President Trump Orders Cannabis Rescheduling To Be Expedited

/0 Comments/in , /by

The prime benefits of reclassifying cannabis from a Schedule I substance to a Schedule III substance is that the Federal government would recognize medical benefits of cannabis, make IRC Section 280E inapplicable to licensed cannabis operators.

On December 18, 2025, President Trump signed an Executive Order Increasing Medical Marijuana and Cannabidoil Research . President Trump’s executive order shifts cannabis from Schedule I to Schedule III, easing research, tax restrictions and marking the biggest federal cannabis policy change in decades. Under such order, the Attorney General shall take all necessary steps to complete the rulemaking process related to rescheduling marijuana to Schedule III of the CSA in the most expeditious manner in accordance with Federal law, including 21 U.S.C. 811.

Under this framework, cannabis is removed from a Schedule I classification — the most restrictive category under the Controlled Substances Act, alongside heroin and LSD — to a Schedule III classification, which encompasses substances with accepted medical use and a lower potential for abuse, such as ketamine and Tylenol with codeine.

In addition, the Centers for Medicare and Medicaid Services, is expected to launch a pilot program in April 2026 enabling certain Medicare-covered seniors to receive free, doctor-recommended CBD products, which must comply with all local and state laws on quality and safety, according to senior White House officials. The products must also come from a legally compliant source and undergo third-party testing for CBD levels and contaminants.

The Growing Trend In Legalizing Cannabis – Current Standings:

Medical marijuana is legal in 39 states and Washington DC

The medical use of cannabis is legal (with a doctor’s recommendation) in 38 states and Washington DC. Currently, the 39 states with medical marijuana legal include Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 23 states and Washington DC

Twenty-three states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those 23 states being Alaska, Arizona, California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, Ohio, Oregon, Rhode Island, Vermont, Virginia and Washington and the territories of the Northern Mariana Islands and Guam.

Recreational marijuana is legal in 6 tribal nations.

Six Tribal nations have legalized marijuana for recreational use.  Those 6 tribes being the Flandreau Santee Sioux Tribe (South Dakota), Oglala Lakota Sioux Tribe (South Dakota), Suquamish Tribe (Washington state), Squaxin Island Tribe (Washington State), Eastern Band of Cherokee Indians (North Carolina) and St. Regis Mohawk Tribe (New York).

The New Executive Order Will Result In A Tax Regime Similar To What Non-Cannabis Businesses Face.

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 currently prohibited by Federal law.

Until the December 18, 2025 Trump executive order reclassification, cannabis was classified in the same category as heroin, ecstasy and LSD under the Controlled Substances Act of 1970. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana had 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.

However, this new reclassification order exempts companies from IRC Section 280E, allowing them to deduct standard expenses like rent and payroll for the first time.

However, the Executive Order, DOES NOT Change Reporting Of Cash Payments.

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

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

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records. However, with this new reclassification cannabis companies’ margins will be larger and major institutional investors will be encouraged to enter the cannabis space, banks may be less reluctant to do business with cannabis-based businesses, and this may convince major exchanges like the NASDAQ to list publicly traded cannabis companies.

Also, the Executive Order, DOES NOT Legalize Recreational Cannabis.

President Trump stated that he is against legalizing recreational cannabis but classifying it as a Schedule III narcotic would allow expanded research to be conducted into its potential benefits. The Executive Order also fails to address access of cannabis businesses to banking and financial markets even if such businesses exclusively deal with medical cannabis.

The most certain way that cannabis can be legalized and thus be treated like any other lawful business is by Congress enacting legislation.

Tax Saving Opportunities For Cannabis Businesses –

Keep in mind that the Executive Order directs the Attorney General to officially remove cannabis from Schedule I so until this is accomplished the IRS could continue to enforce IRC Section 280E as it has historically done.  The issuance of this Executive Order could be construed as an affirmation that cannabis does not “fit the meaning” of a Schedule I substance.  If the premise is that cannabis is no longer considered a Schedule I substance, then one could interpret that it should never have been treated as such under the Controlled Substances Act to begin with.  Given that this new reclassification opens many questions and possibilities into the new tax regime and possibilities for cannabis businesses, tax counsel should be sought on how best to bypass IRC Section 280E for the 2025 tax year and whether it is advisable to amend prior years’ tax returns to reduce outstanding liabilities or seek potential refunds.

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

Given that cannabis still remains illegal at a federal level but has been reclassified from a Schedule I substance to a Schedule III substance you need to protect yourself and your marijuana business from all challenges and uncertainty created by the U.S. government so it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits including the pursuit of filing amended income tax returns which could result in smaller liabilities or produce refunds.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

U.S. Tax Court Denies Cannabis Dispensary To Pursue An Offer In Compromise

/0 Comments/in , /by

An Offer In Compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability or doing so creates a financial hardship. The IRS will consider your unique set of facts and circumstances:

  • Ability to pay
  • Income
  • Expenses
  • Asset equity

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, but if you are a cannabis business with outstanding IRS liabilities, the IRS follows a more restrictive approach which the U.S. Tax Court affirmed.

U.S. Tax Court Case

On December 16, 2025 the U.S. Tax Court issued its opinion in Mission Organic Center Inc. v. Commissioner Of Internal Revenue, 165 T.C. 13 (2025), affirming the IRS’ denial of this cannabis dispensary to pursue an offer in compromise.  In calculating the amount of its offer, the taxpayer reduced its future income by expenses that would not be deductible for tax purposes. The IRS revenue officer disregarded such expenses when calculating the taxpayer’s reasonable collection potential.

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. The Internal Revenue Manual requires expenses that would be disallowed by IRC Section 280E to be disregarded when calculating a taxpayer’s reasonable collection potential. In rejecting taxpayer’s offer, the IRS revenue officer and settlement officer relied on the Internal Revenue Manual.

President Trump’s December 18, 2025 Executive Order

Just 2 days after the decision in Mission Organic Center Inc., President Trump issued an Executive Order Increasing Medical Marijuana and Cannabidoil Research . President Trump’s executive order shifts cannabis from Schedule I to Schedule III, easing research, tax restrictions and marking the biggest federal cannabis policy change in decades. Under such order, the Attorney General shall take all necessary steps to complete the rulemaking process related to rescheduling marijuana to Schedule III of the CSA in the most expeditious manner in accordance with Federal law, including 21 U.S.C. 811.

Under this framework, cannabis is removed from a Schedule I classification — the most restrictive category under the Controlled Substances Act, alongside heroin and LSD — to a Schedule III classification, which encompasses substances with accepted medical use and a lower potential for abuse, such as ketamine and Tylenol with codeine.

In addition, the Centers for Medicare and Medicaid Services, is expected to launch a pilot program in April 2026 enabling certain Medicare-covered seniors to receive free, doctor-recommended CBD products, which must comply with all local and state laws on quality and safety, according to senior White House officials. The products must also come from a legally compliant source and undergo third-party testing for CBD levels and contaminants.

The Growing Trend In Legalizing Cannabis – Current Standings:

Medical marijuana is legal in 39 states and Washington DC

The medical use of cannabis is legal (with a doctor’s recommendation) in 38 states and Washington DC. Currently, the 39 states with medical marijuana legal include Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 23 states and Washington DC

Twenty-three states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those 23 states being Alaska, Arizona, California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, Ohio, Oregon, Rhode Island, Vermont, Virginia and Washington and the territories of the Northern Mariana Islands and Guam.

Recreational marijuana is legal in 6 tribal nations.

Six Tribal nations have legalized marijuana for recreational use.  Those 6 tribes being the Flandreau Santee Sioux Tribe (South Dakota), Oglala Lakota Sioux Tribe (South Dakota), Suquamish Tribe (Washington state), Squaxin Island Tribe (Washington State), Eastern Band of Cherokee Indians (North Carolina) and St. Regis Mohawk Tribe (New York).

The New Executive Order Will Result In A Tax Regime Similar To What Non-Cannabis Businesses Face.

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 currently prohibited by Federal law.

Until the December 18, 2025 Trump executive order reclassification, cannabis was classified in the same category as heroin, ecstasy and LSD under the Controlled Substances Act of 1970. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana had 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.

However, this new reclassification order exempts companies from IRC Section 280E, allowing them to deduct standard expenses like rent and payroll for the first time.

However, the Executive Order, DOES NOT Change Reporting Of Cash Payments.

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

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

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records. However, with this new reclassification cannabis companies’ margins will be larger and major institutional investors will be encouraged to enter the cannabis space, banks may be less reluctant to do business with cannabis-based businesses, and this may convince major exchanges like the NASDAQ to list publicly traded cannabis companies.

Also, the Executive Order, DOES NOT Legalize Recreational Cannabis.

President Trump stated that he is against legalizing recreational cannabis but classifying it as a Schedule III narcotic would allow expanded research to be conducted into its potential benefits. The Executive Order also fails to address access of cannabis businesses to banking and financial markets even if such businesses exclusively deal with medical cannabis.

The most certain way that cannabis can be legalized and thus be treated like any other lawful business is by Congress enacting legislation.

Tax Saving Opportunities For Cannabis Businesses –

Keep in mind that the Executive Order directs the Attorney General to officially remove cannabis from Schedule I so until this is accomplished the IRS could continue to enforce IRC Section 280E as it has historically done.  The issuance of this Executive Order could be construed as an affirmation that cannabis does not “fit the meaning” of a Schedule I substance.  If the premise is that cannabis is no longer considered a Schedule I substance, then one could interpret that it should never have been treated as such under the Controlled Substances Act to begin with.  Given that this new reclassification opens many questions and possibilities into the new tax regime and possibilities for cannabis businesses, tax counsel should be sought on how best to bypass IRC Section 280E for the 2025 tax year and whether it is advisable to amend prior years’ tax returns to reduce outstanding liabilities or seek potential refunds.  Likewise, if IRC Section 280E is no longer to apply under the Executive Order, cannabis businesses should now be able to reduce their future income by operating expenses that are now deductible for tax purposes.

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

Given that cannabis still remains illegal at a federal level but has been reclassified from a Schedule I substance to a Schedule III substance you need to protect yourself and your marijuana business from all challenges and uncertainty created by the U.S. government so it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits including the pursuit of filing amended income tax returns which could result in smaller liabilities or produce refunds or even pursuing an offer in compromise.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

IRS Criminal Investigation Division Releases Its 2025 Annual Report

/0 Comments/in , , , /by

The IRS released the Criminal Investigation Division’s (CI) annual report, highlighting significant successes and criminal enforcement actions taken in fiscal year ending September 30, 2025.  The IRS noted that a key achievement was the identification of over $10.5 billion in tax fraud and other financial crimes.

In issuing this report IRS Chief Of IRS Criminal Investigation Guy Ficco stated:  “The cases the IRS-CI team investigated over the past fiscal year touch multiple continents and require cooperation with partners around the globe. This is why IRS-CI continues to cement itself as the preeminent law enforcement agency investigating financial crimes on a global scale.”

According to the report, CI initiated 2,043 cases in fiscal year 2025, applying approximately 63% of its time to tax related investigations. CI is the only federal law enforcement agency with jurisdiction over federal tax crimes achieving a conviction rate of 89% in fiscal year 2025.   IRS-CI is the only U.S. federal law enforcement agency that focuses 100% on financial investigations.

IRS Criminal Investigation Division Expands Its International Network

The report states that in the last fiscal year IRS-CI built upon its existing network of U.S. field offices and international attachés to combat financial crimes across the globe through the agency’s alliance with the Joint Chiefs of Global Tax Enforcement (J5) and public-private partnerships with financial institutions and the Fin-Tech industry to deter and identify criminal activity.

IRS-CI dedicates itself to “… follow the money. We’ve been doing it for more than 100 years, and we’ve followed criminals into the dark web and now into the metaverse. Tax and other financial crimes know no borders. If you violate the law and end up in the crosshairs of an IRS-CI special agent, you are likely going to jail.”

Case Examples Included In The Annual Report

The Los Angeles Field Office investigated Casie Hynes for tax-related crimes. She was sentenced to 60 months in federal prison for wire fraud and presenting false claims to the United States. She was also ordered to pay $2.37 million in restitution.  She exploited COVID-19 relief programs and pandemic tax credits submitting over 80 fraudulent loan applications through the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program, seeking more than $3.1 million in relief funds.  She fabricated the number of employees, payroll amounts, and supporting tax and bank records, and she used the personal information and signature of others without authorization. Through this scheme, she successfully obtained approximately $2.25 million in fraudulent loan proceeds. In addition, she submitted a dozen fraudulent tax filings claiming nearly $1.3 million in pandemic related tax credits, including the Employee Retention Credit and Paid Sick And Family Leave Credits.

The Charlotte Field Office investigated Victor Smith CPA and William Tomasello CPA who promoted and sold tax deductions to wealthy clients in illegal syndicated conservation easement tax shelters. Smith with his associates sold approximately $14 million and false tax deductions to their clients, causing a tax loss to the IRS of about $4.8 million. Smith himself earned $491,400 in commissions. Tomasello also promoted and sold units to his wealthy clients causing a tax loss of about $2.3 million. He earned $525,072 in commissions.  The defendants knew that contrary to law, these tax shelters, lacked economic substance, and that their wealthy clients participated in the sham investments only to obtain a tax deduction. The defendants also knowingly instructed and caused their clients to falsely backdate documents, like subscription agreements, and checks related to the illegal tax shelters. Smith and Tomasello were each sentenced to 20 months in prison for their role in the scheme.

The Special Agent’s Role In The IRS Criminal Investigation Division

An IRS Special Agent works for CI. Special Agents are duly sworn law enforcement officers who are trained to “follow the money”. They investigate potential criminal violations of the Internal Revenue Code, and related financial crimes. Unless they are working undercover they will identify themselves with credentials which include a gold badge. The same gold badge appears on their business cards. Generally, IRS Special Agents travel in pairs if they are going to interview someone. One to conduct the interview, and the other to take notes, and act as a witness if necessary.

If you are contacted by an IRS Special Agent it is because he or she is conducting a CRIMINAL investigation. It is possible that the Special Agent is only interested in you as a witness against the target of the IRS investigation. However, it is a bad idea to speak to Special Agent without a criminal tax attorney present. IRS Special Agents are highly trained financial investigators. If you are the target or subject of an IRS criminal investigation you are not going to talk your way out of it, by “cooperating”; instead you may be giving the IRS more evidence to use against you.

Even if the IRS Special Agent tells you that you are only a witness you should still consult with an experienced criminal tax attorney BEFORE speaking with an IRS agent. If you make misstatements that you think put you in a better light you could change your role from a witness into a target. The best tactic is to simply tell the Special Agent that you are uncomfortable talking to him until you have had a chance to speak with your attorney. Then ask him for his business card. In this way your tax attorney can contact the Special Agent directly, and determine the best course of action.

There are a number of statutes in the Internal Revenue Code that authorize the federal government to prosecute individuals, including those dealing with tax evasion, fraud and false statements, failure to file returns, failure to pay tax, etc. Some, like the tax evasion statute, are worded in particularly broad terms and may ensnare the unwary or careless taxpayers.

If CI recommends prosecution, it will give its evidence to the Justice Department to decide the special charges. Individuals are typically charged with one or more of three crimes: tax evasion, filing a false return, or not filing a tax return. All of which are tax fraud.

Two Special Programs Run By CI

With the avalanche of billions of data flowing to IRS, CI has been running two special programs: the International Tax Enforcement Group (ITEG), and the Nationally Coordinated Investigations Unit (NCIU). Both focus on increasing the rate of taxpayer compliance with income reporting requirements contained in the Internal Revenue Code – particularly those pertaining to the disclosure of foreign financial accounts, reporting of virtual currency transactions, and reporting transactions involving cannabis.

What Should You Do?

Very quickly a criminal investigation can turn to the worst for a targeted taxpayer so you should promptly seek tax counsel who can act proactively before the IRS does. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and other locations within California protect you from excessive fines and possible jail time. Also, if you are involved in cannabis, check out how a cannabis tax attorney can help you. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Using Family Limited Partnerships In Estate Planning

/0 Comments/in , /by

What can we learn from Sam Walton, Walmart’s founder?  Long before the Walmart retail business took off, Sam was gifting interests in his business to his children.  As Sam explained in his autobiography Made in America, “giving assets away early prevents future tax headaches because their value hasn’t skyrocketed yet”.  That advice still holds true today and has been applied by many wealthy families to pass wealth to the next generation with the least possible estate tax.

What Is Estate Tax?

Unlike income tax which is an annual tax occurrence reported on annual calendar year tax returns we all file, the estate tax is a tax that applies when someone dies.  Income taxes are calculated from your net taxable income.  Estate taxes are calculated from the value of your estate (i.e., your net worth).

The United States uses a unified estate and gift tax system. This means a single exclusion amount applies to both lifetime gifts and transfers at death. Individuals receive a “unified credit”—also known as the applicable credit amount—which offsets taxes owed on these transfers. The IRS doesn’t charge estate or gift tax if the total value of taxable gifts and estates remains below the exclusion threshold. For transfers above that amount, the IRS applies a flat 40% tax rate. The unified credit is the lifetime federal gift and estate tax exemption amount that individuals can transfer tax-free, either through gifts during their life or bequests at death.

The unified federal estate and lifetime gift tax exemption is $15 million per individual ($30 million for married couples) and this amount is indexed for inflation starting in 2026.

What is Estate Planning?

A legal process where a person’s property and finance objectives are arranged with their healthcare decisions to achieve long term family planning goals.

What does an Estate Plan Include?

An Estate Plan package generally includes a Will, a Trust, a Power of Attorney and an Advanced Healthcare Directive. Usually there are other corollary documents that need to be prepared such as Quit Claim Deeds and Assignments.

A Will is an instrument by which a person records their desires regarding distribution of property and their specific wishes after death.

Two major disadvantages of relying on a Will alone to manage your Estate Planning goals include:

  • A Will is not effective in the event you become incapacitated;
  • A Will subjects your loved ones to a lengthy, public and expensive probate process.

A Trust is a legal relationship between its creator (“settlor”), its manager (“trustee”) and its beneficiaries. A Trust can be drafted to achieve any legal purpose during the settlor’s life and will determine the management of your estate in the event you become incapacitated or pass away.

Durable Powers of Attorney allow you to nominate the person of your choice to make decisions regarding your finances and healthcare decisions in the event you become incapacitated.

An Advanced Healthcare Directive and a Living Will allow you to make specific decisions regarding your end of life wishes and the extent to be on life-support.

Using Family Limited Partnerships In Estate Planning.

A Family Limited Partnership (FLP) is a strategic estate planning tool that helps families manage, protect, and transfer significant wealth to the next generation while potentially minimizing estate and gift taxes. It allows senior family members to retain control over assets even after passing ownership interests to heirs.

How an FLP Works –

An FLP is a legal entity that functions like a business and involves two types of partners:

  • General Partners (GPs): Typically parents or grandparents who contribute assets, manage day-to-day operations, make all decisions, and assume liability for the partnership’s debts. They often hold a small percentage of the total interests (e.g., 1-2%) but maintain full control.
  • Limited Partners (LPs): Usually children, grandchildren, or trusts for their benefit who hold ownership interests but have no management authority and limited liability. Their personal assets are protected from the FLP’s liabilities.

Once assets are transferred into the FLP, the general partners can gift limited partnership interests to family members over time, often leveraging annual gift tax exclusions. This results in gifting more value of your estate using less unified federal estate and lifetime gift tax exemption.

Key Advantages in Estate Planning

  • Estate and Gift Tax Reduction: Assets transferred to the FLP are generally removed from the general partner’s taxable estate. The key benefit is the ability to apply valuation discounts (for lack of marketability and lack of control) to the limited partnership interests when gifted, reducing their taxable value by as much as 30-40%. This allows more wealth to be transferred within the gift and estate tax exemptions.
  • Asset Protection: Assets owned by the FLP are generally shielded from the personal creditors of the individual partners. A creditor of a limited partner is typically limited to a “charging order,” which only entitles them to distributions if and when the general partner decides to make them, providing a strong incentive to settle.
  • Control and Management: The general partner maintains control over the assets and business decisions, even after gifting the majority of the partnership’s value to limited partners.
  • Centralized Management: FLPs can consolidate a variety of assets (real estate, securities, business interests) into a single entity, simplifying management and investment strategy across generations.
  • Succession Planning: The structure facilitates an orderly business or wealth transfer, allowing the senior generation to mentor the next generation and dictate the terms of the transition.

Disadvantages and Key Considerations

  • Complexity and Cost: Establishing and maintaining an FLP requires professional assistance from estate planning attorneys and tax specialists, leading to significant legal and accounting costs.
  • IRS Scrutiny: The IRS closely scrutinizes FLPs, especially if they appear to be created solely for tax avoidance. It is crucial to have a legitimate non-tax business purpose and to operate the FLP with strict formality (e.g., holding regular meetings, keeping minutes, avoiding commingling of personal and FLP assets).
  • Liability for General Partners: The general partner has unlimited personal liability for the FLP’s debts and obligations. This risk is often mitigated by naming a Limited Liability Company (LLC) or an S-corporation as the general partner.
  • Illiquidity: Limited partnership interests are not easily sold, which can be a drawback if a partner needs cash quickly.
  • Appropriate Assets: Not all assets are suitable for an FLP; personal residences or everyday personal assets should be kept outside the partnership to avoid IRS challenges.

What Should You Do?

So if you are in a situation of having a large estate (over $15 million of net value) with interests in entities, whether operating businesses or investment entities, an FLP could save you a lot in taxes.

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. With careful planning and strategic execution, businesses can turn this tax change into a competitive advantage. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles, 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 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 may the 2025 government shutdown impact IRS preparation for the 2026 filing season?

/0 Comments/in , /by

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 1st 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.

White House Proposes Americans to Report, Pay Taxes on Foreign Crypto Accounts

/0 Comments/in , /by

In the summer of 2025 the White House proposed that Congress should consider drafting legislation that would force U.S. residents and companies to report foreign digital asset accounts on their taxes.  A digital asset is a digital representation of value that is recorded on a cryptographically secured, distributed ledger or any similar technology.

Common digital assets include:

  • Convertible virtual currency and cryptocurrency.
  • Stablecoins.
  • Non-fungible tokens (NFTs).

This White House proposal was one of several proposals outlined in a crypto report published by the President Trump’s Working Group on Digital Asset Markets, a body chaired by White House crypto and AI czar David Sacks (the crypto report).

This crypto report has also laid out policy proposals in several crypto-related areas, including market structure legislation, stablecoins, banking, and illicit finance. Furthermore, the crypto report recommends directing banking regulators to make clearer pathways for crypto banks to engage in traditional banking activities. Also, the report focused on illicit finance, asked FinCEN—a financial crimes-focused organization within the Treasury Department—to evaluate whether the Bank Secrecy Act, a decades-old law requiring financial institutions to assist the U.S. government in rooting out money laundering, should be amended with new language specific to the crypto industry. These proposals, if passed into law, may discourage Americans from moving their crypto offshore and benefit American crypto businesses by promoting growth and use of digital assets in the United States.

Now, considering the crypto report’s recommendations, the White House is currently reviewing a proposed rule that would grant the Internal Revenue Service access to information on U.S. taxpayers’ digital asset transactions conducted in foreign jurisdictions. The rule was received by the Office of Information and Regulatory Affairs in November 2025. This rule, if implemented, would give the IRS a clearer view into cross-border crypto holdings and potential undeclared tax liabilities. Furthermore, the proposed rule would implement the Crypto-Asset Reporting Framework (CARF), an international standard created in 2022 by the Organization for Economic Cooperation and Development. CARF provides for automatic information-sharing across participating jurisdictions to reduce offshore tax evasion involving digital assets, similar to the existing Common Reporting Standard for bank accounts. Time will tell if the Trump administration prepares this policy into legislation needing congressional action and expanding IRS’s authority Americans’ international crypto activities.

In the meantime, several other regulations and guidance from the Treasury Department and the IRS have recently been enacted in relation to digital assets and reporting requirements.

November 2025 Treasury Department guidance allowing crypto exchange-traded products (ETPs) to stake digital assets and share staking rewards with retail investors

On November 10, 2025 the Treasury Department issued new guidance allowing crypto exchange-traded products (ETPs) to stake digital assets and share staking rewards with retail investors. This applies to crypto ETPs that hold or track major digital assets such as Ethereum (ETH), Cardano (ADA), Solana (SOL) – or any other token that can be staked and meets regulatory standards.

What are crypto ETPs and how does staking work?

Crypto ETPs are regulated investment vehicles – similar to exchange-traded funds (ETFs) – that let investors gain exposure to digital assets without holding them directly. They trade on traditional stock exchanges and are often backed 1:1 by crypto held in custody.

Staking, meanwhile, is the process of locking up digital assets on a block chain to help validate transactions in return for periodic rewards, typically paid in the same token. It’s a key feature of proof-of-stake (PoS) block chains like Ethereum, allowing holders to earn passive income while supporting network security.

Compliance Requirements

To qualify, the ETP must follow specific rules –

1) Hold only one digital asset type and cash;

2) Use a qualified custodian to manage keys and execute staking;

3) Maintain SEC-approved liquidity policies ensuring redemptions can occur even with staked assets;

4) Keep arms-length arrangements with independent staking providers; and

5) Limit activities strictly to holding, staking, and redeeming assets—without discretionary trading.

With this new guidance, crypto ETPs can now stake eligible digital assets directly on PoS networks and distribute the resulting rewards to investors, all within a clear, regulated, and tax-compliant framework.

This new guidance also says staking does not trigger extra taxes at the entity level or mess with the product’s tax-friendly status. Now some ETPs can do more than just track a crypto asset, they can also give you staking rewards, which is the extra yield you get for locking up or delegating your tokens to help secure the network. With this new guidance, fund managers have a way to build products that pass on those staking rewards without the same tax complications.

The new guidance builds on Revenue Ruling 2023-14, which outlined how staking rewards are taxed, marking another key step in the Trump administration’s evolving crypto policy and likely resulting in a greater popularity of staking-enabled crypto ETPs, making it easier for everyday investors to get involved. However, you need to remember if you’re an investor that staking rewards comes with tax consequences. For example, if you get rewards—that’s probably ordinary income, right when you receive it, no matter what the trust looks like.

U.S. Penalties for Non-Compliance.

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

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

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

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

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

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

Voluntary Disclosure 

Taxpayers who have not reported their crypto currency income and/or gains or who have not reported foreign accounts, are eligible to voluntary come forward to IRS under a Voluntary Disclosure Program which can avoid criminal prosecution and secure a reduction in penalties.  This is a very popular program and we have had much success qualifying taxpayers and demonstrating to the IRS that their non-compliance was not willful.

What Should You Do?

With both the IRS’s and the Treasury Department’s continued focus in the crypto area and commitment of more resources for enforcement, now is the ideal time to be proactive and come forward with voluntary disclosure to eliminate your risk for criminal prosecution, and minimize your civil penalties.  Don’t delay because once the IRS has targeted you for investigation – even it’s is a routine random audit – it will be too late voluntarily come forward.

Take control of this risk and engage a bitcoin tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Bay Area (San Francisco, San Jose and Walnut Creek) and other California locations.  We can come up with solutions and strategies to these risks and protect you and your business to mitigate criminal prosecution, seek abatement of penalties, and minimize your tax liability.  Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you.

 

Bakersfield Tax Return Preparer Sentenced for Role in $25 Million Fraud Scheme

/0 Comments/in , , /by

The U.S. Justice Department (“DOJ”) announced on November 17, 2025 that Victor Cruz, age 41, of Bakersfield, California was sentenced to 18 months in prison for participating in a scheme to submit fraudulent individual federal income tax returns that claimed $25 million in refunds.

According to court records, between November 2019 and June 2023, Miguel Martinez, 42, a Mexican national residing in the United States illegally, led a scheme to file thousands of fraudulent tax returns that claimed millions of dollars in refunds. Martinez created fake businesses that reported to the IRS phony wages paid and withholding information for supposed employees. Martinez then filed thousands of individual income tax returns in the names of the supposed employees that claimed the employees were owed refunds based on the phony wages paid and withholding information that had been reported for them.

Cruz helped Martinez carry out the scheme by preparing and filing more than 500 of the fraudulent tax returns. This was approximately 10% to 15% of the total fraudulent tax returns for which Martinez was responsible. Cruz received thousands of dollars in fees from Martinez in exchange for his services.

The IRS actually paid out $2.3 million of the $25 million in refunds that were claimed by the fraudulent tax returns.

Martinez pleaded guilty and, in September 2024, was sentenced to six years in prison.

Actions by DOJ help support IRS’ campaigns to fight refund fraud and identity theft. 

The Office of the Chief of IRS Criminal Investigation (“CI”) has previously stated that “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. 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 a tax preparer’s actions or you are tax preparer facing investigation by the federal government, 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

IRS Announces Penalty Relief for Tax Year 2025 for Information Reporting on Tips & Overtime under the One Big Beautiful Bill Tax Act

/0 Comments/in , /by

On July 4, 2025 President Donald J. Trump signed into law H.R.1 – One Big Beautiful Bill Act (“OBBBA”).  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.

One of the provisions of the OBBBA provides federal income tax deductions for a portion of an eligible worker’s tips and overtime earnings. Both deductions are temporary and are set to expire after the 2028 tax year.

Prior Law

All income is subject to federal income taxes except as provided otherwise under the Internal Revenue Code.  There is no distinction from worker’s tips or overtime earnings.  In addition, worker’s tips and overtime earnings are subject to Social Security and Medicare taxes (as well as state and local taxes).

New Law – Deduction for overtime pay

OBBBA creates a temporary deduction from gross income for premium pay for overtime hours worked. This means that if you earned $1,000.00 in overtime wages, that you could be able to claim as a deduction $1,000.00 this essentially exempting this income from federal taxation.

New Law – Deduction for tips

OBBBA creates a separate deduction for tipped workers, allowing them to deduct up to $25,000 of qualified tips earned.

Impact on employers

Starting with the 2025 tax year, employers are required to separately report on Form W-2 the portion of the employee’s pay that is for qualified overtime compensation and the employee’s qualifying tip-earning compensation. non-employees, businesses must publish a statement identifying the portion of payments made to the individual that are designated as cash tips, as well as the individual’s qualifying tip-earning occupation.

Transition penalty relief for tax year 2025

On November 5, 2025 the IRS issued guidance (Notice 2025-62) providing penalty relief to employers and other payors for tax year 2025 regarding new information reporting requirements for cash tips and qualified overtime compensation under the OBBBA.

Specifically, employers and other payors will not face penalties for failing to provide a separate accounting of any amounts reasonably designated as cash tips or the occupation of the person receiving such tips. In addition, employers and other payors will also not face penalties for failing to separately provide the total amount of qualified overtime compensation. The relief is limited to returns and statements filed and provided for tax year 2025 and applies only to the extent that the person required to make the return or statement otherwise files and provides a complete and correct return or statement.

While not a requirement to receive the penalty relief, employers and other payors are encouraged to provide employees and payees, particularly those in a tipped occupation, with the occupation codes and separate accountings of cash tips, so the employee or payee can claim the deduction for qualified tips for tax year 2025. Likewise, employers and payors are encouraged to provide employees and payees with separate accountings of overtime compensation, so the employee or payee has readily available the information necessary to claim the deduction for qualified overtime compensation for tax year 2025.

If you are an employer using a payroll service, you should check with your service provider on what information they need to accurately report on the 2025 Form W-2 each employee’s qualified overtime compensation and qualifying tip-earning compensation.  Also, where the employer filed 2025 quarterly employment tax returns (Form 941) without claiming a tax credit for Social Security taxes paid qualified tips, amended employment tax returns should be prepared and filed to claim these overpaid amounts.

But beware on the deduction for overtime pay …

OBBBA caps the deduction for overtime earnings at $12,500 (or $25,000, in the case of a joint return) for all employees. For higher earners, the allowable deduction is reduced by $100 for each $1,000 by which the employee’s gross income exceeds $150,000 (or $300,000, in the case of a joint return). That would mean for an individual worker, this deduction would be completely phased out upon the employee’s gross income exceeding $275,000.  Keep in mind that this deduction applies only to the premium compensation paid more than an employee’s regular rate of pay. If Federal law such as Section 7 of the Fair Labor Standards Act established a worker’s premium pay, then such premium compensation paid more than an employee’s regular rate of pay also qualified.  However, if such premium compensation is paid under some state-law requirements or under come collective bargaining agreement, such premium pay does not qualify for the deduction. The overtime deduction also does not apply to qualified tips.

But beware on the deduction for tips …

Similarly to the overtime deduction, the allowable deduction for tipped earnings is reduced by $100 for each $1,000 by which the tipped worker’s gross income exceeds $150,000 (or $300,000, in the case of a joint return). Only tips that are paid voluntarily by the customer or client, not subject to negotiation, may be deducted as qualified tips. Tips received under tip-sharing arrangements also count as qualified tips; however, earnings from mandatory service charges assessed automatically to customers are not deductible as qualified tips.

Furthermore, the deduction is available only for tips earned in “traditionally and customarily tipped industries.” This means the hospitality industry (restaurants and hotels), and other businesses where tips are common (such as nail or hair salons). It remains to be seen to what extent anyone who renders services could claim qualified tips; therefore, to provide clear guidance as tips received under tip-sharing arrangements count as qualified tips, the Treasury Secretary is required to publish within the next 90 days, a list of occupations that have customarily and regularly received tips on or prior to December 31, 2024.

OBBBA also includes an employer tax credit for Social Security taxes paid on all qualified tips which under prior law was applicable only to food or beverage service employees but now this credit extends to all employees that customarily receive tips in all industries such as in the industry of beauty services (i.e., hair care, nail care, and spa treatments).

This deduction also applies to individuals who are not statutory employees but who earn tips during a trade or business. The tip deduction only applies to the extent that the income from that trade or business (including tips) exceeds the full sum of allowable deductions (not counting the tip deduction) allocable to that trade or business.  In another words, to the extent that the tip deduction would result in a loss in your business, you would not be able to claim the full tip deduction amount.

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. It is advisable to consult with a tax professional to understand how these tips and overtime deduction changes might affect your specific tax situation, especially if your income relies on tips and/or overtime or you are an employer. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles, 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 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.

New IRS Rule For Issuance Of 1099’s In Place For 2026 – How This Impacts You.

/0 Comments/in , /by

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.

  1. 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.

  1. 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.

  1. 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.

 

Treasury Issues New Guidance On Crypto ETPs – What You Need To Know

/0 Comments/in , /by

On November 10, 2025 the Treasury Department issued new guidance allowing crypto exchange-traded products (ETPs) to stake digital assets and share staking rewards with retail investors. This applies to crypto ETPs that hold or track major digital assets such as Ethereum (ETH), Cardano (ADA), Solana (SOL) – or any other token that can be staked and meets regulatory standards.

What are crypto ETPs and how does staking work?

Crypto ETPs are regulated investment vehicles – similar to exchange-traded funds (ETFs) – that let investors gain exposure to digital assets without holding them directly. They trade on traditional stock exchanges and are often backed 1:1 by crypto held in custody.

Staking, meanwhile, is the process of locking up digital assets on a blockchain to help validate transactions in return for periodic rewards, typically paid in the same token. It’s a key feature of proof-of-stake (PoS) blockchains like Ethereum, allowing holders to earn passive income while supporting network security.

Compliance Requirements

To qualify, the ETP must follow specific rules –

1) Hold only one digital asset type and cash;

2) Use a qualified custodian to manage keys and execute staking;

3) Maintain SEC-approved liquidity policies ensuring redemptions can occur even with staked assets;

4) Keep arms-length arrangements with independent staking providers; and

5) Limit activities strictly to holding, staking, and redeeming assets—without discretionary trading.

With this new guidance, crypto ETPs can now stake eligible digital assets directly on PoS networks and distribute the resulting rewards to investors, all within a clear, regulated, and tax-compliant framework.

This new guidance also says staking does not trigger extra taxes at the entity level or mess with the product’s tax-friendly status. Now some ETPs can do more than just track a crypto asset, they can also give you staking rewards, which is the extra yield you get for locking up or delegating your tokens to help secure the network. With this new guidance, fund managers have a way to build products that pass on those staking rewards without the same tax complications.

The new guidance builds on Revenue Ruling 2023-14, which outlined how staking rewards are taxed, marking another key step in the Trump administration’s evolving crypto policy and likely resulting in a greater popularity of staking-enabled crypto ETPs, making it easier for everyday investors to get involved. However, you need to remember if you’re an investor that staking rewards comes with tax consequences. For example, if you get rewards—that’s probably ordinary income, right when you receive it, no matter what the trust looks like.

What To Report To IRS On Your Income Tax Return?

Since 2019, Forms 1040 series, Individual Income Tax Return, includes the following checkbox question:

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

For the 2023 tax year, that wording has changed slightly and has been added to Form 1041, U.S. Income Tax Return for Estates and Trusts; Form 1065, U.S. Return of Partnership Income; Form 1120, U.S. Corporation Income Tax Return; and Form 1120-S, U.S. Income Tax Return for an S Corporation.

Depending on the form, the digital assets question asks this basic question, with appropriate variations tailored for corporate, partnership or estate and trust taxpayers:

At any time during [the calendar year], did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?   ◊ Yes            ◊ No

With more businesses willing to accept and transact in cryptocurrencies, the absence of specific rules related to the reporting of business income from cryptocurrency transactions has created a “tax gap” that the IRS intends to close.

What is a digital asset?

A digital asset is a digital representation of value that is recorded on a cryptographically secured, distributed ledger or any similar technology. Common digital assets include:

  • Convertible virtual currency and cryptocurrency.
  • Stablecoins.
  • Non-fungible tokens (NFTs).

Everyone must answer the question

Everyone who files Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, 1120 and 1120S must check one box answering either “Yes” or “No” to the digital asset question. The question must be answered by all taxpayers, not just by those who engaged in a transaction involving digital assets in 2023.

When to check “Yes”

Normally, a taxpayer must check the “Yes” box if they:

  • Received digital assets as payment for property or services provided;
  • Received digital assets resulting from a reward or award;
  • Received new digital assets resulting from mining, staking and similar activities;
  • Received digital assets resulting from a hard fork (a branching of a cryptocurrency’s blockchain that splits a single cryptocurrency into two);
  • Disposed of digital assets in exchange for property or services;
  • Disposed of a digital asset in exchange or trade for another digital asset;
  • Sold a digital asset; or
  • Otherwise disposed of any other financial interest in a digital asset.

How to report digital asset income

In addition to checking the “Yes” box, taxpayers must report all income related to their digital asset transactions. For example, an investor who held a digital asset as a capital asset and sold, exchanged or transferred it during 2023 must use Form 8949, Sales and other Dispositions of Capital Assets, to figure their capital gain or loss on the transaction and then report it on Schedule D (Form 1040), Capital Gains and Losses. A taxpayer who disposed of any digital asset by gift may be required to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

If an employee was paid with digital assets, they must report the value of assets received as wages. Similarly, if they worked as an independent contractor and were paid with digital assets, they must report that income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Schedule C is also used by anyone who sold, exchanged or transferred digital assets to customers in connection with a trade or business.

When to check “No”

Normally, a taxpayer who merely owned digital assets during 2023 can check the “No” box as long as they did not engage in any transactions involving digital assets during the year. They can also check the “No” box if their activities were limited to one or more of the following:

  • Holding digital assets in a wallet or account;
  • Transferring digital assets from one wallet or account they own or control to another wallet or account they own or control; or
  • Purchasing digital assets using U.S. or other real currency, including through electronic platforms.

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

How The IRS Finds Noncompliant Taxpayers

The IRS and other federal agencies have access to extensive troves of data in the worldwide web of bitcoin and other cryptocurrencies.  Chainalysis is a company that created a cryptocurrency-tracing software dubbed “Reactor” which is being used by at least 10 federal agencies including the IRS.  The IRS Cyber Crimes Unit (CCU), a division of its larger Criminal Investigation (CI) wing and the leader in the IRS’ cryptocurrency crimes investigations, uses this software as a tool to help identify taxpayers who could be non-compliant in the tax laws or involved in criminal activity.

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

In 2018 the IRS announced a Virtual Currency Compliance Campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers. The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.

IRS Access To Cryptocurrency Transactions.

IRS will also issue Summonses to institutions involved in cryptocurrency to secure information on their accountholders.  One of the first John Doe Summons in cryptocurrency area issued by IRS was ruled enforceable by U.S. Magistrate Judge Jacqueline Scott Corley in November 2017 (United States v. Coinbase, Inc., United States District Court, Northern District Of California, Case No.17-cv-01431).  Coinbase located in San Francisco is the largest cryptocurrency exchange in the United States.  Under the order, Coinbase was required to turn over the names, addresses and tax identification numbers on 14,355 account holders. The Court has ordered Coinbase to produce the following customer information: (1) taxpayer ID number, (2) name, (3) birth date, (4) address, (5) records of account activity, including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and (6) all periodic statements of account or invoices (or the equivalent). On March 16, 2018 Coinbase complied with this Summons and turned over data of 14,355 accountholders to the IRS.

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

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

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

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

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

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

Voluntary Disclosure – The Way To Avoid Criminal Fines & Punishment

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

What Should You Do?

The IRS suspects that there are still crypto users that have been evading taxes by not reporting crypto transactions on their tax returns.  With IRS’ continued focus in this area and commitment of more resources for enforcement, now is the ideal time to be proactive and come forward with voluntary disclosure to eliminate your risk for criminal prosecution, and minimize your civil penalties.  Don’t delay because once the IRS has targeted you for investigation – even it’s is a routine random audit – it will be too late voluntarily come forward.

Take control of this risk and engage a bitcoin tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Bay Area (San Francisco, San Jose and Walnut Creek) and other California locations.  We can come up with solutions and strategies to these risks and protect you and your business to mitigate criminal prosecution, seek abatement of penalties, and minimize your tax liability.  Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you.