Maryland Tax Preparer Pleads Guilty To Conspiring To Defraud the IRS

Maryland Tax Preparer Pleads Guilty To Conspiring To Defraud the IRS

The U.S. Department Of Justice announced on March 5, 2021 in a press release that Anita Fortune, age 56, of Upper Marlboro, Maryland, who provided return preparation services under multiple business names, including Tax Terminatorz Inc., pleaded guilty to conspiracy to defraud the United States and aiding in the preparation of a false tax return.

Guilty Plea.

According to court documents and statements made in court, Ms. Fortune prepared and filed returns using co-conspirators’ electronic filing identification numbers and identifiers, which they provided in exchange for fees and office space.  For the tax years 2011 to 2018, Ms. Fortune and her associates fraudulently reduced their clients’ tax liabilities and increased their refunds by adding fictitious or inflated itemized deductions and business losses to the clients’ returns.  In total, Ms. Fortune caused a tax loss to the IRS of $189,748.

Ms. Fortune is scheduled to be sentenced on June 4, 2021, and faces a maximum sentence of five years in prison for the conspiracy count and three years for the preparing a false return count.  Ms. Fortune also faces a period of supervised release, restitution and monetary penalties.  A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.

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

The Federal District Courts should expect to see more of these cases as 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.

“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”.

Working with the Department of Justice Tax Division and U.S. Attorneys around the nation, IRS Criminal Investigation (CI) made 11 arrests, indicted 15 individuals and saw five other individuals or businesses sentenced who perpetrated some type of refund fraud or identity theft scheme.

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), Los Angeles 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 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.

 

First It Was Coinbase, Now It Is Poloniex – Court Authorizes Service of John Doe Summons Seeking Identities of U.S. Taxpayers Who Have Used Cryptocurrency

First It Was Coinbase, Now It Is Poloniex – Court Authorizes Service of John Doe Summons Seeking Identities of U.S. Taxpayers Who Have Used Cryptocurrency

Cryptocurrency / Bitcoin – Is this the 21st century answer to hiding assets in Swiss bank accounts? 

The IRS thinks this is the case which is why 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.

Following the success of the results of a John Doe Summons issued to Coinbase, Inc. as I previously reported, on April 1, 2021 the U.S. Department Of Justice announced that a federal court in the District of Massachusetts entered an order today authorizing the IRS to serve a John Doe summons on Circle Internet Financial Inc., or its predecessors, subsidiaries, divisions, and affiliates, including Poloniex LLC (collectively “Circle”), seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020. The IRS is seeking the records of Americans who engaged in business with or through Circle, a digital currency exchanger headquartered in Boston.

Under the order, Circle will be required to turn over the names, addresses and tax identification numbers on its account holders. The Court has ordered Circle 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).

“Those who transact with cryptocurrency must meet their tax obligations like any other taxpayer,” said Acting Assistant Attorney General David A. Hubbert of the Justice Department’s Tax Division. “The Department of Justice will continue to work with the IRS to ensure that cryptocurrency owners are paying their fair share of taxes.”

“Tools like the John Doe summons authorized today send the clear message to U.S. taxpayers that the IRS is working to ensure that they are fully compliant in their use of virtual currency,” said IRS Commissioner Chuck Rettig. “The John Doe summons is a step to enable the IRS to uncover those who are failing to properly report their virtual currency transactions. We will enforce the law where we find systemic noncompliance or fraud.”

Cryptocurrency, as generally defined, is a digital representation of value. Because transactions in cryptocurrencies can be difficult to trace and have an inherently pseudo-anonymous aspect, taxpayers may be using them to hide taxable income from the IRS. In the court’s order, U.S. Judge Richard G. Stearns found that there is a reasonable basis for believing that cryptocurrency users may have failed to comply with federal tax laws.

Starting with 2019, Form 1040 Makes It Harder For U.S. Taxpayers To Avoid Non-compliance Or Claim Ignorance.

Since 2019, Form 1040, Schedule1, Additional Income and Adjustments to Income, now includes the following checkbox question:

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

Taxpayers who file Schedule 1 to report income or adjustments to income that can’t be entered directly on Form 1040 will now be required to check the appropriate box to answer the virtual currency question. Taxpayers do not need to file Schedule 1 if their answer to this question is NO and they do not have to file Schedule 1 for any other purpose. This requirement is similar to how the IRS includes questions on Schedule B inquiring whether a taxpayer has foreign bank accounts.

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.

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?

With only several hundred people reporting their crypto gains each year since bitcoin’s launch, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns.  And now that like-exchange treatment is prohibited on transactions that occur after 2017, now is the ideal time to be proactive and come forward with voluntary disclosure to lock in your deferred gains through 2017, eliminate your risk for criminal prosecution, and minimize your civil penalties.  Don’t delay because once the IRS has targeted you for investigation – even 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), San Francisco Bay Area (including Walnut Creek and San Jose) 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.

IRS Commissioner Tells Congress That He Prefers Cannabis Businesses Be Able To Pay Taxes Electronically

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.

Rep. David Joyce (R-OH), who serves as a co-chair of the Congressional Cannabis Caucus, said that barring marijuana companies from traditional financial services is “inefficient for business and the IRS alike, obviously, not to mention ample opportunity for fraud and abuse it creates, as well as potential for criminal acts as far as robbing and stealing from those.”

Getting Harder For Legal Cannabis To Find Banking

Even though more and more states are allowing the sale of cannabis at the medical and/or recreational level, it is still a business that deals essentially in cash only. Why? Because most traditional banks refuse to deal with any cannabis businesses.  This forces cannabis businesses to seek alternative financial institutions, smaller banks and credit unions that are willing to work with cannabis businesses so that these businesses can pay their expenses and even taxes in a manner more safe and secure than delivering stacks of $20 bills.

Nevertheless, cannabis companies still operate in a legal grey area because cannabis remains illegal under Federal law. Federal law classifies cannabis as a Schedule 1 drug, meaning it has “currently no accepted medical use”. Treating cannabis, no differently than heroin, the Federal government has entrusted the Treasury Department with the authority and responsibility to monitor bank activity to make sure that activities which are illegal under Federal law are not utilizing the banking channels and functions that are normally available.

Financial Crimes Enforcement Network (“FinCEN”)

FinCEN is a bureau of the U.S. Department of the Treasury. The Director of FinCEN is appointed by the Secretary of the Treasury and reports to the Treasury Under-Secretary for Terrorism and Financial Intelligence. FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.

FinCEN carries out its mission by receiving and maintaining financial transactions data; analyzing and disseminating that data for law enforcement purposes; and building global cooperation with counterpart organizations in other countries and with international bodies.

FinCEN exercises regulatory functions primarily under the Currency and Financial Transactions Reporting Act of 1970, as amended by Title III of the USA PATRIOT Act of 2001. Under this authority the Secretary of the Treasury is to issue regulations requiring banks and other financial institutions to take a number of precautions against financial crime, including the establishment of AML programs and the filing of reports that have been determined to have a high degree of usefulness in criminal, tax, and regulatory investigations and proceedings, and certain intelligence and counter-terrorism matters. This authority has been delegated to FinCEN.

The basic concept underlying FinCEN’s core activities is “follow the money.” As FinCEN believes that the primary motive of criminals is financial gain, and they leave financial trails as they try to launder the proceeds of crimes or attempt to spend their ill-gotten profits. FinCEN shares the information it receives and analyzes with other law enforcement agencies to investigate and hold accountable a broad range of criminals, including perpetrators of fraud, tax evaders, and narcotics traffickers. More recently, the techniques used to follow money trails also have been applied to investigating and disrupting terrorist groups, which often depend on financial and other support networks.

Reporting Of Cash Payments

The Bank Secrecy Act (“BSA”) enacted in 1970 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.

Cannabis-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. 

Why Banks Are Reluctant To Deal With Cannabis Businesses

Under the Obama administration, then-Deputy Attorney General James Cole issued a memo, known as the Cole Memorandum that clarified the Justice Department’s stance on cannabis. The memo, from August 29, 2013, asserted that, for the most part, the Justice Department would not enforce the cannabis ban in states that had legalized it. Following that spirit, on February 14, 2014 the Treasury Department issued its own guidance through FinCEN on how banks could provide services to the cannabis industry without violating Federal Law.  As long as banks complied with this guidance, they could avoid the threat of federal prosecution and make themselves available to provide banking and financial services to cannabis businesses.

But under the Trump administration, the Justice Department led by former Attorney General Jeff Sessions rescinded the Cole memo, calling marijuana “a dangerous drug” and asserting that “marijuana activity is a serious crime”. The Treasury Department led by Treasury Secretary Steve Mnuchin has yet to revoke the FinCEN guidance which although that guidance referenced the Cole memo multiple times, the guidance still remains a part of the framework by which banks and other financial institutions can make themselves available to do business with the cannabis industry.

Now That We Are In The Biden Administration, Where Does Cannabis Banking Go?

During a confirmation hearing on February 23, 2021 for President Joe Biden’s pick for deputy secretary of the Treasury, Sen. Catherine Cortez Masto (D-NV) asked the nominee, Adewale Adeyemo, whether he feels 2014 FinCEN guidance should be updated to “set expectations for financial institutions that provide services to cannabis-related industries” and what steps he would take to that end.

Mr. Adeyemo replied: “I look forward, if confirmed, to talking to my colleagues at Treasury about this important issue and thinking through what changes may be needed and doing this in a way that’s consistent with the interagency with the president’s guidance.”

Today’s Banking Challenge

Despite more states legalizing cannabis, a tiny fraction of banks and alternative financial institutions are willing to work with cannabis companies.  As of September 30, 2020 FinCEN issued a report stating that there were 677 banks and credit unions that filed reports saying they were working with cannabis clients.  Unfortunately this number is down from 695 in the last fiscal quarter ending in June and 711 for the quarter preceding that.

What Should You Do?

It is best to be proactive and engage an experienced board certified tax attorney-CPA in your area who is highly skilled in the different legal, banking 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), Los Angeles and other California locations protect you and maximize your net profits.  Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

If You Can’t Beat Them Join Them – New York State Legalizes Recreational Marijuana

Democratic Governor Andrew M. Como signed the Marijuana Regulation And Taxation Act (S.854-A/A.1248-A) into law on March 31, 2021 – $2.5 billion market expected.

Governor Como’s office in a press release stated that the development of an adult-use cannabis industry in New York State under this legislation has the potential to create significant economic opportunities for New Yorkers and the State. Tax collections from the adult-use cannabis program are projected to reach $350 million annually. Additionally, there is the potential for this new industry to create 30,000 to 60,000 new jobs across the State.

“This is a historic day in New York – one that rights the wrongs of the past by putting an end to harsh prison sentences, embraces an industry that will grow the Empire State’s economy, and prioritizes marginalized communities so those that have suffered the most will be the first to reap the benefits.” Governor Cuomo said. “This was one of my top priorities in this year’s State of the State agenda and I’m proud these comprehensive reforms address and balance the social equity, safety and economic impacts of legal adult-use cannabis. I thank both the Leader and the Speaker, and the tireless advocacy of so many for helping make today’s historic day possible.”

Key Provisions To New York’s Marijuana Regulation And Taxation Act:

Focus on social equity – The State intends to issue 50% of adult-use licenses to social and economic equity applicants.

Boost to medical cannabis – Allows for additional dispensaries, additional patient access and more products to strengthen the medical cannabis market.

Taxes, local opt-outsCannabis products would be taxed at 13%, of which 9% would go to the state and 4% to localities.  An additional tax would be imposed on production as follows: 0.5 cents per milligram for flower, 0.8 cents per milligram for concentrated cannabis and 3 cents per milligram for edibles. Cities, towns and villages could opt out of retail sales.

Regulation and oversightThe measure establishes an Office of Cannabis Management with an executive director, a chief equity officer and a five-member board. The office would have the authority to evaluate license applications using metrics such as social equity status, commitment to environmentally sound practices, public health and fair labor practices. In addition, a state Cannabis Advisory Board would be established to make policy recommendations on such things as licensing and grant approvals from the Community Reinvestment Fund.

New York State adds to an existing group of 11 states and Washington, D.C. that have legalized recreational cannabis, and adds to an existing group of 33 states that have legalized it for medical purposes.  Additionally, last year two new states joined the movement with South Dakota voters adopting legalization of both medical and recreational cannabis and Mississippi voters adopting legalization of medical cannabis use.

With about 37 states now legalizing some form of cannabis use, you would think that it is now time for the Federal government to change course.

The Anti-Federal U.S. Climate

The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. Although you can still face federal criminal charges for using, growing, or selling weed in a manner that is completely lawful under California law, the federal authorities in the past have pulled back from targeting individuals and businesses engaged in medical marijuana activities. This pull back came from Department of Justice (“DOJ”) Safe Harbor Guidelines issued in 2013 under what is known as the “Cole Memo”.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

Since 2013, these guidelines provided a level of certainty to the marijuana industry as to what point could you be crossing the line with the Federal government.  But on January 4, 2018, then Attorney General Jeff Sessions revoked the Cole Memo.  Now U.S. Attorneys in the local offices throughout the country retain broad prosecutorial discretion as to whether to prosecute cannabis businesses under federal law even though the state that these businesses operate in have legalized some form of marijuana.

Joyce-Blumenauer Amendment (previously referred to as the Rohrabacher-Farr Amendment)

Building on the DOJ’s issuance of the Cole Memo, in 2014 the House passed an amendment to the yearly federal appropriations bill that effectively shields medical marijuana businesses from federal prosecution. Proposed by Representatives Rohrabacher and Farr, the amendment forbids federal agencies to spend money on investigating and prosecuting medical marijuana-related activities in states where such activities are legal.

The amendment states that:

NONE OF THE FUNDS MADE AVAILABLE UNDER THIS ACT TO THE DEPARTMENT OF JUSTICE MAY BE USED, WITH RESPECT TO ANY OF THE STATES OF ALABAMA, ALASKA, ARIZONA, ARKANSAS, CALIFORNIA, COLORADO, CONNECTICUT, DELAWARE, FLORIDA, GEORGIA, HAWAII, ILLINOIS, INDIANA, IOWA, KENTUCKY, LOUISIANA, MAINE, MARYLAND, MASSACHUSETTS, MICHIGAN, MINNESOTA, MISSISSIPPI, MISSOURI, MONTANA, NEVADA, NEW HAMPSHIRE, NEW JERSEY, NEW MEXICO, NEW YORK, NORTH CAROLINA, NORTH DAKOTA, OHIO, OKLAHOMA, OREGON, PENNSYLVANIA, RHODE ISLAND, SOUTH CAROLINA, TENNESSEE, TEXAS, UTAH, VERMONT, VIRGINIA, WASHINGTON, WEST VIRGINIA, WISCONSIN, AND WYOMING, OR WITH RESPECT TO THE DISTRICT OF COLUMBIA, GUAM, OR PUERTO RICO, TO PREVENT ANY OF THEM FROM IMPLEMENTING THEIR OWN LAWS THAT AUTHORIZE THE USE, DISTRIBUTION, POSSESSION, OR CULTIVATION OF MEDICAL MARIJUANA.

This action by the House is not impacted by the change of position by the DOJ. However, unless this amendment gets included in each succeeding federal appropriations bill, the protection from Federal prosecution of medical marijuana businesses will no longer be in place.  Fortunately, Congress has included this amendment but yet has changed any of the tax or banking laws that pose challenges to the cannabis industry.

Clearly, to avail yourself of the protections of the amendment, you must be on the medical cannabis side and you must be in complete compliance with your State’s medical cannabis laws and regulations. You may not be covered under the amendment if you are involved in the recreational cannabis side even if legal in the State you are operating.

What Should You Do?

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

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.

Mexico Closer To Legalizing Cannabis

While the United States federal government refuses to make any use of marijuana legal and maintains banking and taxing roadblocks to the cannabis industry and despite a growing number of States legalizing cannabis, Canada has made huge strides into the United States market effectively pulling profits out of the United States into Canada. Well soon it looks like this same movement of profits will be pulled over the southern border into Mexico.

Mexican Federal Legislation

The Health and Justice committees in Mexico’s Lower House of Congress last month passed a draft proposal to decriminalize cannabis on Monday and submitted it to the full chamber. The bill, which has the support of President Andres Manuel Lopez Obrador, puts the country one step closer to having one of the world’s largest cannabis markets.

Under the current language of the bill, adults aged 18 and up would still be able to purchase and possess up to 28 grams of cannabis for personal use, as well as cultivate up to six plants. The proposal seeks to establish the Mexican Institute for Cannabis Regulation and Control, which will grant five types of licenses for cannabis production, distribution, testing, and export and import.  Cannabis would be regarded the same as cigarettes for public consumption purposes under the revised law, but it could not be distributed online or via the mail.

The bill is now on its way to the full Chamber of Deputies.

How Cannabis Legalization In The United States Is Stacking Up:

Following election results last Fall, this month New Jersey, Alabama and Virginia legislatures are moving forward to enact legislation legalizing and regulating cannabis.

Alabama – The Alabama Senate on February 3, 2021 approved a bill to legalize medical marijuana in the state.  This latest proposal would establish an 11-member Alabama Medical Cannabis Commission to implement regulations and oversee licensing. To qualify for cannabis consumption, patients would have to be diagnosed with one of about 20 conditions, including anxiety, sleep disorders, post-traumatic stress disorder and intractable pain.  The bill prohibits raw cannabis, smoking, vaping and candy or baked good products. Patients would instead be allowed to purchase capsules, lozenges, oils, suppositories and topical patches.

New Jersey – On February 22, 2021, Governor Phil Murphy signed legislation (A21/S21, A1897 and A5342) that legalizes the retail sale of cannabis and removes criminal offenses for possession of up to six ounces of cannabis for individuals 21 and older.

Virginia – On February 27, 2021 members of the Virginia Senate and the House of Delegates advanced legislation, Senate Bill 1406 and House Bill 2312, to legalize cannabis possession, personal cultivation, and retail sales for adults 21 and older. The bills now head to the governor for his approval, amendment, or veto.  Legislators agreed to establish an independent agency, the Virginia Cannabis Control Authority, to oversee the establishment of regulations that will govern the adult-use market. That agency will convene this summer. The Committee also established a January 1, 2024 enactment date for the law. Upon that date, but not before then, adults will be able to possess up to one ounce of marijuana and cultivate up to four cannabis plants per household without penalty.

These states add to an existing group of 11 states and Washington, D.C. that have legalized recreational cannabis, and adds to an existing group of 33 states that have legalized it for medical purposes.

Additionally, last year two new states joined the movement with South Dakota voters adopting legalization of both medical and recreational cannabis and Mississippi voters adopting legalization of medical cannabis use.

With about 37 states now legalizing some form of cannabis use, you would think that it is now time for the Federal government to change course.

U.S. Cannabis Industry Still Facing Uncertainty

Despite certain states in the U.S. legalizing cannabis, it is still illegal under U.S. Federal law so U.S. cannabis business must still face the ongoing challenges of running a cannabis business given this disparity with U.S. Federal law. Those challenges being: your local Federal District Attorney shutting down your business and seizing assets; losing all bank privileges; and getting a big tax bill from IRS that you cannot pay.

Risk of Being Shut Down And Assets Seized By Your Local Federal District Attorney

On January 4, 2018 then acting Attorney General Jeff Sessions rescinded what was known as the “Cole Memo”.

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

But now that the Cole Memo has be rescinded, federal prosecutors in cannabis legal states will now be free to decide how aggressively they wish to enforce federal marijuana laws. While State law and public acceptance of marijuana usage may temper federal prosecutors’ aggressiveness, this risk of seizure and shutdown is still real. Criminal prosecution is also possible so it is important to have qualified legal counsel lined-up and available to intervene.

Risk Of Losing All Bank Privileges

While states are opening their markets to marijuana, the illegality under Federal law still restricts cannabis businesses access to banking channels. On February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) which is a division of the Department Of Treasury issued guidance (FIN-2014-G001) clarifying how financial institutions can provide services to marijuana-related businesses consistent with their Bank Secrecy Act (“BSA”) obligations, and aligned the information provided by financial institutions in BSA reports with federal and state law enforcement priorities. This FinCEN guidance issued by the Department Of Treasury was following the Cole Memo issued by the DOJ. But now that the Cole Memo has been rescinded, the FinCEN guidance is not has persuasive leading many banks to turn away cannabis businesses. For those cannabis businesses that have eluded banks with their true business activity (which such misrepresentation is also a Federal crime), those businesses run the risk of having their bank accounts shut down by the bank when the bank learns of their true business activity so it is important to secure qualified legal counsel to come up with solutions that will allow you to still conduct business and meet financial obligations.

Risk Of Getting A Big Tax Bill From IRS That You Cannot Pay

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses. A cannabis business that has not properly reported its income and expenses and not engaged in the planning to minimize income taxes can face a large liability proposed by IRS reflected on a Notice Of Deficiency or tax bill.

Of the three big risks, by far this is the one posing the greatest challenge as the Federal taxation of cannabis businesses is consistent in all states and not dependent on whether local Federal prosecutors are aggressive in enforcing the illegality of cannabis or the banks unwilling to do business with the cannabis industry. This unexpected liability can put you out of business so it is important to secure qualified tax counsel to be proactive with tax planning to minimize taxes and to defend you in any tax examinations, appeals or litigation with the IRS.

What Should You Do?

Considering this risks of cannabis 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), Metropolitan Los Angeles and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits.

 

Riverside County Sheriff’s Office Announces Shutdown Of Another Illegal Cannabis Enterprise

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

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

Riverside County Raid

On February 17, 2021 the Riverside County Sheriff’s Office issued a Civic Alert that on Tuesday, February 16, 2021 investigators from the Riverside County Sheriff’s Department’s Marijuana Enforcement Team (MET) served a search warrant at an illegal marijuana cultivation operating at a private residence in the unincorporated area of Riverside County located in the 35000 block of Lynch Road, Sage CA. The search warrant was authored in response to citizen complaints about the residence.

Upon arrival, investigators located several outbuildings containing marijuana plants in various stages of growth. Additionally, investigators located a cannabis edibles manufacturing operation on the property. A further search of the property turned up a large cache of illegal weapons and over $700,000 in U.S. Currency. Employees of the operations were detained, questioned, and later released. The investigation is ongoing.

The Riverside County Sheriff’s Department has a zero-tolerance policy for the illegal cultivation and sale of marijuana recognizing that these operations pose a great risk to neighboring residents and also negatively impacts cannabis businesses legally operating within Riverside County.

Penalties For Selling Cannabis Without A License.

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

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

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

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

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

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

What Should You Do?

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

Both civil and criminal penalties will apply to unlicensed operators so it is imperative that anyone cultivating, manufacturing or distributing cannabis on a commercial basis in California seeks a local and state license for their operations immediately, if they have not already done so. Protect yourself and your investment by engaging a cannabis tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. 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 Texas Winter Storms

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

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

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