in 2016 exposed cases involving celebrities and business executives who reportedly moved large chunks of their wealth into offshore tax havens.  The source of documents in the Panama Papers came from 11 million documents secured from the Panamanian law firm of Mossack Fonseca.  The Paradise Papers is even more extensive as it is based on more than 13.4 million documents dated from 1950 to 2016 from Bermuda including the Appleby Law Firm and the Asiaciti Trust Company.

Several members of Trump’s inner circle, including Secretary of State Rex Tillerson and chief economic adviser Gary Cohn, were mentioned in the Paradise Papers.  Now while it’s not necessarily illegal to distribute wealth across secret companies, which can be used by the super wealthy as legitimate forms of holding their wealth, shell companies can be used to evade taxes and disguise illegal behavior. Also just because someone is mentioned in the Paradise Papers, it doesn’t necessarily mean their business holdings are illegal or they did anything illegal. Unfortunately, when one is mixed in with a basket of bad apples, you know how people will tend to judge the whole harvest.

Nevertheless, this leak is another huge hit the offshore world has taken. The Panama Papers included connections to families and associates of Syrian President Bashar Assad, former Libyan dictator Moammar Gadhafi, and former Egyptian President Hosni Mubarak. The Panama Papers also confirmed that associates of Russian President Vladimir Putin have funneled as much as $2 billion through offshore accounts, banks and shadow companies.  Some well-known celebrities were also identified in the Panama Papers that include Jackie Chan, Micheline Roquebrune and Lionel Messi.

So as government tax officials start reading the Paradise Papers, you can expect in the coming months that many new names will come out that the IRS will be interested in targeting.

Filing Requirements If You Have Foreign Accounts

By law, many U.S. taxpayers with foreign accounts exceeding certain thresholds must file Form 114, Report of Foreign Bank and Financial Accounts, known as the “FBAR.” It is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during a calendar year must file FBARs. It is due by the due date of your Form 1040 and must be filed electronically through the BSA E-Filing System website.

Generally, U.S. citizens, resident aliens and certain non-resident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. Reporting thresholds vary based on whether a taxpayer files a joint income tax return or lives abroad. The lowest reporting threshold for Form 8938 is $50,000 but varies by taxpayer.

By law, Americans living abroad, as well as many non-U.S. citizens, must file a U.S. income tax return. In addition, key tax benefits, such as the foreign earned income exclusion, are only available to those who file U.S. returns.

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

Penalties for non-compliance.
Civil Fraud – If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%.

Criminal Fraud – 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)).

Additionally, the penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. For non-willful violations it is $10,000.00 per account per year going back as far as six years. For willful violations the penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

Lastly, failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.

The Solution.

The IRS has special programs for taxpayers to come forward to disclose unreported foreign accounts and unreported foreign income. The main program is called the Offshore Voluntary Disclosure Program (OVDP). OVDP offers taxpayers with undisclosed income from offshore accounts an opportunity to get current with their tax returns and information reporting obligations. The program encourages taxpayers to voluntarily disclose foreign accounts now rather than risk detection by the IRS at a later date and face more severe penalties and possible criminal prosecution.

For taxpayers who willfully did not comply with the U.S. tax laws, we recommend going into the 2014 Offshore Voluntary Disclosure Program (OVDP). Under this program, you can get immunity from criminal prosecution and the one-time penalty is 27.5% of the highest aggregate value of your foreign income producing asset holdings.

For taxpayers who were non-willful, we recommend going into the Streamlined Procedures of OVDP. Under these procedures the penalty rate is 5% and if you are a foreign person, that penalty can be waived. This is a very popular program and we have had much success qualifying taxpayers and demonstrating to the IRS that their non-compliance was not willful.

What Should You Do?

Don’t delay because if the government finds out about you first, you could be in the same hot water as Rex Tillerson and Gary Cohn.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, San Francisco and other California locations resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Peru Joins FATCA

Peru Becomes 114th Country to Sign FATCA Accord.

Under the Foreign Account Tax Compliance Act (“FATCA”), foreign banks, insurers and investment funds must send the Internal Revenue Service information about Americans’ and U.S. permanent residents’ offshore accounts worth more than $50,000. Institutions that fail to comply could effectively be frozen out of U.S. markets. The U.S. has entered into intergovernmental Agreements (“IGA’s”) with 113 countries for the implementation of FATCA.

Peru has now signed on to FATCA which requires Peruvian financial institutions to report information about U.S. customers’ accounts for transmission to the IRS. Peru becomes the 114th country to join this accord and the 14th Latin American country to join the accord along with Argentina, Belize, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Mexico, Panama, and Uruguay. All of these countries’ participation has a huge significance here in California given the large portion of the State’s population having connections to these countries.

Application to the United States

FATCA was enacted into law in 2010 as a way to help combat tax evasion by requiring foreign financial institutions to provide financial information on U.S. account holders or face severe monetary penalties collected from investments here in the U.S. The overwhelming acceptance of foreign countries to participate in FATCA means that the U.S. will be able to have an inflow of information from all countries regarding tax matters and therefore those with unreported foreign financial accounts are in even greater danger of penalties and possible prosecution by the IRS.

Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. Willful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation and may even result in the IRS filing criminal charges.

Penalties for Non-Compliance.

Civil Fraud – If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%.

Criminal Fraud – 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)).

Additionally, the penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. For non-willful violations, it is $10,000.00 per account per year going back as far as six years. For willful violations, the penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

Lastly, failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.

Voluntary Disclosure

The IRS has special programs for taxpayers to come forward to disclose unreported foreign accounts and unreported foreign income. The main program is called the Offshore Voluntary Disclosure Program (OVDP). OVDP offers taxpayers with undisclosed income from offshore accounts an opportunity to get current with their tax returns and information reporting obligations. The program encourages taxpayers to voluntarily disclose foreign accounts now rather than risk detection by the IRS at a later date and face more severe penalties and possible criminal prosecution.

For taxpayers who willfully did not comply with the U.S. tax laws, we recommend going into the 2014 Offshore Voluntary Disclosure Program (OVDP). Under this program, you can get immunity from criminal prosecution and the one-time penalty is 27.5% of the highest aggregate value of your foreign income producing asset holdings.

For taxpayers who were non-willful, we recommend going into the Streamlined Procedures of OVDP. Under these procedures the penalty rate is 5% and if you are a foreign person, that penalty can be waived. This is a very popular program and we have had much success qualifying taxpayers and demonstrating to the IRS that their non-compliance was not willful.

What Should You Do?

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, San Jose and elsewhere in California help ensure that you are in compliance with federal tax laws.

California office of tax appeals

California Starts Implementation Of New Tax Appeals Programs By Establishing The New “Office Of Tax Appeals”

On June 15, 2017, the California Legislature passed Assembly Bill 102, which transfers nearly all tax administration and appeal functions from the BOE to two new tax departments: the Department Of Tax And Fee Administration (“DTFA”) and the Office Of Tax Appeals (“OTA”).

Starting January 1, 2018, California State tax appeals will be heard by the Office Of Tax Appeals (“OTA”). Created by the Taxpayer Transparency And Fairness Act Of 2017, the OTA will replace the appellate process once handled by the State Board of Equalization (“BOE”). The BOE handles the enforcement of various types of state taxes – most notably Property Taxes and California Sales & Use Taxes. The OTA will hear and determine all appeals that involve corporate income tax, corporate franchise tax, personal income tax, sales tax, and use tax. If a taxpayer disagrees with the audit findings involving any of these taxes which are reflected on a Notice Of Action or a Notice Of Determination, the taxpayer may file an appeal with the new OTA by the “appeal date” listed on said notice. As of October 1, 2017, any such notice that gets issued will include an insert containing information about appeal rights and the OTA’s contact information. As of October 1, 2017 all appeals need to be filed with OTA, and beginning January 1, 2018, OTA’s three-member panels will hear and determine all appeals. The BOE will cease hearing these appeals after December 31, 2017.

Old System Was “Politically Connected”

The BOE was constitutionally created in 1879 with a mandate that property taxes would be fairly assessed and collected across California. Since that time, the BOE’s statutory authority has been expanded to administer the state’s sales and use tax and numerous other state taxes and fees. In addition, the Board, comprising four members elected from districts and the statewide-elected State Controller, also hears and decides tax disputes. Until the change in the law, California was the only state in the United States where administrative tax disputes were heard by elected representatives. Not only was it allowed but also it was encouraged that taxpayers (or when represented, their attorneys) contact each government official sitting on the five-member BOE panel in ex-parte communications to promote the taxpayer’s position in advance of the hearing.

Designed To Promoted Fairness

On June 15, 2017, the California Legislature passed Assembly Bill 102, which transfers nearly all tax administration and appeal functions from the BOE to two new tax departments: the DTFA and the OTA. The BOE still retains its constitutional duties which going back to its historical roots is the oversight of property taxes and assessment of state-assessed properties. Both the DTFA and OTA would be under the control of respective directors, each appointed by the governor and subject to confirmation by the California Senate.

The DTFA will be based in Sacramento and will administer state and local sales and use taxes, fuel and tobacco excise taxes, and a variety of other taxes and fees. The new law has no impact on State income tax audits which will still be conducted by the Franchise Tax Board (“FTB”) or employment tax audits which will still be conducted by the Employment Development Department (“EDD”). OTA would hear sales and use tax appeals from the DTFA and personal and corporate income tax appeals from the FTB.

The OTA was designed by the State Legislature to operate independent of any other State tax office and provides a venue where disagreements concerning the application of California State tax law can be resolved on a fair and impartial basis for both the taxpayer and the government. The OTA is supposed to take a fresh look at a taxpayer’s case and consider the strengths and weaknesses of the issues in the taxpayer’s case. The advantage of appealing a California State tax audit to this level provides the taxpayer with the opportunity to reach a mutually acceptable settlement without expensive and time-consuming court trials. This approach follows what the IRS and over half the State Tax Agencies have been doing for many years.

Within the OTA, there will be tax appeals panels consisting of three administrative law judges (ALJ’s). These ALJ’s must have state tax experience and each be a member of the California bar. OTA headquarters will be in Sacramento, with hearing offices in Sacramento, Fresno, and Los Angeles. The ALJ’s must issue written opinions for each appeal.

Although the OTA is not a judicial body or a tax court, it is now a step in California Tax Procedure for taxpayers to challenge tax audit decisions. Furthermore, decisions of the OTA can be appealed to California Superior Court for a “de novo review”. “De novo” is a form of appeal in which the court holds a trial as if no prior trial had been held.

Looking To Appeal A California State Tax Audit Report To The Office Of Appeals?

When taxpayers disagree with the findings of their California State tax audits, they may usually appeal to the OTA. The auditor agent will issue a Notice Of Determination to a taxpayer, which essentially provides the taxpayer with the opportunity to file a Tax Protest requesting his or her case be heard by the OTA. Hiring an experienced tax attorney should make a difference in getting the best possible result. The attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. with locations in Orange County, San Francisco and elsewhere in California know how best to communicate directly to tax appellate bodies including the OTA and build a persuasive case on your behalf because we know how to present your case with legal argument and tax authority.

IRS 2017 Tax Deductions

Forgot To Include A Deduction? Did Not Pick Up All Your Income? Considerations On Filing An Amended Return

Forgot To Include A Deduction? Did Not Pick Up All Your Income?

Considerations On Filing An Amended Return

If you filed a tax return only to later realize that it was not complete or you did something incorrect, you can correct this by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

But before you proceed, consider these essential facts:

1. Manner Of Filing. Regardless of whether you e-filed your Form 1040, U.S. Individual Income Tax Return or filed a paper form, an amended return can only be filed in paper form.

2. Explanation For Filing. Form 1040X includes an explanation section where you explain why the tax return is being amended. This could be due to a change in your filing status, income, deductions or credits.

3. Timing For Filing. Form 1040X must be filed within three years from the date you filed your original tax return or within two years of the date you paid the tax, whichever is later. If the IRS received funds though a levy or applied an overpayment from another tax year that is considered to be a date you paid the tax and the two-year period will start from that date.

4. Separate Submissions For Each Tax Year. If you are amending more than one tax return, prepare Form 1040X for each year and mail them to the IRS in separate envelopes. Be sure to enter the year of the return you are amending at the top of Form 1040X.

You normally do not need to file an amended return to correct math errors. Instead the IRS computers will automatically make those changes for you and send you a notice by mail of the result of the change. If you now owe a balance to the IRS, that notice will include a payment voucher to send in payment. If you now have a refund due to you, the IRS will send out separately from the notice a refund check.

If you are filing an amended tax return to claim an additional refund, wait until you have received your original tax refund before filing Form 1040X. However, you need not delay cashing your original refund. If you are due a refund, the IRS will pay you interest on the amount of the refund. Of course, next year the IRS will send you a Form 1099-INT reflecting the interest paid, so you will have to report this income on your tax return.

In case you forgot to attach your W-2’s or other required tax reporting documents, no need to worry as the IRS computers will match up the amounts reported on your tax return to this third party tax reporting information. If the IRS computers find a discrepancy, the IRS will send a notice by mail which will require you to respond with the requested documents or an explanation.

Keep in mind that amended returns take up to 12 weeks to process. You can track the status of your amended tax return three weeks after you file with the IRS’s tool called, “Where’s My Amended Return?”. The automated tool is available on ww.IRS.gov. You can track the status of your amended return for the current year and up to three prior years.

Possible Adverse Considerations:

1. Audit Risk. The IRS requires paper submissions of Form 1040X because unlike original tax returns processed by a computer, amended tax returns are examined by a person. Although you only changed one item on the return, the examiner can, and frequently

does, examine all the items on the return. If there is anything questionable, the examiner could send a notice requesting more information or refer this return for an audit.

2. Imposition Of Penalties. If you file an amended return and you owe additional tax, you will be assessed penalties and interest on the amount due. You may want to just pay the additional tax due and wait for a tax bill that includes interest and penalties. You will then have an accurate amount to pay off the liability. Another of paying only the tax due is that if you have a valid reason for the late payment penalty, you may appeal to the IRS for an abatement of the penalty. Just keep in mind that interest is not abatable and a direct function on how much is owed. If you are not successful in getting the penalty abated, not only do you have the penalty to pay but also the underlying interest on the account.

What Should You Do?

When you did not include all deductions and credits in your original tax return, it usually makes sense to proceed with the submission of an amended tax return. But where you failed to include all of your income and/or overstated your deductions, you should consider meeting with tax counsel first as your filing of the amended tax returns could be used as an admission of guilt that the IRS could base criminal charges or a 75% civil fraud penalty. Let our tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. in Orange County, San Jose and other California locations evaluate your situation and come up with a Tax Resolution Development Plan to get the best possible outcome.

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Paul Manafort and Richard Gates indicted on 12 counts including tax crimes for failure report foreign income and failure to disclose overseas bank accounts

Paul Manafort and Richard Gates, two former top campaign officials for President Donald Trump, have been indicted on 12 counts, according to documents made public on October 30, 2017, making them the first people to be charged in special counsel Robert Mueller’s probe into 2016 foreign election interference.  In a 31-page indictment, federal prosecutors alleged that Manafort and Gates engaged in unlawful activities ranging from money laundering to operating as unregistered foreign agents of the government of Ukraine to failing to disclose overseas bank accounts.

 

With respect to tax crimes, the indictment alleges that Manafort laundered over $18 million, income that investigators say was “concealed from the United States Treasury, Department of Justice, and others.” Gates, meanwhile, moved over $3 million through offshore accounts, prosecutors say. In total, over $75 million was discovered as a part of offshore transactions connected to the pair.  These transactions investigators allege was their attempt to fail to report and pay income taxes on income that should have been reported and to fail to disclose overseas bank accounts.

 

Filing Requirements If You Have Foreign Accounts

 

By law, many U.S. taxpayers with foreign accounts exceeding certain thresholds must file Form 114, Report of Foreign Bank and Financial Accounts, known as the “FBAR.” It is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

 

Taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015 must file FBARs. It is due by June 30 and must be filed electronically through the BSA E-Filing System website.

 

Generally, U.S. citizens, resident aliens and certain non-resident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. Reporting thresholds vary based on whether a taxpayer files a joint income tax return or lives abroad. The lowest reporting threshold for Form 8938 is $50,000 but varies by taxpayer.

 

By law, Americans living abroad, as well as many non-U.S. citizens, must file a U.S. income tax return. In addition, key tax benefits, such as the foreign earned income exclusion, are only available to those who file U.S. returns.

 

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

 

Penalties for non-compliance.

 

Civil Fraud – If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%.

 

Criminal Fraud – 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)).

 

Additionally, the penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. For non-willful violations it is $10,000.00 per account per year going back as far as six years. For willful violations the penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

 

Lastly, failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.

 

Voluntary Disclosure

The IRS has special programs for taxpayers to come forward to disclose unreported foreign accounts and unreported foreign income. The main program is called the Offshore Voluntary Disclosure Program (OVDP). OVDP offers taxpayers with undisclosed income from offshore accounts an opportunity to get current with their tax returns and information reporting obligations. The program encourages taxpayers to voluntarily disclose foreign accounts now rather than risk detection by the IRS at a later date and face more severe penalties and possible criminal prosecution.

 

For taxpayers who willfully did not comply with the U.S. tax laws, we recommend going into the 2014 Offshore Voluntary Disclosure Program (OVDP). Under this program, you can get immunity from criminal prosecution and the one-time penalty is 27.5% of the highest aggregate value of your foreign income producing asset holdings.

 

For taxpayers who were non-willful, we recommend going into the Streamlined Procedures of OVDP. Under these procedures the penalty rate is 5% and if you are a foreign person, that penalty can be waived. This is a very popular program and we have had much success qualifying taxpayers and demonstrating to the IRS that their non-compliance was not willful.

What Should You Do?

Don’t delay because if the government finds out about you first, you could be in the same hot water as Paul Manafort and Richard Gates.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Long Beach and other California locations resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.