Archive for category: IRS Operations & Procedures

Rescheduling Of Cannabis Opens Relief For Cannabis Businesses To Settle IRS Tax Debt Through An Offer In Compromise.

President Trump’s December 18, 2025 Executive Order to remove cannabis from a Schedule I classification to a Schedule III classification

President Trump’s execution on December 18, 2025 of an Executive Order Increasing Medical Marijuana and Cannabidoil Research to remove cannabis from a Schedule I classification to a Schedule III classification has created much confusion with some arguing that he does not have such authority to reschedule and others stating that this Order is merely a directive for the Executive Branch to implement changes to accomplish this rescheduling.

The issuance of this Executive Order however should result in cannabis businesses with IRS debt to pursue discounted settlements under the IRS Offer In Compromise program.

How Does This Executive Order Make A Difference?

The IRS generally approves an Offer In Compromise when the amount you offer represents the most IRS can expect to collect within a reasonable period of time.  This standard is defined as “reasonable collection potential” but if you are a cannabis business with outstanding IRS liabilities, the IRS had followed a more restrictive approach.

IRC Section 280E disallows any deduction or credit of amounts paid or incurred in carrying on any trade or business of trafficking in controlled substances under Schedule I or Schedule II. The Internal Revenue Manual requires expenses that would be disallowed by IRC Section 280E to be disregarded when the IRS is calculating a taxpayer’s reasonable collection potential for an Offer In Compromise.  Cannabis businesses have been subject to IRC Section 280E as a Schedule I substance.

Such a concept on December 16, 2025 was affirmed by the U.S. Tax Court when it issued its opinion in Mission Organic Center Inc. v. Commissioner Of Internal Revenue, 165 T.C. 13 (2025), sustaining the IRS’ denial of this cannabis dispensary to pursue an Offer In Compromise.  The taxpayer in calculating the amount of its offer reduced its future income by operating expenses that were ordinary and necessary to conduct business but was not deductible for tax purposes under IRC Section 280E. The IRS Revenue Officer disregarded such expenses when calculating the taxpayer’s reasonable collection potential.

So, for example, rent expense which is an ordinary and necessary expense which of course if not paid would result in the landlord evicting the taxpayer and thus terminating the business.  It is crazy that IRS would disregard such an expense for purposes of determining reasonable collection potential on the basis that the taxpayer is not allowed to deduct this rent expense in arriving at its taxable income.  Interestingly, the IRS will allow taxpayers submitting an Offer In Compromise to reduce their future income by such applicable obligations like alimony, child support, student loan payments, secure loan obligations, and certain limited personal living expenses, even though all the foregoing is not deductible for income tax purposes.

What Is An Offer In Compromise?

An Offer In Compromise is an agreement between a taxpayer and the IRS to settle a tax debt for less than the full amount owed. Generally, it may be an option for taxpayers who can’t pay their full tax debt, or if doing so would create a financial hardship. The IRS considers the taxpayer’s overall financial circumstances when considering an Offer In Compromise in an effort to administratively resolve the amount due.

Taxpayers who want to avail themselves of the IRS Offer In Compromise program file a formal application, in which they propose to pay less than their total obligation amount (taxes, interest and any associated penalties). That much is straightforward. But as another adage goes: “the devil is in the details,” and that is where many taxpayers head in the wrong direction, and make an already challenging and stressful financial situation exponentially worse.

It All Comes Down To Reducing Your Past IRS Debt

There is a school of thought that the issuance of this Executive Order could be construed as an affirmation that cannabis does not “fit the meaning” of a Schedule I substance; and therefore, cannabis should never have been treated as such under the Controlled Substances Act to begin with.  This theory has yet to be tested in the Courts but given the effect of the Executive Order that supports the viability of cannabis businesses to pursue an Offer In Compromise to settle past IRS debt, we have been recommending cannabis businesses pursue the Offer In Compromise approach.  Another advantage of an Offer In Compromise over amending past year tax returns is that while the Offer In Compromise is being considered by IRS (or any denial is being appealed), the IRS cannot enforce collection action.  That puts a pause on levies, garnishments, and tax liens for months if not years while this is being sorted out.

Here are the four biggest myths on pursuing an Offer In Compromise –

1. IRS Offer In Compromise Myth: Taxpayers only need to petition the Federal government to take advantage of the program.

The Facts: Many States have Offer In Compromise programs, and each has its own qualifying standards. Taxpayers who owe money to both the IRS and their respective State tax agency must coordinate the filings in order to facilitate a mutually acceptable resolution. Just dealing with the IRS is not enough, and the IRS is under no obligation (and will not) reach out to their State-level counterparts. The onus to do this is completely on each taxpayer.

2. IRS Offer In Compromise Myth: Filling out the proper forms is time consuming, but does not require expertise.

The Facts: The vast majority of taxpayers do not have requisite knowledge of the IRS collection process for their petition to be successful, regardless of how much time they allocate to their application. While the lists of common errors is long, among the most frequent are: overstating assets and income (and therefore offering the IRS too much); failing to submit the proper application fee and a deposit for the amount offered; and failing to include proper financial disclosure. And if you are still not convinced: the Federal government’s own figures show that 75% of applications are returned due to forms being filled out incorrectly, and of the 25% that are processed, approximately 50% are rejected.

3. IRS Offer In Compromise Myth: Third-party firms and consultants can help you settle your debt and enjoy a “big discount.”

The Facts: This is false advertising at its worst, since the consequences here can be life-altering. These firms and consultants have no idea what your tax situation is like, and therefore cannot even promise that the IRS will accept your petition, let alone allow you to enjoy a “big discount.” Only a qualified and experienced professional who has analyzed your specific financial details, and who knows the IRS rules and guidelines inside and out (including material that is not easily available to the public — or comprehensible even when it is) can determine your eligibility for an Offer In Compromise.

4. IRS Offer In Compromise Myth: If you owe money to the IRS, then you submit an application right away to stop collection action or interest while your case is being reviewed.

The Facts: Before the IRS will even consider your application, they will check to see where you are current with all filing requirements. If anything is overdue, or if you are in an open bankruptcy proceeding, then your application will be returned to you.

The Bottom Line

The IRS Offer In Compromise program has the potential to be substantially beneficial for qualifying taxpayers who (and this is the most critical part) complete and submit their application properly, completely and effectively. If your cannabis business is facing shut-down by the IRS for outstanding IRS debt, the submission of an Offer In Compromise should put a stop on such action.  This relief allows for the business to continue to operate and negotiations with the IRS to commence.  The IRS assesses applications on a case-by-case basis, and the more boxes you check, the more likely you are to be granted financial relief. Conversely, if you get trapped by any of the myths above — or dozens of others that endure — not only will your application be rejected and returned, but your debt will continue piling up by the day.

What Should You Do?

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. We understand the cannabis industry and having a cannabis tax attorney on your side can make the difference in getting the tax relief you deserve.  Also, if you are involved in crypto currency, check out what a Bitcoin Tax Attorney can do for you.

Former IRS Commissioner Danny Werfel expressed concern over events since his resignation in January 2025 that he believes will have an adverse impact on IRS’ ability to handle operations for the 2026 filing season.

Those events comprise of –

• The 2025 government shutdown that just ended,
• IRS furloughs including seven different senior IRS officials,
• The passing of the One Big Beautiful Bill Act (OBBBA) in July 2025, and
• Reductions in the IRS agency’s overall workforce.

Before tax season, and around this time of year, the IRS usually updates forms, instructions and technology to reflect the number of changes that occurs in the tax code or guidance. However, according to Mr. Werfel the IRS is in uncertain chaos this year, which can stall progress and decision making.

Consequences To IRS Of The 2025 Government Shut Down

The last government shutdown was during Trump’s first term (December 22, 2018 to January 25, 2019). The most recent 2025 government shutdown lasted about 40 days. Here are some things that you should consider that makes the 2025 government shutdown different from Trump’s first term government shutdown:

1. IRS does not have an IRS Commissioner leading the agency. Instead Treasury Secretary Scott Bessent is designated as the acting IRS Commissioner.
2. Year-end holidays (Thanksgiving, Christmas and New Year’s Day) will be upon us.
3. The time between Christmas and New Year’s Day is reserved by IRS to get their computer systems ready for next year’s filing season.
4. The longer the shutdown, the greater amount of backlog in mail, faxes and voice messages that IRS officials will need to go through.
5. No guarantee that all those employees who were furloughed during the shutdown will be coming back to work, thus resulting in further staffing shortages.

Considering the foregoing, it may not be until 1^st quarter 2026 that IRS operations are back to a normal status and keep in mind that the current funding of the federal government is due to expire January 30, 2026 which could further challenge IRS’ ability to get to normal operations.

An Opportunity For Taxpayers Who Owe The IRS.

Do not think that if you owe the IRS your tax problem will disappear because the IRS is not fully operational.  Instead you should be utilizing this valuable time to get yourself prepared so you are ready to make the best offer or proposal to take control of your outstanding tax debts.

As a prerequisite to any proposal to the IRS, you must be in current compliance.  That means if you have any outstanding income tax returns, they must be completed and submitted to IRS.  Also, if you are required to make estimated tax payments, you must be current in making those payments.  As we are in the last quarter of 2025, taxpayers who expect to owe for 2025 should start organizing their records for 2025 so that in early 2026, their 2025 income tax returns can be completed and the 2025 liability can be rolled over into any proposal.  Under such a scenario you would not be required to make estimated tax payments until 2026.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. Even if the IRS is not fully prepared for the upcoming 2026 tax season it is going to happen and you need to be ready for it, especially with the passing of OBBBA and new Treasury Department and IRS guidance.  If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Also if you are involved in cannabis, check out what our cannabis tax attorneys can do for you. And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

On July 4, 2025 President Donald J. Trump signed into law H.R.1 – One Big Beautiful Bill Act (“OBBBA”).  The OBBBA contains hundreds of provisions including permanently extending the individual tax rates Trump signed into law in 2017, which were originally set to expire at the end of 2025.

New Threshold For Issuance Of 1099’s

Effective with tax year 2026, Section 70433 of the OBBBA increases the $600 threshold for reporting payments to non-employees for personal services to $2,000, which will then be adjusted for inflation beginning in 2027. This change is expected to provide significant relief for rideshare platforms, auction sites, online marketplaces and others that have historically issued Forms 1099-K and should also alleviate the administrative burden of filing forms for casual sellers, gig workers and others with minimal amounts of income and transactions during the year. Tax year 2025 will be the last year that the lower $600 threshold amount will apply.

While amounts below the new reporting thresholds will still constitute income subject to taxation, a payor will no longer be required to issue a 1099 or engage in backup withholding at the lower amounts. This could significantly reduce the number of 1099s that payors are required to issue.  Regardless of whether income received by a taxpayer is evidenced by a Form 1099, taxpayers are required to declare such income on their tax returns.  If a tax return is filed and does not reflect all Form 1099’s used under the taxpayer’s social security number, the IRS computers using a “matching program” will uncover the discrepancy and send out a notice or tax bill that will include accruals of interest and penalties.

Impact To Taxpayers In The “Gig Economy”

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

And if you use payment apps like PayPal, Venmo, Square, and other third-party electronic payment networks to pay for goods and services, you should be aware of a tax reporting change that was to go into effect in January 2022.  However, following feedback from taxpayers, tax professionals and payment processors and to reduce taxpayer confusion, the IRS announced on November 21, 2023 in Notice 2023-74 to delay the new $600 Form 1099-K reporting threshold for third party settlement organizations for calendar year 2023.

However, starting with the 2024 calendar year, payment app providers had to start reporting to the IRS a user’s business transactions if, in aggregate, they total $600 or more for the year.

The expansion of the reporting rule was the result of a provision in the American Rescue Plan, which was signed into law in 2021. The IRS was looking to use this information to uncover unreported income and recover lost tax revenues.

Under this reporting rule, payments to non-employees for personal services must be reported on an “information return,” commonly called a Form 1099-NEC, if the payment is $600 or more in a calendar year. Similarly, payments of non-wages, such as for a settlement that includes penalties or emotional distress-type damages, are reportable on Form 1099-MISC if the payment is $600 or more.

Transactions that may apply or not apply to reporting requirements

Reporting requirements do not apply to personal transactions such as birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another for a household bill. These payments are not taxable and should not be reported on Form 1099-K.

However, the casual sale of goods and services, including selling used personal items like clothing, furniture and other household items for a loss, could generate a Form 1099-K for many people, even if the seller has no tax liability from those sales.

This complexity in distinguishing between these types of transactions factored into the IRS decision to delay the reporting requirements an additional year and to plan for a threshold of $5,000 for 2024 in order to phase in implementation. The IRS invites feedback on the threshold of $5,000 for tax year 2024 and other elements of the reporting requirement, including how best to focus reporting on taxable transactions.

Other details can be found at IRS.gov including frequently asked questions (FAQs) for Form 1099-K Payment Card and Third Party Network Transactions, in Fact Sheet 2024-03. These FAQs provide more general information for taxpayers, including common situations some taxpayers may be in, such as ticket sales or seasonal crafts business. The FAQs are in addition Understanding your Form 1099-K on IRS.gov page.

Federal Government’s Independent Contractor Ruling

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

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

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

California law updated in 2020 to expand independent contractor status

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

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

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

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

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

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

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

1. The activity is taxable.

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

2. Some expenses are deductible.

The tax code allows you to deduct certain costs of doing business from gross income. For example, a taxpayer who uses their car for business may qualify to claim the standard mileage rate, which is 70 cents per mile for 2025. Generally, you cannot deduct personal, living or family expenses. You can deduct the business part only, such as supplies, cell phones, auto expenses, food and drinks for passengers, car washes, parking fees, tolls, roadside assistance plans, taxes, and incentives associated with certain electric and hybrid vehicles.

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

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

3. You Could Be Subject To Self Employment Tax

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

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

4. Beware Of Requirement To Make Estimated Tax Payments.

Remember you are not an “employee” of the sharing economy facilitators; you are an “independent contractor”.  As such, there is no withholding of any taxes from your checks; you are responsible for all taxes – Self Employment taxes and income taxes – on your net earnings.  The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year. These payments for the 2026 tax year are due on April 15, 2026, June 15, 2026, September 15, 2026 and January 15, 2027. Taxpayers use Form 1040-ES to figure these payments.

Why The IRS Likes The Gig Economy.

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

What Should You Do?

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

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

Protect yourself. If you need help with your tax return preparation, tax planning or you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

 

At midnight on October 1, 2025, funding for Federal government agencies lapsed triggering a partial shutdown of the federal government. The date when funding will be restored by Congress has not been established but under plans established by each Federal agency, as the lapse in funding continues more Federal government functions will be shutdown.

The Anti-Deficiency Act.

Overriding each Federal agency’s plan is the Anti-Deficiency Act, 31 U.S.C. §1341, which provides that in the absence of appropriated funds no obligation can be incurred except for the protection of life and property, the orderly suspension of operations, or as otherwise authorized by law. This means that absent an appropriation, many Federal employees are prohibited from working, even on a volunteer basis, “except for emergencies involving the safety of human life or the protection of property”. 31 U.S.C. §1342. Accordingly, each Federal agency must designate those employees whose work is necessary to sustain legal operations essential to the safety of human life and the protection of property.

Department Of Justice’s Contingency Plan.

The Department of Justice has issued guidance, which gives priority to continuing work on criminal cases. Consequently, no employees in the Tax Division of the Department Of Justice will be authorized to work on CIVIL MATTERS during a lapse in appropriations.

Internal Revenue Service’s Contingency Plan.

The IRS being an agency under the Department Of Treasury in late November issued a fiscal year 2019 “Lapsed Appropriations Contingency Plan” that governs what will happen at the IRS during a government shutdown.

This initial plan covered only a five-day shutdown and was formulated for 2018/2019. But given that we are in 2025 and the shutdown could last longer than five business days, the IRS may have to reassess ongoing activities and identify necessary adjustments of excepted positions and personnel.

The initial plan identified 9,946 IRS employees as “excepted/exempt” employees who would not be furloughed. The rest of the IRS’s 79,868 employees (as of November 10, 2018) would be furloughed, meaning they will be put on leave of absence without pay, under 5 C.F.R. Section 752.402.

The initial plan identified the following activities of IRS that will continue which are necessary for safety of human life or protection of government property:

• Continuing to complete and test upcoming filing year programs
• Processing electronic returns, up to the point of refund
• Processing paper tax returns through “batching”
• Processing remittances; and
• Maintaining criminal law enforcement operations.

When funds are appropriated to the IRS, furloughed employees will return to work (they are expected to return within four hours after the reactivation is announced if it occurs on a scheduled work day).  However, the Trump Administration announced that in lieu of furloughed employees eventually coming back to work, certain of these employees may be permanently discharged.

An Opportunity For Taxpayers Who Owe The IRS.

Do not think that if you owe the IRS your tax problem will disappear because the IRS is not fully operational.  Instead you should be utilizing this valuable time to get yourself prepared so that when IRS re-opens for business, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

The last government shutdown was during Trump’s first term and lasted 35 days (December 22, 2018 to January 25, 2019).  While there is no certainty when the current shutdown will end, here are some things that you should consider the makes this shutdown different from the last shutdown:

1. IRS does not have an IRS Commissioner leading the agency. Instead Treasury Secretary Scott Bessent is designated as the acting IRS Commissioner.
2. Year-end holidays (Veteran’s Day, Thanksgiving, Christmas and New Year’s Day) will be upon us.
3. The time between Christmas and New Year’s Day is reserved by IRS to get their computer systems ready for next year’s filing season.
4. The longer the shutdown, the greater amount of backlog in mail, faxes and voice messages that IRS officials will need to go through.
5. No guarantee that all those employees who were furloughed during the shutdown will be coming back to work, thus resulting in further staffing shortages.

Considering the foregoing, it may not be until 1^st quarter 2026 that IRS operations are back to a normal status.

As a prerequisite to any proposal to the IRS, you must be in current compliance.  That means if you have any outstanding income tax returns, they must be completed and submitted to IRS.  Also, if you are required to make estimated tax payments, you must be current in making those payments.  As we are in the last quarter of 2025, taxpayers who expect to owe for 2025 should start organizing their records for 2025 so that in early 2026, their 2025 income tax returns can be completed and the 2025 liability can be rolled over into any proposal.  Under such a scenario you would not be required to make estimated tax payments until 2026.

The take away from this – use the Federal government’s downtime to your advantage to prepare for the future.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Also if you are involved in cannabis, check out what our cannabis tax attorneys can do for you. And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

At midnight on October 1, 2025, funding for Federal government agencies lapsed triggering a partial shutdown of the federal government. The date when funding will be restored by Congress has not been established but under plans established by each Federal agency, as the lapse in funding continues more Federal government functions will be shutdown.

The Anti-Deficiency Act.

Overriding each Federal agency’s plan is the Anti-Deficiency Act, 31 U.S.C. §1341, which provides that in the absence of appropriated funds no obligation can be incurred except for the protection of life and property, the orderly suspension of operations, or as otherwise authorized by law. This means that absent an appropriation, many Federal employees are prohibited from working, even on a volunteer basis, “except for emergencies involving the safety of human life or the protection of property”. 31 U.S.C. §1342. Accordingly, each Federal agency must designate those employees whose work is necessary to sustain legal operations essential to the safety of human life and the protection of property.

Department Of Justice’s Contingency Plan.

The Department of Justice has issued guidance, which gives priority to continuing work on criminal cases. Consequently, no employees in the Tax Division of the Department Of Justice will be authorized to work on CIVIL MATTERS during a lapse in appropriations.

Internal Revenue Service’s Contingency Plan.

The IRS being an agency under the Department Of Treasury in late November issued a fiscal year 2019 “Lapsed Appropriations Contingency Plan” that governs what will happen at the IRS during a government shutdown.

This initial plan covered only a five-day shutdown and was formulated for 2018/2019. But given that we are in 2025 and the shutdown could last longer than five business days, the IRS may have to reassess ongoing activities and identify necessary adjustments of excepted positions and personnel.

The initial plan identified 9,946 IRS employees as “excepted/exempt” employees who would not be furloughed. The rest of the IRS’s 79,868 employees (as of November 10, 2018) would be furloughed, meaning they will be put on leave of absence without pay, under 5 C.F.R. Section 752.402.

The initial plan identified the following activities of IRS that will continue which are necessary for safety of human life or protection of government property:

• Continuing to complete and test upcoming filing year programs
• Processing electronic returns, up to the point of refund
• Processing paper tax returns through “batching”
• Processing remittances; and
• Maintaining criminal law enforcement operations.

When funds are appropriated to the IRS, furloughed employees will return to work (they are expected to return within four hours after the reactivation is announced if it occurs on a scheduled work day).  However, the Trump Administration announced that in lieu of furloughed employees eventually coming back to work, certain of these employees may be permanently discharged.

An Opportunity For Taxpayers Who Owe The IRS.

Do not think that if you owe the IRS your tax problem will disappear because the IRS is not fully operational.  Instead you should be utilizing this valuable time to get yourself prepared so that when IRS re-opens for business, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

As a prerequisite to any proposal to the IRS, you must be in current compliance.  That means if you have any outstanding income tax returns, they must be completed and submitted to IRS.  Also, if you are required to make estimated tax payments, you must be current in making those payments.  As we are in the last quarter of 2025, taxpayers who expect to owe for 2025 should start organizing their records for 2025 so that in early 2026, their 2025 income tax returns can be completed and the 2025 liability can be rolled over into any proposal.  Under such a scenario you would not be required to make estimated tax payments until 2026.

The take away from this – use the Federal government’s downtime to your advantage to prepare for the future.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Also if you are involved in cannabis, check out what our cannabis tax attorneys can do for you. And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.