cannabis business banking law

Federal Cannabis Banking Access Coming? Check Out The Latest Word By Congress.

On February 13, 2019 a hearing was conducted by the Subcommittee on Consumer Protection and Financial Institutions which is under the U.S. House Committee On Financial Services headed by Chairwoman Maxime Waters (D–CA). Testimony was provided at this hearing which could lead to the subcommittee putting forth a bill in Congress that eventually could put into law guaranteed access to the banking industry for state-licensed cannabis businesses.

Details On The Hearing

The Committee recognizes that an increasing number of financial institutions have expressed interest in providing banking services to state authorized cannabis-related businesses; however, many financial institutions are refraining from offering banking services to these businesses based on several legal and compliance risks especially since federal law still classifies cannabis as an illegal Schedule 1 drug under the Controlled Substances Act. Furthermore, public safety and other concerns have been expressed by stakeholders, including state and local government officials regarding cannabis-related businesses having difficulties accessing basic banking services, such as depositing large sums of cash from their business activity. The Committee Memorandum can be viewed here.

Reps. Ed Perlmutter (D-CO), Denny Heck (D-WA), Steve Stivers (R-OH), and Warren Davidson (R-OH) have a discussion draft for the Secure and Fair Enforcement Banking Act of 2019 (SAFE Banking Act) that was considered at this hearing. The proposal, among other things, would harmonize federal and state law concerning cannabis-related businesses and allow these businesses access to banking services. Additionally, depository institutions and their employees would be exempt from federal prosecution or investigation solely for providing banking services to a state authorized cannabis-related business. The draft of the bill can be viewed here.

Click here for the recorded webcast of the hearing.

Higher Federal Taxes Still Remain

While the developments listed above are favorable for cannabis business in the U.S., it still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

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.

Federal Reporting Of Cash Payments Still Remain

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.

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

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  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.

IRS tax forms - Government Shutdown

How Another Government Shutdown In The Middle Of Tax Season Can Stifle IRS Operations And Increase Tax Problems For Taxpayers.

How Another Government Shutdown In The Middle Of Tax Season Can Stifle IRS Operations And Increase Tax Problems For Taxpayers.

As required by law, once a year the Taxpayer Advocate’s Office (an independent Federal government department that monitors the Internal Revenue Service) must send a report to Congress describing challenges the IRS is facing, problems experienced by taxpayers in dealing with the IRS and recommendations to resolve these problems.

On February 12, 2019, National Taxpayer Advocate Chief Nina E. Olson released her 2018 Annual Report to Congress describing challenges the IRS is facing as a result of the recent government shutdown. The release of the National Taxpayer Advocate’s report was delayed by a month because of the government shutdown.

Ms. Olson also released the second edition of the National Taxpayer Advocate’s “Purple Book” which presents 58 legislative recommendations designed to strengthen taxpayer rights and improve tax administration.

Impact of the government shutdown on taxpayer rights

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

Although not stated in the law or Justice Department guidance, the IRS Office of Chief Counsel has interpreted the “protection of property” exception to apply only to the protection of government property – not a taxpayer’s property.

This could be a big problem for taxpayers if just before a government shutdown the IRS issues a levy to a bank. When receiving a levy notice, the bank must freeze the taxpayer’s account for 21 days and then if the levy has not been released, the bank must turn the funds over to the IRS.

Ms. Olson in her report noted that the Internal Revenue Code requires the IRS to release a levy if it has determined the levy is creating an economic hardship due to the financial condition of the taxpayer. However, the IRS’s legal interpretation of the Anti-Deficiency Act would not permit personnel to work on any taxpayer’s account to release levies even if the taxpayer needed the levied funds to pay for basic living expenses or a life-saving operation.

Ironically, the IRS’s Lapsed Appropriations Contingency Plan allowed employees to open mail solely to search for checks payable to the government.  The plan did not permit any employees to assist taxpayers experiencing an economic hardship.

Impact of the government shutdown on IRS operations

The report says the shutdown has had a significant impact on IRS operations. The IRS opened the 2019 filing season immediately after the shutdown ended, and a comparison of services between now and 2018 shows greater difficulties in getting assistance.

Assistance Requested From IRS 2018 2019
Accounts Management – Percentage of IRS officials answering incoming calls 86% 48%
Accounts Management – Average wait time for call to be answered 4 minutes 17 minutes
Automated Collection System – Percentage of IRS officials answering incoming calls 65% 38%
Automated Collection System – Average wait time for call to be answered 19 minutes 48 minutes
Installment Agreement/Balance Due – Percentage of IRS officials answering incoming calls 58% 7%
Installment Agreement/Balance Due – Average wait time for call to be answered 30 minutes 81 minutes

During the government shutdown, correspondence inventories ballooned. By January 24, 2019 the IRS had more than five million pieces of mail waiting to be processed; it had 80,000 responses to 2018 Earned Income Tax Credit (EITC) audits that had not been addressed (likely causing eligible taxpayers to have their legitimate EITC claims frozen during the 2019 filing season); and it had 87,000 amended returns waiting to be manually processed.

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 in another government shutdown or is still catching up from the last government shutdown. Instead you should be utilizing this valuable time to get yourself prepared so that when IRS is resuming action against you, 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. Fortunately, as we are now in 2019, taxpayers who expect to owe for 2018 should have their 2018 income tax returns done now so that the 2018 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2019.

Remember that it is the government that was shut down – not 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 by law.

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

What Should You Do?

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

IRS tax return filing deadline extension for those affected by Alaska Earthquake

Are You Effected By The Alaska Earthquake? IRS Is Providing You With Tax Relief And Extending Upcoming Tax Deadlines.

The IRS announced on February 5, 2019 that victims of the earthquake that took place on November 30, 2018 in Alaska may qualify for tax relief. Individuals who reside or have a business in the Municipality of Anchorage, Kenai Peninsula Borough and Matanuska-Susitna Borough have until April 30, 2019, to file certain individual and business tax returns and make certain 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. For instance, certain deadlines falling on or after November 30, 2018 and before April 30, 2019, are granted additional time to file through April 30, 2019. This includes 2018 individual income tax returns and payments normally due on April 15, 2019. It also includes the quarterly estimated income tax payments due on January 15, 2019 and April 15, 2019 and the quarterly payroll and excise tax returns normally due on January 31, 2019.

In addition, penalties on payroll and excise tax deposits due on or after November 30, 2018, and before December 17, 2018, will be abated as long as the deposits were made by December 17, 2018.

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 activities.

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. And if you are involved in cannabis, check out what our cannabis tax attorneys can do for you.

Santa Barbara County Police Shuts Down Illegal Cannabis Operation

Santa Barbara County Police Shuts Down Illegal Cannabis Operation

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.

State Authorities Raid Illegal Cannabis Operation In Carpinteria

The Santa Barbara County Sheriff’s Office announced in a press release that on January 31, 2019, the Santa Barbara County Sheriff’s Cannabis Compliance Team concluded a four-month investigation into a local cannabis cultivator, operating under the name of Power Farms LLC, which is located just outside the City of Carpinteria. During this investigation, which spanned two counties and involved three separate search warrants, Detectives discovered one of the owners (whose name is being withheld due to the ongoing investigation) had provided false information during the county cannabis application process and was failing to follow proper shipping and manifest procedures.

The owner’s Los Angeles County home, was served with a search warrant. There, Detectives seized several unregistered firearms, two which were reported stolen, as well as approximately 60 pounds of processed and packaged marijuana taken from Power Farms. They also seized thousands of dollars in cash and other items of evidence.

This investigation culminated in the voluntary surrender of the owner’s state temporary cannabis license, which resulted in detectives from the Cannabis Compliance Team, Special Investigations Bureau, District Attorney’s Office, and Game Wardens from the California Department of Fish and Wildlife, eradicating and removing illegal cannabis from Power Farms as they no longer had a valid state permit to cultivate or possess commercial cannabis. Approximately 22,420 cannabis plants were eradicated from three separate green houses and approximately 1,420 pounds of dried / drying cannabis were seized.

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;
  1. Defendants who have two or more prior convictions for H&S Code §11360 sale/transportation of cannabis; 
  1. Defendants who knowingly sold, attempted to sell, or offered to sell or furnish cannabis to someone under 18; or
  1. 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 like the Santa Barbara County Cannabis Compliance Team which since June 2018 focuses 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 the cannabis tax attorneys at 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 other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits.

HR 420 cannabis legalization bill

Senator Introduces Cannabis Legalization Bills – If You Can’t Beat Them, Then Join Them!

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.

The federal penalties for possession of any amount of marijuana are as follows:

  • First Offense – Misdemeanor involving up to one year of incarceration and $1,000 in fines
  • Second Offense – Misdemeanor punishable by 15 days to 2 years behind bars and $2,500 in fines
  • Third and subsequent offenses – Misdemeanor or felony punishable by 90 days to 3 years of incarceration and fines of up to $5,000.

The penalties for the sale of marijuana depend on the amount of marijuana you have been accused of selling or attempting to sell:

  • Less than 50 kilograms – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 kilograms – Felony punishable by up to 20 years in prison and/or fines of up to $1,000,000
  • 100 to 999 kilograms – Felony involving 5 to 40 years incarceration and/or fines of up to $2,000,000
  • 1000 kg and up – Felony carrying a sentence of 10 years to life in prison and/or up to  $4,000,000 in fines

As for the cultivation of marijuana, the federal authorities punish it on the basis of the number of plants you were caught growing:

  • Less than 50 plants – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 plants – Felony punishable by up to 20 years in prison and/or up to $1,000,000 in fines
  • 100 to 999 plants – Felony carrying a 5 to 40-year prison sentence and/or fines of up to $5,000,000
  • 1,000 plants or more – Felony involving 10 years to life in prison and/or fines of up to $10,000,000

With aggravating factors such as a trafficking activity that results in an injury or death, a sale within 1,000 feet of a school, or a case involving five grams sold to a minor, the above penalties may increase dramatically.

Federal Bills Introduced In 2019

Following the filing last month by Congressman Earl Blumenauer (D-OR) of a congressional bill to regulate marijuana like alcohol (click here for more details on H.R. 420), Senator Ron Wyden (D-OR) filed Senate Bill 420 (click here for detail) which would deschedule marijuana by removing it from the Controlled Substances Act (“CSA”), establish a federal excise tax on legal sales and create a system of permits for businesses to engage in cannabis commerce. It would also authorize regulations on packaging and labeling of cannabis products and apply alcohol advertising guidelines to the product.

Senator Wyden also introduced two other pro-cannabis bills:

Senate Bill 421 (click here for details) proposes a number of changes such as exempting state-legal marijuana activity from the CSA, allowing banking access for cannabis companies, eliminating advertising prohibitions, expunging criminal records, shielding immigrants from deportation over marijuana and allowing Department of Veterans Affairs doctors to issue medical cannabis recommendations.

Senate Bill 422 (click here for details), proposes the exemption of state-legal cannabis businesses from Internal Revenue Code §280E, which section prevents them from taking normal business tax deductions that are available to operators in other industries.

But until these bills become law, the cannabis industry will still have to bear the followings risks and challenges:

Higher Taxes Still Remain

While the developments listed above are favorable for cannabis business, it still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

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.

Reporting Of Cash Payments Still Remain

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.

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

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  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.

trump tax reform plan bill

What’s Missing In The Trump Tax Reform Bill?

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

 

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

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

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

 

What Is Missing In Trump’s Tax Reform Bill?

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

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

 

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


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

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


Penalties for non-compliance.

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

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

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

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

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


The Solution.

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

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

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

 

What Should You Do?

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

IRS 2017 Tax Deductions

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

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

Considerations On Filing An Amended Return

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

But before you proceed, consider these essential facts:

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

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

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

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

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

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

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

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

Possible Adverse Considerations:

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

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

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

What Should You Do?

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

Halloween Costumes could be a tax deduction

Looking to make Halloween candy and costumes tax deductible?

The kids should be ready for Halloween but are you ready to take advantage of making this holiday to be tax deductible?

Yes your Halloween Candy could be a tax deduction….

You can in fact deduct Halloween candy if you figure out a way to make it business related. The IRS doesn’t say a lot about this topic because they don’t want to give you “permission” to deduct these items, but they also have not specifically stated that you cannot deduct Halloween candy.

So here are five different ways for you to consider deducting those over-priced bags of snack size chocolates:

  1. Make a promotion out of it by attaching your business card or a promotional flyer to the candies that are being passed out.
  2. There are many companies who will print candy wrappers with your logo on it which is an even better and more advanced way to promote your business and still have something for trick-or-treaters.
  3. Send a box of candy to potential or existing clients during October. This promotes your business and would likely not be questioned as a business deduction.
  4. Donate any leftover candy to the U.S. military. Charitable organizations with 501(3)(c) status like Operation Gratitude (EIN 20-0103575) and Soldiers’ Angels (EIN 20-0583415) collect leftover Halloween candy to include in care packages for soldiers. They are two of many 501(c)(3) organizations on the IRS-approved list to donate tax deductible charitable goods. Always be sure to check the IRS list before claiming your donations are tax deductible, as status can change.
  5. Make it a party. You can deduct a portion of a Halloween party if the party is to conduct or promote business. Typically this looks like an open house of some sort where you mingle with current and potential clients, play a few Halloween games, give out candy and treats, and discuss business. The IRS does not specify how much time you must spend discussing the business to claim a deduction but you must invite people that you do business with or are looking to do business with.

Like with any expense you are looking to deduct it is important to make sure that the tax law would support a deduction and that you have the required backup documentation in case you are audited by the IRS.

Yes your Halloween Costumes could be a tax deduction….

Now when I think of Halloween, I also look forward to seeing all of the different costumes that people wear. Some are very extravagant and I am sure pricey. And for some they would like to know how that can be deductible. Since costumes fall under the category of clothing or uniforms, be mindful that the tax law requires three elements for clothing useful only in the business environment to be deductible.

The required elements for deductibility are:

  1. The clothing is required or essential in the taxpayer’s employment;
  2. The clothing is not suitable for general or personal wear; and
  3. The clothing is not so worn for general or personal wear.

If these three requirements are satisfied, not only is the cost of the closing deductible but also its upkeep.

Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc.). Musicians and entertainers can deduct the cost of theatrical clothing and accessories that are not suitable for everyday wear.

In contrast, a white cap, white shirt or white jacket, white bib overalls, and standard work shoes that a painter is required by his union to wear on the job and there is nothing on any of the clothes that indicate the company this person works for would not be deductible because it is not distinctive. Similarly, blue work clothes worn by a welder are not deductible even if the foreman requires them. However, required protective clothing like safety boots, safety glasses, hard hats, and work gloves are deductible.

But consider this – by adding the company’s logo on the clothing will make it deductible even if it can be worn outside the scope of employment because you are advertising your company. In that case you are a walking billboard.

Given the large military presence here in California, military personnel on full-time active duty cannot deduct uniforms. However, reservists can deduct the unreimbursed cost of uniforms if military regulations restrict wearing it except on duty. Still, you must reduce your deduction by any nontaxable allowance you receive. If local military rules don’t allow wearing fatigues off duty, you can deduct the amount by which your uniform cost exceeds your uniform allowance.

Given today’s dot.com and casual era environment, people are not coming to work as dressed up as they used to. Nevertheless, where business clothes are suitable for general wear, there’s no deduction even if these particular clothes would not have been purchased but for the employment.

While these tax rules are pretty circumscribed, they are also intensively factual. Such was the case with an Ohio TV news anchor, Anietra Y. Hamper. She was claiming approximately $20,000 a year in 2005, 2006, 2007 and 2008 in clothing expense that included not only what she wore for each broadcast but also lounge wear, a robe, sportswear, lingerie, thong underwear, an Ohio State jersey, jewelry, running shoes, dry cleaning, business gifts, cable TV, contact lenses, cosmetics, gym memberships, haircuts, Internet access, self-defense classes, and her subscriptions to Cosmo, Glamour, Newsweek, and Nickelodeon. Her argument was that as a TV anchor she was required to maintain a specified appearance described in the Women’s Wardrobe Guidelines.

These guidelines say the “ideal in selecting an outfit for on-air use should be the selection of ‘standard business wear’, typical of that which one might wear on any business day in a normal office setting anywhere in the USA.” But where business clothes are suitable for general wear, there’s no deduction even if these particular clothes would not have been purchased but for the employment. For this TV anchor, that was no help. She claimed the requirement to dress conservatively made the clothing unsuitable for everyday use, and that’s how she treated it. She wore the business clothing only at work and even kept it separate from her personal clothing. But the IRS and Tax Court denied her wardrobe deductions and they added penalties.

What else can you do to save taxes?

Now while you will find no one at the Law Offices Of Jeffrey B. Kahn, P.C. wearing outlandish costumes and eating bowls of chocolates each day, 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, San Diego, San Francisco 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.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

 

Why You Should Not Let Your Guard Down In An IRS Audit Under The National Research Program

Certain tax returns that are selected for audit by the IRS each year are selected as part of the National Research Program (“NRP”).  The goal of this program is to design and implement a successful strategy to collect data that will be used to measure payment, filing and reporting compliance and to deliver the data to the IRS Business Operation Divisions to meet a wide range of needs including support for the development of strategic plans and improvements in workload identification. The IRS will also use the NRP to analyze taxpayer compliance and to assess the effectiveness of compliance programs and treatments in use by the IRS.  Data for analysis will include amounts reported by taxpayers on their tax returns and the corrected amounts that were determined by examiners.

While the information gathered from these audits gets fed into IRS’ Big Data Analytics, taxpayers should keep in mind that these are still real audits that will likely result in changes the taxpayer’s account that once assessed by IRS will result in additional liability by the taxpayer for which the IRS will pursue collection.  Since these audits will follow the same audit guidelines for any individual income tax return, it is important to note the general procedures that will apply.

Types of IRS Examinations

  1. Campus Examinations are the simplest form of an examination. They are correspondence exams addressing simple problems like substantiation that can be resolved easily by correspondence and/or telephone. An examination under NRP would not be conducted in this fashion as not enough information would be collected in this type of audit.
  2. Area Office Examinations may be conducted for slightly more complicated issues such as small business returns and more complex non-business returns. Area Office Examinations may be conducted by correspondence, office interview or even by a field examination, depending on type and complexity of the return. In all cases, the taxpayer is asked to provide supporting documentation of questionable items. Business returns will always examined an office or field interview rather than a correspondence examination. It is in this type of an environment that an audit under the NRP would occur.
  3. Field Examinations are the most complex civil examination. The examining agent will be a revenue agent, as opposed to an officer auditor. He or she will be better trained and will have more experience. A Field Examination consists of examination of a taxpayer’s books and records at the taxpayer’s place of business or where the books, records or source documents are maintained. The agent will review the taxpayer’s entire return and all documentation related to that return. The agent may be assisted by a technical specialist such as a “technical advisor” if the return presents a special issue such as valuation. Unlike, office auditors, revenue agents spend considerable time preparing for the examination. Prior to the examination, the revenue agent will review any prior examination reports from the same taxpayer. This may lead to scrutiny of recurring issues or inclusion of other years’ returns in the examination. Of course, the revenue agent will also look at the return for unusual or questionable items.  . It is in this type of an environment that an audit under the NRP would occur.

What Should You Do?

An audit under the NRP is no different than any other type of IRS audit.  A poorly conducted audit can result in large additional tax adjustments and penalties and interest up to as much as 100% of the adjustment. Most local tax preparers are not equipped to represent you in an audit before the IRS. Using a tax attorney to help with an audit can significantly increase your chances of getting a better outcome. Many times individuals don’t realize that audits can go both ways, you may actually end up being owed money after an audit. A tax attorney can analyze your situation and find the best approach to take in order to get the best outcome. The IRS actually prefers working with professional tax representatives because it makes their job easier and helps the process move along more efficiently, which can actually result in a more favorable decision. Also, because your representative would deal directly with the agent, usually the audit can be completed without the need for the taxpayer to appear before the agent.

Why Contacting Your Congressman Will Usually Never Help You Resolve Your Tax Problems

Although being a constituent of your elected Congressman gives you reason to voice your concerns about agenda under your Congressman’s consideration, don’t think that just because you have personal tax problems that your Congressman will come to the rescue or be able to cut any bureaucratic tape.

It is true that every elected official has employees who do what is known as constituent service, helping people with thorny problems that may involve a federal agency. Most often, the problems they hear involve Social Security benefits, federal disability filings, veterans’ benefits and mortgage issues. Immigration requests involving small-business employees and newly married couples are common, too.  But when it comes to the Internal Revenue Service, your Congressman’s office will typically hand off you compliant or problem to the Office Of The Taxpayer Advocate for further processing and stay out of the loop.

Taxpayer Advocate Service

Congress created the Taxpayer Advocate Service in 1996 so for at least one thing that Congressman would not need to deal with their constituents’ tax problems directly.  You do not need to go through your Congressman to get to the Taxpayer Advocate Service but there are some important things and limitations you should be aware if you choose to contact the Taxpayer Advocate Service directly.Each state has at least one Local Taxpayer Advocate who is independent of the local IRS office and reports directly to the National Taxpayer Advocate. In California the offices at located in Fresno, Laguna Nigel, Los Angeles, Oakland, Sacramento, San Diego and San Jose.

Twice a year the National Taxpayer Advocate will independently submit reports to Congress.The first report, due by June 30, contains the objectives of the Taxpayer Advocate for the coming fiscal year (starting October 1). The second one, due by December 31, reports on activities of the Taxpayer Advocate during the fiscal year, including his or her initiatives to improve taxpayer services and IRS responsiveness, and a summary of at least 20 of the Most Serious Problems facing taxpayers.The National Taxpayer Advocate delivers these reports to the Senate Committee on Finance and the House Committee on Ways and Means with no prior review or comment from the Commissioner, the IRS Oversight Board, the Secretary of the Treasury, any other Treasury officer or employee, or the Office of Management and Budget.

Here are three things every taxpayer should know about the Taxpayer Advocate Service:

  1. Although the Taxpayer Advocate Service is an independent organization within the IRS, it is no substitute for independent legal and tax representation.
  2. While the Taxpayer Advocate Service attempts to help taxpayers whose problems are causing financial difficulty, this office has no power on its own to remedy your problems and must still deal with the appropriate department of the IRS.
  3. The Taxpayer Advocate Service will not get involved where you have not tried to resolve your tax problem through normal IRS channels.

You should also keep in mind that every taxpayer when interacting with the IRS enjoys the following rights referred to as the “Taxpayer Bill Of Rights”:

  • The Right to Be Informed.
  • The Right to Quality Service.
  • The Right to Pay No More than the Correct Amount of Tax.
  • The Right to Challenge the IRS’s Position and Be Heard.
  • The Right to Appeal an IRS Decision in an Independent Forum.
  • The Right to Finality.
  • The Right to Privacy.
  • The Right to Confidentiality.
  • The Right to Retain Representation.
  • The Right to a Fair and Just Tax System.

What Should You Do?

Now don’t get me wrong.  The Office Of The Taxpayer Advocate can be helpful in introducing change and improvements to how the IRS operates and they report directly to Congress with their suggestions.  But when you need independent and aggressive representation where all options are considered and you need an approach that “thinks outside the box”, your interests would likely be best served by exercising your right to retain the representation of your own tax counsel.