IRS Provides Tax Relief For Victims Of Wildfires In California

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IRS Provides Tax Relief For Victims Of Wildfires In California

The IRS announced on August 27, 2021 that victims of wildfires in California Ida that began on July 14, 2021 now have until November 15, 2021 to file various individual and business tax returns and make tax payments.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. Currently this includes individuals and households affected by wildfires that reside or have a business in Lassen, Nevada, Placer, and Plumas counties. The current list of eligible localities is always available on the disaster relief page on IRS.gov.  The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area.

The tax relief postpones various tax filing and payment deadlines that occurred starting on July 14, 2021. As a result, affected individuals and businesses will have until November 15, 2021 to file returns and pay any taxes that were originally due during this period. This means individuals who had a valid extension to file their 2020 return due to run out on October 15, 2021, will now have until November 15, 2021, to file.  However, any tax payments related to these 2020 returns that were due on May 17, 2021 are not eligible for this relief.

The November 15, 2021 deadline also applies to quarterly estimated income tax payments due on September 15, 2021, and the quarterly payroll and excise tax returns normally due on August 2, 2021.

In addition, penalties on payroll and excise tax deposits due on or after July 14, 2021 and before July 29, 2021 will be abated as long as the deposits were made by July 29, 2021.

Tax Planning Tip

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2021 return normally filed next year), or the return for the prior year (2020). Be sure to write the FEMA declaration number – 4610 − and “California Wildfires” on any return claiming a loss.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Tips On Reconstructing Records

Reconstructing records after a disaster is important for several reasons including insurance reimbursement and taxes. Most importantly, records can help people prove their disaster-related losses. More accurately estimated losses can help people get more recovery assistance like loans or grants.

Whether it’s personal or business property that has been lost or destroyed, here are some steps that can help people reconstruct important records.

Tax records

Get free tax return transcripts immediately using the Get Transcript on IRS.gov or through the IRS2Go app.  Tax return transcripts show line-by-line the entries made on your Federal income tax returns.  The most three recent tax years are available.

Financial statements

People can gather past statements from their credit card company or bank. These records may be available online. People can also contact their bank to get paper copies of these statements.

Property records

  • To get documents related to property, homeowners can contact the title company, escrow company or bank that handled the purchase of their home or other property.
  • Taxpayers who made home improvements can get in touch with the contractors who did the work and ask for statements to verify the work and cost. They can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, taxpayers can contact the attorney who handled the trust.
  • When no other records are available, people should check the county assessor’s office for old records that might address the value of the property.
  • Car owners can research the current fair-market value for most vehicles. Resources are available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association and Edmunds.

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Northern California (Sacramento and San Francisco Bay Area) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  You can also check out the KahnTaxLaw Coronavirus Resource Center.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Is The IRS Finally Recognizing Cannabis As A Business Like Any Other?

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You should know that when the IRS wants to talk about a particular business sector that it is usually a sign that such business sector is identified as having a high potential for non-compliance and thus more tax revenues.

On August 18, 2021 the IRS held a forum organized to discuss tax policies for cannabis and cryptocurrency businesses. The meeting was led by a representative of the National Association of Tax Professionals (NATP) and highlighted some issues relating to both industries. The presentation, which was aimed at tax professionals interested in learning about these industries especially since cannabis is illegal under Federal law.

Change In The IRS’ Perception Of Cannabis 

In January 2015, the IRS issued a memo to provide guidance to its agents on conducting audits of cannabis businesses addressing whether an IRS agent can require a taxpayer trafficking in a Schedule 1 controlled substance to change its tax accounting to conform to IRC section 280E.  Not surprisingly that the IRS ruled that IRS agents have the authority to change a cannabis business’ method of accounting so that pursuant to IRC section 280E costs which should not be included in inventory are not included in Cost Of Goods Sold (“COGS”) and remain non-deductible for income tax purposes.

On March 30, 2020, the Treasury Inspector General For Tax Administration (TIGTA) released a report to the IRS pointing them toward targeting the state-licensed cannabis industry for lost tax revenue.  The IRS has said it will implement certain recommendations in this report, specifically:

  • Develop a comprehensive compliance approach for the cannabis industry, including a method to identify businesses in this industry and track examination results;
  • Leverage publically available information at the State level and expand the use of existing Fed/State agreements to identify nonfilers and unreported income in the cannabis industry; and
  • Increase educational outreach towards unbanked taxpayers making cash deposits regarding the unbanked relief policies available.

In a hearing before the House Appropriations Financial Services and General Government Subcommittee on February 23, 2021, IRS Commissioner Charles Rettig told Congress that the federal agency would “prefer” for state-legal marijuana businesses to be able to pay taxes electronically, as the current largely cash-based system under federal cannabis prohibition is onerous and presents risks to workers.

IRS Training Materials For Audits Of Cannabis Businesses

Earlier this year, attorney Rachel K. Gillette released certain documents received from the IRS as a result of a Freedom Of Information Act (FOIA) Request she filed.  Those documents include training materials for IRS revenue and field agents on how to conduct audits of cannabis related businesses, including any documents related to how to apply IRC section 280E.  While the materials were produced in 2015 and therefore predate significant Tax Court rulings like the Harborside case and the Tax Cuts And Jobs Act of 2017 (TCJA) and the enactment of IRC section 471(c), the materials provide useful insight as to how the IRS is conducting these audits.

The main points from the IRS documents are summarized as follows:

Audit Techniques for Testing Gross Receipts

While the sale of cannabis is legal in California as well as in a growing number of states, cannabis remains a Schedule 1 narcotic under Federal law, the Controlled Substances Act (“CSA”) 21 U.S.C. § 812. As such businesses in the cannabis industry are not treated like ordinary businesses. Despite state laws allowing cannabis, it remains illegal on a federal level but cannabis businesses are obligated to pay federal income tax on income because IRC section 61(a) does not differentiate between income derived from legal sources and income derived from illegal sources.

Cannabis businesses are generally cash intensive businesses. Customers may pay in cash to protect their identity. In several states, banks have made it difficult to open accounts for known cannabis businesses. Accordingly, cannabis businesses claim that it is necessary that they deal in cash.

The main concern about cash intensive business is funds are often used to make purchases and are not accounted for by being deposited into bank accounts. Unlike checks and credit card receipts, cash does not get recorded before the funds are used. Cash funds are easily withdrawn from the safe by the taxpayer, business partner, or shareholder for personal use. Most medicinal centers deposit enough funds into bank accounts to pay rental and other expenses. If funds are used to pay business expenses, these transactions will be easier to identify than the funds used for personal expenditures. The use of an indirect method by the agent to determine income may be necessary if it appears that a taxpayer failed to report all cash sales.

Audit Techniques for Testing Expenses

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

The agent should inquire as to the allocation and categories of COGS reported on each return. More and more taxpayers are combining their disallowed business expenses and wages with the reported COGS.

COGS for a retailer includes only inventoriable costs capitalized under §1.471-3(b) as it existed before the enactment of IRC section 263A: The purchase price of the cannabis (net of any trade discounts), and the transportation or other necessary charges incurred in acquiring possession of the cannabis.

COGS for a grower includes inventoriable costs capitalized under §1.471-3(c) and §1.471-11 as they existed before the enactment of IRC section 263A: Direct material costs; Direct labor costs; Category 1 indirect costs (§1.471-11(c)(2)(i)), such as repairs, maintenance, rent; and possibly, Category 3 indirect costs (§1.471-11(c)(2)(iii)), such as taxes, depreciation, officers’ salaries attributable to services incident to and necessary for production operations. COGS for a grower DOES NOT include Category 2 indirect costs (§1.471-1(c)(2)(ii), such as marketing expenses, advertising expenses, selling expenses, and general and administrative expenses incident to and necessary for the taxpayer’s activities taken as a whole.

Penalty Considerations

A taxpayer who is facing increased taxes from an audit should be subject to an accuracy-related penalty under section IRC section 6662(a). A taxpayer may be liable for a 20% penalty on any underpayment of tax attributable to negligence or disregard of rules of regulations or any substantial understatement of income tax. See IRC section 6662(a) and (b)(1) and (2). “Negligence” includes any failure to make a reasonable attempt to comply with the provisions of the Code and includes “any failure by the taxpayer to keep adequate books and records or to substantiate items properly.” IRC section 6662(c). Negligence has also been defined as a lack of due care or failure to do what a reasonable person would do under the circumstances. An accuracy-related penalty does not apply, however, to any portion of an underpayment for which there was reasonable cause and where the taxpayer acted in good faith. See IRC section 6664(c)(1).

Cannabis Tax Audits & Litigation.

It is no surprise that cannabis businesses are proliferating as more States legalize cannabis and make available licenses to grow, manufacture, distribute and sell cannabis. The IRS recognizes this and it is making these cannabis businesses face Federal income tax audits. IRC section 280E is at the forefront of all IRS cannabis tax audits and enforcement of section 280E could result in unbearable tax liabilities.

Proving deductions to the IRS is a two-step process:

  • First, you must substantiate that you actually paid the expense you are claiming.
  •  Second, you must prove that an expense is actually tax deductible.

Step One: Incurred And Paid The Expense.

For example, if you claim a $5,000 purchase expense from a cannabis distributor, offering a copy of a bill or an invoice from the distributor (if one is even provided) is not enough. It only proves that you owe the money, not that you actually made good on paying the bill. The IRS accepts canceled checks, bank statements and credit card statements as proof of payment. But when such bills are paid in cash as it typical in a cannabis business, you would not have any of these supporting documents but the IRS may accept the equivalent in electronic form.

Step Two: Deductibility Of The Expense.

Next you must prove that an expense is actually tax deductible. For cannabis businesses this is challenging because of the IRC section 280E limitation. Recall that under IRC section 280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

A cannabis business can still deduct its Cost Of Goods Sold (“COGS”). Cost of goods sold are the direct costs attributable to the production of goods. For a cannabis reseller this includes the cost of cannabis itself and transportation used in acquiring cannabis. To the extent greater costs of doing business can be legitimately included in COGS that will that result in lower taxable income. You can be sure the IRS agents in audits will be looking closely at what is included in COGS. Working with a cannabis tax attorney can ensure that you receive the proper treatment of COGS versus ordinary and necessary expenses resulting in the lowest possible income tax liability.

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

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

Tips For Cannabis Tax Return Preparation.

Here are some tips for cannabis businesses to follow in the preparation of their 2020 tax returns.

  • Reconcile Your Books Before Closing Your Books. Incomplete books can cause delays and add unnecessary complexities.
  • Utilize A Cannabis Tax Professional. Engage a tax professional who has experience in the cannabis industry. Such a professional would be familiar with the intricacies of IRC Sec. 280E and relevant cases to make the proper presentation on the tax return in a manner that would support the smaller tax liability possible.
  • Justify Your Numbers As If An IRS Audit Is A Certainty. Don’t wait to receive a notice from IRS that the tax return is selected for examination.  That can be one or two years away.  Instead make it a point to put together the backup to you numbers now while everything is fresh.

What Should You Do?

Ultimately it is the tax risk with IRS that could put any cannabis business “out of business” so you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine),the Inland Empire (Ontario and Palm Springs) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits.  Also, if you are involved in crypto-currency, check out what a Bitcoin tax attorney can do for you.

IRS Provides Tax Relief For Victims Of Hurricane Ida

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IRS Provides Tax Relief For Victims Of Hurricane Ida

The IRS announced on August 31, 2021 that victims of Hurricane Ida that began on August 26, 2021 now have until January 3, 2022 to file various individual and business tax returns and make tax payments.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. Currently this includes the entire state of Louisiana, but taxpayers in Ida-impacted localities designated by FEMA in neighboring states will automatically receive the same filing and payment relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov.  The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area.

The tax relief postpones various tax filing and payment deadlines that occurred starting on August 26, 2021. As a result, affected individuals and businesses will have until January 3, 2022 to file returns and pay any taxes that were originally due during this period. This means individuals who had a valid extension to file their 2020 return due to run out on October 15, 2021, will now have until January 3, 2022, to file.  However, any tax payments related to these 2020 returns that were due on May 17, 2021 are not eligible for this relief.

The January 3, 2022 deadline also applies to quarterly estimated income tax payments due on September 15, 2021, and the quarterly payroll and excise tax returns normally due on November 1, 2021. It also applies to tax-exempt organizations, operating on a calendar-year basis that had a valid extension due to run out on November 15, 2021. Businesses with extensions also have the additional time including, among others, calendar-year corporations whose 2020 extensions run out on October 15, 2021.

In addition, penalties on payroll and excise tax deposits due on or after August 26, 2021 and before September 10, 2021 will be abated as long as the deposits were made by September 10, 2021.

Tax Planning Tip

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2021 return normally filed next year), or the return for the prior year (2020). Be sure to write the FEMA declaration number – 4611 − for Hurricane Ida in Louisiana on any return claiming a loss.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Tips On Reconstructing Records

Reconstructing records after a disaster is important for several reasons including insurance reimbursement and taxes. Most importantly, records can help people prove their disaster-related losses. More accurately estimated losses can help people get more recovery assistance like loans or grants.

Whether it’s personal or business property that has been lost or destroyed, here are some steps that can help people reconstruct important records.

Tax records

Get free tax return transcripts immediately using the Get Transcript on IRS.gov or through the IRS2Go app.  Tax return transcripts show line-by-line the entries made on your Federal income tax returns.  The most three recent tax years are available.

Financial statements

People can gather past statements from their credit card company or bank. These records may be available online. People can also contact their bank to get paper copies of these statements.

Property records

  • To get documents related to property, homeowners can contact the title company, escrow company or bank that handled the purchase of their home or other property.
  • Taxpayers who made home improvements can get in touch with the contractors who did the work and ask for statements to verify the work and cost. They can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, taxpayers can contact the attorney who handled the trust.
  • When no other records are available, people should check the county assessor’s office for old records that might address the value of the property.
  • Car owners can research the current fair-market value for most vehicles. Resources are available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association and Edmunds.

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  You can also check out the KahnTaxLaw Coronavirus Resource Center.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

President Biden Proposes Doubling IRS Workforce And Increase Funding To IRS To Chase Down Tax Cheats

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President Biden Proposes Doubling IRS Workforce And Increase Funding To IRS To Chase Down Tax Cheats

On May 20, 2021 the U.S Department Of Treasury issued a report called the “U.S. Treasury American Families Plan Tax Compliance Agenda” which under the plans announced by President Joe Biden is proposing to double the size of the IRS, by hiring nearly 87,000 new workers over the next decade, as part of a sweeping plan to chase down tax cheats.

The agency said uncollected taxes in 2019 amounted to about $554 billion, though IRS Commissioner Chuck Rettig said recently the figure could be as high as $1 trillion per year.  About 80% of that tax gap is attributable to people underreporting their incomes or taking too many deductions. The rest is people either not filing returns at all, or doing their taxes correctly and failing to pay what they owe.

The hiring spree, part of a bid to increase IRS funding by $80 billion, would be phased in to give the department time to adjust whereby the agency’s workforce would never grow by more than a “manageable” 15% each year and its total budget would increase by about 10% annually.  The money would be used not just to increase audits but also to modernize the agency’s computer systems and improve other taxpayer services.

At the same time, the administration wants to require financial institutions and other businesses to report a lot more information about the money coursing through their customers’ accounts.  It is part of a concerted effort by the administration to go after uncollected taxes owed by large corporations, partnerships and wealthy individuals.

Financial institutions would have to report the gross inflows and outflows on all business and personal accounts. So-called payment settlement entities, like PayPal, foreign financial institutions and cryptocurrency exchanges would also be subject to additional reporting requirements. Businesses would have to alert the IRS to cryptocurrency transactions worth more than $10,000.

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

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

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

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

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

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

What Should You Do?

If you believe that there could be issues with your prior tax returns or if you have not filed your tax returns, you should promptly contact tax counsel.  Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and offices elsewhere in California get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. If you are involved in cannabis, check out what else a cannabis tax attorney can do for you. Also, if you are involved in crypto currency, check out what a Bitcoin tax attorney can do for you.

IRS Provides Tax Relief For Victims Of Tennessee Storms

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IRS Provides Tax Relief For Victims Of Tennessee Storms

The IRS announced on May 14, 2021 that victims of this spring’s storms and tornadoes in Tennessee will have until August 2, 2021, to file various individual and business tax returns and make tax payments.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. The current list of eligible localities is always available on the disaster relief page on IRS.gov.  The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area.

The tax relief postpones various tax filing and payment deadlines that occurred starting on March 25, 2021. As a result, affected individuals and businesses will have until August 2 to file returns and pay any taxes that were originally due during this period. This includes 2020 individual income tax returns due on May 17, 2021, as well as various 2020 business returns normally due on April 15, 2021. Among other things, this also means that affected taxpayers will have until August 2, 2021 to make 2020 IRA contributions.

The August 2, 2021 deadline also applies to quarterly estimated income tax payments due on April 15, 2021 and June 15, 2021, and the quarterly payroll and excise tax returns normally due on April 30, 2021. It also applies to tax-exempt organizations, operating on a calendar-year basis, that have a 2020 return due on May 17, 2021.

In addition, penalties on payroll and excise tax deposits due on or after March 25, 2021 and before April 9, 2021 will be abated as long as the deposits were made by April 9, 2021.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Tips On Reconstructing Records

Reconstructing records after a disaster is important for several reasons including insurance reimbursement and taxes. Most importantly, records can help people prove their disaster-related losses. More accurately estimated losses can help people get more recovery assistance like loans or grants.

Whether it’s personal or business property that has been lost or destroyed, here are some steps that can help people reconstruct important records.

Tax records

Get free tax return transcripts immediately using the Get Transcript on IRS.gov or through the IRS2Go app.  Tax return transcripts show line-by-line the entries made on your Federal income tax returns.  The most three recent tax years are available.

Financial statements

People can gather past statements from their credit card company or bank. These records may be available online. People can also contact their bank to get paper copies of these statements.

Property records

  • To get documents related to property, homeowners can contact the title company, escrow company or bank that handled the purchase of their home or other property.
  • Taxpayers who made home improvements can get in touch with the contractors who did the work and ask for statements to verify the work and cost. They can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, taxpayers can contact the attorney who handled the trust.
  • When no other records are available, people should check the county assessor’s office for old records that might address the value of the property.
  • Car owners can research the current fair-market value for most vehicles. Resources are available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association and Edmunds.

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  You can also check out the KahnTaxLaw Coronavirus Resource Center.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

 

More COVID-19 Tax Relief: IRS extends additional tax deadlines for individuals to May 17 and affirms deductibility of PPE

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More COVID-19 Tax Relief: IRS extends additional tax deadlines for individuals to May 17 and affirms deductibility of PPE

The IRS announced that individuals have until May 17, 2021 to meet certain deadlines that would normally fall on April 15th, such as making IRA contributions and filing certain claims for refund.  Additionally, the IRS announced that the purchase of personal protective equipment (PPE), such as masks, hand sanitizer and sanitizing wipes, for the primary purpose of preventing the spread of coronavirus are deductible medical expenses.

This follows a previous announcement from the IRS on March 17, 2021, that the federal income tax filing due date for individuals for the 2020 tax year was extended from April 15, 2021, to May 17, 2021.  Notice 2021-21 provides details on the additional tax deadlines which have been postponed until May 17th.

Time to make contributions to IRAs and health savings accounts extended to May 17th

In extending the deadline to file Form 1040 series returns to May 17th, the IRS is automatically postponing to the same date the time for individuals to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs).  This postponement also automatically postpones to May 17, 2021, the time for reporting and payment of the 10% additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans.  The IRS is also postponing the due date for Form 5498 series returns related to these accounts to June 30, 2021.

2017 unclaimed refunds – deadline extended to May 17th

For tax year 2017 Federal income tax returns, the normal April 15th deadline to claim a refund has also been extended to May 17, 2021. The law provides a three-year window of opportunity to claim a refund.  If taxpayers do not file a return within three years, the money becomes property of the U.S. Treasury. The law requires taxpayers to properly address, mail and ensure the tax return is postmarked by the May 17, 2021, date.

Additionally, foreign trusts and estates with federal income tax filing or payment obligations, who file Form 1040-NR, now have until May 17, 2021.

2021 AFSP deadline postponed to May 17th

Tax preparers interested in voluntarily participating in the Annual Filing Season Program (AFSP) for calendar-year 2021 now have until May 17, 2021 to file their application with the Internal Revenue Service. The normal due date is April 15th.

First Quarter 2021 estimated tax payment remains due April 15th

IRS’ announcement does not alter the April 15, 2021 deadline for estimated tax payments.  These payments are still due on April 15th. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. In general, estimated tax payments are made quarterly to the IRS by people whose income isn’t subject to income tax withholding, including self-employment income, interest, dividends, alimony or rental income. Most taxpayers automatically have their taxes withheld from their paychecks and submitted to the IRS by their employer.

Deductibility of PPE

Expenses for masks, hand sanitizers, sanitizing wipes and other personal protective equipment (PPE) used primarily to prevent the spread of COVID-19 will be treated as amounts paid for medical care under Internal Revenue Code (IRC) §213(d).  These expenses are included in Medical Expenses on Schedule A, Itemized Deductions, and the amount in excess of 7.5% of your Adjusted Gross Income is deductible.

Alternatively, the amounts paid for PPE are also eligible to be paid or reimbursed under health flexible spending arrangements (health FSAs), Archer medical savings accounts (Archer MSAs), health reimbursement arrangements (HRAs), or health savings accounts (HSAs).

An Opportunity For Taxpayers Who Owe The IRS

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. Fortunately, as we are now in 2021, taxpayers who expect to owe for 2020 should have their 2020 income tax returns done now so that the 2020 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2021.

Remember that COVID-19 does not alter the tax laws, so all taxpayers should continue to meet their tax obligations as normal. Individuals and businesses should keep filing their tax returns and making payments and deposits with the IRS, as they are required to do.

The take away from this – use the Federal government’s extension 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), Northern California (Sacramento and San Francisco Bay Area) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

“Tax Day” For Individuals To File And Pay Extended To May 17, 2021.

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“Tax Day” For Individuals To File And Pay Extended To May 17, 2021.

On March 17, 2021 The Treasury Department and Internal Revenue Service announced that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. Formal guidance from the IRS will be forthcoming; however, it should be noted that this announcement of an extension applies to individual income tax returns only.  It does not include C-corporation tax returns or tax returns for other entities due April 15, 2021.

This relief does not apply to estimated tax payments that are due on April 15, 2021. These payments are still due on April 15th. In general, estimated tax payments are made quarterly to the IRS by people whose income is not subject to income tax withholding, including self-employment income, interest, dividends, alimony or rental income.

Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed. This postponement applies only to individual taxpayers, including individuals who pay self-employment tax. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021. Individual taxpayers will automatically avoid interest and penalties on the taxes paid by May 17th.

Individual taxpayers do not need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Individual taxpayers who need additional time to file beyond the May 17th deadline can request a filing extension until October 15, 2021 by filing Form 4868. Filing Form 4868 gives taxpayers until October 15, 2021 to file their 2020 tax return but does not grant an extension of time to pay taxes due. Taxpayers should pay their federal income tax due by May 17, 2021, to avoid interest and penalties.

In making this announcement IRS Commissioner Chuck Rettig stated that:

“This continues to be a tough time for many people, and the IRS wants to continue to do everything possible to help taxpayers navigate the unusual circumstances related to the pandemic, while also working on important tax administration responsibilities.  Even with the new deadline, we urge taxpayers to consider filing as soon as possible, especially those who are owed refunds. Filing electronically with direct deposit is the quickest way to get refunds, and it can help some taxpayers more quickly receive any remaining stimulus payments they may be entitled to.”

State tax returns

The federal tax filing deadline postponement to May 17, 2021, only applies to individual federal income returns and tax (including tax on self-employment income) payments otherwise due April 15, 2021, not state tax payments or deposits or payments of any other type of federal tax. 42 states plus the District of Columbia have State filing and payment deadlines.  Similar to the federal tax filing and payment deadline extension, the Franchise Tax Board posted on its website that California will also extend the state tax filing and payment deadline for individuals to May 17th, 2021.  Like the federal program, the California extension does not apply to California estimated tax payments due on April 15, 2021.  Click here for a complete list of State Tax Agencies that will take you to their respective filing and payment deadlines which should be automatically updated as these agencies decide to change their deadlines.

Winter storm disaster relief for Louisiana, Oklahoma and Texas

Earlier this year, following the disaster declarations issued by the Federal Emergency Management Agency (FEMA), the IRS announced relief for victims of the February winter storms in Texas, Oklahoma and Louisiana. These states have until June 15, 2021, to file various individual and business tax returns and make tax payments. The extension to May 17th does not affect this June deadline. Click here for more information on disaster relief.

An Opportunity For Taxpayers Who Owe The IRS

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. Fortunately, as we are now in 2021, taxpayers who expect to owe for 2020 should have their 2020 income tax returns done now so that the 2020 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2021.

Remember that COVID-19 does not alter the tax laws, so all taxpayers should continue to meet their tax obligations as normal. Individuals and businesses should keep filing their tax returns and making payments and deposits with the IRS, as they are required to do.

The take away from this – use the Federal government’s extension 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), Metropolitan Los Angeles (Long Beach and Ontario) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

IRS Provides Tax Relief For Victims Of Texas Winter Storms

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IRS Provides Tax Relief For Victims Of Texas Winter Storms

The IRS announced on February 22, 2021 that victims of this month’s winter storms in Texas will have until June 15, 2021, to file various individual and business tax returns and make tax payments.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. The current list of eligible localities is always available on the disaster relief page on IRS.gov.  The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area.

The tax relief for Texas taxpayers postpones various tax filing and payment deadlines that occurred starting on February 11, 2021. As a result, affected individuals and businesses will have until June 15, 2021, to file returns and pay any taxes that were originally due during this period. This includes 2020 individual and business returns normally due on April 15, 2021, as well as various 2020 business returns due on March 15, 2021. Among other things, this also means that affected taxpayers will have until June 15, 2021 to make 2020 IRA contributions.

The June 15, 2021 deadline also applies to quarterly estimated income tax payments due on April 15, 2021 and the quarterly payroll and excise tax returns normally due on April 30, 2021. It also applies to tax-exempt organizations, operating on a calendar-year basis, that have a 2020 return due on May 17, 2021.

In addition, penalties on payroll and excise tax deposits due on or after February 11, 2021 and before February 26, 2021 will be abated as long as the deposits are made by February 26, 2021.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Tips On Reconstructing Records

Reconstructing records after a disaster is important for several reasons including insurance reimbursement and taxes. Most importantly, records can help people prove their disaster-related losses. More accurately estimated losses can help people get more recovery assistance like loans or grants.

Whether it’s personal or business property that has been lost or destroyed, here are some steps that can help people reconstruct important records.

Tax records

Get free tax return transcripts immediately using the Get Transcript on IRS.gov or through the IRS2Go app.  Tax return transcripts show line-by-line the entries made on your Federal income tax returns.  The most three recent tax years are available.  

Financial statements

People can gather past statements from their credit card company or bank. These records may be available online. People can also contact their bank to get paper copies of these statements.

Property records

  • To get documents related to property, homeowners can contact the title company, escrow company or bank that handled the purchase of their home or other property.
  • Taxpayers who made home improvements can get in touch with the contractors who did the work and ask for statements to verify the work and cost. They can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, taxpayers can contact the attorney who handled the trust.
  • When no other records are available, people should check the county assessor’s office for old records that might address the value of the property.
  • Car owners can research the current fair-market value for most vehicles. Resources are available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association and Edmunds.

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  You can also check out the KahnTaxLaw Coronavirus Resource Center.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

How IRS Trains Its Agents To Conduct Audits Of Cannabis Businesses

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In January 2015, the IRS issued a memo to provide guidance to its agents on conducting audits of cannabis businesses addressing whether an IRS agent can require a taxpayer trafficking in a Schedule 1 controlled substance to change its tax accounting to conform to IRC section 280E.  Not surprisingly that the IRS ruled that IRS agents have the authority to change a cannabis business’ method of accounting so that pursuant to IRC section 280E costs which should not be included in inventory are not included in Costs Of Goods Sold (“COGS”) and remain non-deductible for income tax purposes.

IRS Training Materials For Audits Of Cannabis Businesses

Recently, attorney Rachel K. Gillette released certain documents received from the IRS as a result of a Freedom Of Information Act (FOIA) Request she filed.  Those documents include training materials for IRS revenue and field agents on how to conduct audits of cannabis related businesses, including any documents related to how to apply IRC section 280E.  While the materials were produced in 2015 and therefore predate significant Tax Court rulings like the Harborside case and the Tax Cuts And Jobs Act of 2017 (TCJA) and the enactment of IRC section 471(c), the materials provide useful insight as to how the IRS is conducting these audits.

The main points from the IRS documents are summarized as follows:

Audit Techniques for Testing Gross Receipts

While the sale of cannabis is legal in California as well as in a growing number of states, cannabis remains a Schedule 1 narcotic under Federal law, the Controlled Substances Act (“CSA”) 21 U.S.C. § 812. As such businesses in the cannabis industry are not treated like ordinary businesses. Despite state laws allowing cannabis, it remains illegal on a federal level but cannabis businesses are obligated to pay federal income tax on income because IRC section 61(a) does not differentiate between income derived from legal sources and income derived from illegal sources.

Cannabis businesses are generally cash intensive businesses. Customers may pay in cash to protect their identity. In several states, banks have made it difficult to open accounts for known cannabis businesses. Accordingly, cannabis businesses claim that it is necessary that they deal in cash.

The main concern about cash intensive business is funds are often used to make purchases and are not accounted for by being deposited into bank accounts. Unlike checks and credit card receipts, cash does not get recorded before the funds are used. Cash funds are easily withdrawn from the safe by the taxpayer, business partner, or shareholder for personal use. Most medicinal centers deposit enough funds into bank accounts to pay rental and other expenses. If funds are used to pay business expenses, these transactions will be easier to identify than the funds used for personal expenditures. The use of an indirect method by the agent to determine income may be necessary if it appears that a taxpayer failed to report all cash sales.

Audit Techniques for Testing Expenses

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

The agent should inquire as to the allocation and categories of COGS reported on each return. More and more taxpayers are combining their disallowed business expenses and wages with the reported COGS.

COGS for a retailer includes only inventoriable costs capitalized under §1.471-3(b) as it existed before the enactment of IRC section 263A: The purchase price of the cannabis (net of any trade discounts), and the transportation or other necessary charges incurred in acquiring possession of the cannabis.

COGS for a grower includes inventoriable costs capitalized under §1.471-3(c) and §1.471-11 as they existed before the enactment of IRC section 263A: Direct material costs; Direct labor costs; Category 1 indirect costs (§1.471-11(c)(2)(i)), such as repairs, maintenance, rent; and possibly, Category 3 indirect costs (§1.471-11(c)(2)(iii)), such as taxes, depreciation, officers’ salaries attributable to services incident to and necessary for production operations. COGS for a grower DOES NOT include Category 2 indirect costs (§1.471-1(c)(2)(ii), such as marketing expenses, advertising expenses, selling expenses, and general and administrative expenses incident to and necessary for the taxpayer’s activities taken as a whole.

Penalty Considerations

A taxpayer who is facing increased taxes from an audit should be subject to an accuracy-related penalty under section IRC section 6662(a). A taxpayer may be liable for a 20% penalty on any underpayment of tax attributable to negligence or disregard of rules of regulations or any substantial understatement of income tax. See IRC section 6662(a) and (b)(1) and (2). “Negligence” includes any failure to make a reasonable attempt to comply with the provisions of the Code and includes “any failure by the taxpayer to keep adequate books and records or to substantiate items properly.” IRC section 6662(c). Negligence has also been defined as a lack of due care or failure to do what a reasonable person would do under the circumstances. An accuracy-related penalty does not apply, however, to any portion of an underpayment for which there was reasonable cause and where the taxpayer acted in good faith. See IRC section 6664(c)(1).

Current Developments.

On March 30, 2020, the Treasury Inspector General For Tax Administration (TIGTA) released a report to the IRS pointing them toward targeting the state-licensed cannabis industry for lost tax revenue.  The IRS has said it will implement certain recommendations in this report, specifically:

  • Develop a comprehensive compliance approach for the cannabis industry, including a method to identify businesses in this industry and track examination results;
  • Leverage publically available information at the State level and expand the use of existing Fed/State agreements to identify nonfilers and unreported income in the cannabis industry; and
  • Increase educational outreach towards unbanked taxpayers making cash deposits regarding the unbanked relief policies available.

Cannabis Tax Audits & Litigation.

It is no surprise that cannabis businesses are proliferating as more States legalize cannabis and make available licenses to grow, manufacture, distribute and sell cannabis. The IRS recognizes this and it is making these cannabis businesses face Federal income tax audits. IRC section 280E is at the forefront of all IRS cannabis tax audits and enforcement of section 280E could result in unbearable tax liabilities.

Proving deductions to the IRS is a two-step process:

  • First, you must substantiate that you actually paid the expense you are claiming.
  •  Second, you must prove that an expense is actually tax deductible.

Step One: Incurred And Paid The Expense.

For example, if you claim a $5,000 purchase expense from a cannabis distributor, offering a copy of a bill or an invoice from the distributor (if one is even provided) is not enough. It only proves that you owe the money, not that you actually made good on paying the bill. The IRS accepts canceled checks, bank statements and credit card statements as proof of payment. But when such bills are paid in cash as it typical in a cannabis business, you would not have any of these supporting documents but the IRS may accept the equivalent in electronic form.

Step Two: Deductibility Of The Expense.

Next you must prove that an expense is actually tax deductible. For cannabis businesses this is challenging because of the IRC section 280E limitation. Recall that under IRC section 280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

A cannabis business can still deduct its Cost Of Goods Sold (“COGS”). Cost of goods sold are the direct costs attributable to the production of goods. For a cannabis reseller this includes the cost of cannabis itself and transportation used in acquiring cannabis. To the extent greater costs of doing business can be legitimately included in COGS that will that result in lower taxable income. You can be sure the IRS agents in audits will be looking closely at what is included in COGS. Working with a cannabis tax attorney can ensure that you receive the proper treatment of COGS versus ordinary and necessary expenses resulting in the lowest possible income tax liability.

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

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

Tips For Cannabis Tax Return Preparation.

Here are some tips for cannabis businesses to follow in the preparation of their 2020 tax returns.

  • Reconcile Your Books Before Closing Your Books. Incomplete books can cause delays and add unnecessary complexities.
  • Utilize A Cannabis Tax Professional. Engage a tax professional who has experience in the cannabis industry. Such a professional would be familiar with the intricacies of IRC Sec. 280E and relevant cases to make the proper presentation on the tax return in a manner that would support the smaller tax liability possible.
  • Justify Your Numbers As If An IRS Audit Is A Certainty. Don’t wait to receive a notice from IRS that the tax return is selected for examination.  That can be one or two years away.  Instead make it a point to put together the backup to you numbers now while everything is fresh.

What Should You Do?

Ultimately it is the tax risk with IRS that could put any cannabis business “out of business” so you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits.  Also, if you are involved in crypto-currency, check out what a Bitcoin tax attorney can do for you.

 

Justice Department Sues to Shut Down Florida Tax Return Preparers

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Justice Department Sues to Shut Down Florida Tax Return Preparers

The U.S. Attorney’s Office for the Southern District Of Florida announced on February 23, 2021 in a press release that the Justice Department (DOJ) filed a complaint in the U.S. District Court for the Southern District of Florida seeking to bar three Miami Gardens-area tax return preparers and their businesses and franchises, from owning or operating a tax return preparation business and preparing tax returns for others. The DOJ simultaneously filed a request for a preliminary injunction that would immediately prohibit the defendants from further preparing taxes during the pendency of the suit.

Details Of The Complaint Filed By DOJ.

According to the DOJ, the civil suit against John L. Gay Jr., Tammi King, and Norman G. Williams Jr. (United States District Court for the Southern District of Florida, Case Number 1:21-cv-20707) also seeks an order requiring defendants to disgorge ill-gotten return preparation fees obtained through their alleged misconduct.  The complaint alleges Mr. Gay is the owner of The Tax Doctor LLC and operates three locations in the Miami Gardens-area under that name. The complaint further alleges that The Tax Doctor LLC has two franchises, one in Miami and one in Ft. Lauderdale, that are owned and operated by King under the names Kingsworld Financial Services Inc. and Brightstar Management Corp. The complaint also alleges that Williams works as one of King’s tax return preparers as a second job.

According to the complaint, defendants manipulated Florida-area taxpayers’ returns — often without taxpayers’ knowledge — to significantly understate their tax liabilities or falsely render them eligible for tax credits. The complaint alleges they did so by fabricating charitable contributions, unreimbursed employee expenses, residential energy credits, and head-of-household filing status, as well as by fabricating business income or expenses in order to overstate claims for earned income tax credits. According to the complaint, defendants’ consistent understatement of liabilities and overstatement of refunds has resulted in millions of dollars of lost tax revenue to the United States.

As an example, the complaint alleges that Mr. Williams claimed more than $1.3 million in false or inflated charitable contributions for 96 of his fellow firefighters in 2020 alone. These individuals, and many other of defendants’ customers, are now liable for repayment of income tax refunds wrongly claimed in their names, plus penalties and interest.

IRS announces arrests and indictments after two-week campaign to fight refund fraud and identity theft. 

The IRS announced on March 20, 2019 the results of a national two-week enforcement and education campaign to combat refund crimes and identity theft that resulted in numerous legal actions against suspected criminals and businesses committing these crimes.  As a result of IRS’ efforts, the Federal District Courts could expect to see more of these cases.

“Identity theft is a pervasive crime and stopping it remains a top priority of the IRS,” said IRS Commissioner Chuck Rettig. “The IRS, with the help of our Security Summit partners, continues to make progress in this area, but we need to continue our significant efforts to protect taxpayers and assist those who have been a victim of identity theft. We are fighting this problem with enhanced systems, smarter technology and the efforts of our dedicated workforce, including Criminal Investigation. We will retain our relentless, vigorous pursuit of those who prey upon others in this arena”.

“Millions of taxpayers put their trust in tax professionals to prepare accurate and lawful returns.

Unfortunately, a few bad apples take advantage of that trust for their own greed and profit,” said Don Fort, then Chief of IRS Criminal Investigation. “CI’s special agents are highly skilled at unraveling fraudulent schemes. With our partners in other agencies and the private sector, we are dismantling these crooked enterprises and enforcing our tax laws”.

What Should You Do?

Whether you are a victim of identity theft or the perpetrator of identity theft, it is important that you seek legal counsel as soon as possible to preserve your rights and/or mitigate your losses.  The tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California know exactly what to say and how to handle issues with the IRS as well as State Tax Agencies.  Our experience and expertise not only levels the playing field but also puts you in the driver’s seat as we take full control of resolving your tax problems. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you.  Additionally, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.Top of Form