Can Cannabis Help College Students Be More Motivated?

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According to a report published by the American Psychological Association in the journal Experimental and Clinical Psychopharmacology, new analysis out of the University Of Memphis contradicts the perception among the general public that cannabis leads to amotivation and diminished effortful behavior.

The study examined the relation between cannabis use and effort-related decision making in a sample of 47 college students. Specifically, 25 students using cannabis (68% meeting criteria for Cannabis Use Disorder) and 22 students not using cannabis completed the Effort Expenditure for Rewards Task (EEfRT).  The EEfRT is a behavioral assessment given by psychologists.

The report stated: “Contrary to the amotivational syndrome hypothesis, college students using more cannabis were more likely to select the high-effort choice option, regardless of the reward magnitude, probability, and expected value of the overall reward. Although there was not a significant difference between cannabis use groups, there was a medium sized effect, lending consistent support for an association between cannabis use and greater high-effort choices.”

Researchers summarized in their impact statement in the report that that cannabis use by college students is associated with a greater likelihood of selecting high effort trials and that more studies with larger sample groups should be pursued.

Developments like this contradict the basis of classification of cannabis under Federal law which makes cannabis illegal.

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)

The medical use of cannabis is legal (with a doctor’s recommendation) in 37 states and Washington DC. Those 37 states being Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia.

The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico

Six tribal nations also legalized cannabis use – those 6 tribes being the Flandreau Santee Sioux Tribe (South Dakota), Oglala Lakota Sioux Tribe (South Dakota), Suquamish Tribe (Washington state), Squaxin Island Tribe (Washington state), Eastern Band of Cherokee Indians (North Carolina) and St. Regis Mohawk Tribe (New York).

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.

Tips On Holding Cryptocurrency In An IRA To Defer Taxation

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Tips On Holding Cryptocurrency In An IRA To Defer Taxation

Cryptocurrency was not well known and confusing for the general public to get comfortable with but with innovations in the industry starting in 2017, cryptocurrency is becoming more widely known and accepted as a means to do business. One of those innovations increasing the popularity of cryptocurrency is the introduction of a multi-currency wallet that holds Bitcoin Cash and Bitcoin Core in a non-custodial fashion. The wallet known as the “Bitcoin.com Wallet” allows users to store their private keys themselves which avoids the funds to be held by any third party. Since this wallet which became available in August 2017, it is believed that there are now over 81 million wallet users in 2022.

Taxation Of Cryptocurrency

Although both the general public and the crypto community refer to bitcoin, altcoin, etc. as “virtual currencies”, the IRS in 2014 issued Notice 2014-21 stating that it treats them as property for tax purposes. Therefore, selling, spending and even exchanging crypto for other tokens all likely have capital gain implications. Likewise, receiving it as compensation or by other means will be ordinary income.

Some would think that if bitcoin is property, trades should be tax deferred under the like-kind changes rues of IRC section 1031. Under that theory someone who owned Bitcoin could diversify their holdings into Ethereum or Litecoin, and plausibly tell the IRS it created no tax obligations. Unfortunately, the Tax Cuts & Jobs Act of 2017 does away with that loophole making it clear that “like kind exchanges” which lets people swap an asset for a similar one without triggering a tax obligation are not available for non-real estate assets.

While bitcoin receives most of the attention these days, it is only one of hundreds of cryptocurrencies. Everything discussed with regard to bitcoin taxation applies to all cryptocurrencies.

Here are the basic tax rules on specific cryptocurrency transactions:

  • Trading cryptocurrencies produces capital gains or losses, with the latter being able to offset gains and reduce tax.
  • Exchanging one token for another — for example, using Ethereum to purchase an altcoin — creates a taxable event. The token is treated as being sold, thus generating capital gains or losses.
  • Receiving payments in cryptocurrency in exchange for products or services or as salary is treated as ordinary income at the fair market value of the coin at the time of receipt.
  • Spending cryptocurrency is a tax event and may generate capital gains or losses, which can be short-term or long-term. For example, say you bought one coin for $500. If that coin was then worth $700 and you bought a $700 gift card, there is a $200 taxable gain. Depending on the holding period, it could be a short- or long-term capital gain subject to different rates.
  • Converting a cryptocurrency to U.S. dollars or another currency at a gain is a taxable event, as it is treated as being sold, thus generating capital gains.
  • Air drops are considered ordinary income on the day of the air drop. That value will become the basis of the coin. When it’s sold, exchanged, etc., there will be a capital gain.
  • Mining coins is considered ordinary income equal to the fair market value of the coin the day it was successfully mined.
  • Initial coin offerings do not fall under the IRS’s tax-free treatment for raising capital. Thus, they produce ordinary income to individuals and businesses alike.

So How Do The Rules Apply When Holding Cryptocurrency In An IRA?

IRC section 408(m) generally prohibits the investment of assets of an IRA (and any self-directed qualified plan account) in certain “collectibles” including precious metals; however, there are exceptions for certain coins and bullion.

The U.S. Tax Court reaffirmed the physical possession rule in, McNulty v. Commissioner of Internal Revenue, No. 1377-19 (U.S.T.C. Nov. 18, 2021), and this ruling could have a big impact on some cryptocurrency account holders.

In McNulty, the taxpayers (husband and wife) established a self-directed individual retirement account (IRA) under IRC section 408 and directed assets held in the IRA to invest in a single-member limited liability company (LLC). Mr. McNulty was the manager of the LLC that her IRA invested in. She directed the LLC to purchase American Eagle (AE) coins and took physical possession of the coins. IRS contended that the year she received physical custody of the AE coins resulted in a taxable distribution equal to the cost of the AE coins. The Tax Court agreed with IRS.

The Tax Court stated:

“Independent oversight by a third-party fiduciary to track and monitor investment activities is one of the key aspects of the statutory scheme. When coins or bullion are in the physical possession of the IRA owner (in whatever capacity the owner may be acting), there is no independent oversight that could prevent the owner from invading her retirement funds. This lack of oversight is clearly inconsistent with the statutory scheme. Personal control over the IRA assets by the IRA owner is against the very nature of an IRA.”

The Tax Court’s focus on the “taxpayer’s control” of an IRA asset can have far reaching implications for self-directed IRA’s beyond bullion coins.  In the case of cryptocurrency, holding cryptocurrency in a cold wallet that is controlled by the IRA owner would provide the IRA owner with “unfettered control”.  A cold wallet can be detached from the internet. Hardware wallets and paper wallets are both cold wallet options. Hardware wallets use a physical medium — typically in the shape of a USB stick — to store the wallet’s private keys, making them de facto unreachable to hackers or other malicious parties.

So if you are looking to invest in cryptocurrency through a self-directed IRA, it is best to hold your cryptocurrency on a licensed and insured crypto exchange in the name of the IRA to avoid the impact of the physical possession rule of IRC section 408(m).

IRS Suspicion Of Noncompliant Taxpayers In Cryptocurrency

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.

The IRS suspects that many cryptocurrency users have been evading taxes by not reporting crypto transactions on their tax returns given the millions of wallets already issued.

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

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

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

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

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

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

What Should You Do?

Especially now that like-exchange treatment is prohibited on non-real estate 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. Let a bitcoin tax attorney 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 elsewhere in California get you qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability.  Also, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.

How Israel’s Kibbutzim Is Capitalizing On Global Medical Cannabis Production

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Israel’s communal farms known as “kibbutzim” have been on the brink of extinction as Israel’s economy becomes more capitalist but some kibbutzim are thriving thanks to the addition of a new crop … cannabis.

Since 2016 when the Israeli government established a regulatory framework, dozens of kibbutzim in Israel have become active growers of cannabis. There are 270 kibbutzim and it is estimated that at least a third of them will be involved in cannabis.  Application to grow cannabis is made to the Israeli Ministry of Health.

The cannabis space set aside by kibbutzim depends whether production capacity is added to cultivation space which reportedly starts at 4,000 square meters and can be as high as 200,000 square meters.  A lot of this activity is in collaboration with private and public cannabis companies.

Under Israeli law, companies that generate more than 25% of their revenues through exports enjoy various tax exemptions and benefits and when adding the benefits of large swaths of land, unused building facilities and inexpensive labor that these Kibbutzim have, you can see why there is such a big interest in tapping these farms.

Israel’s Global Dominance In Medical Cannabis

Most people would be surprised to hear that Israel is the global leader in medical cannabis research. Not a surprise here considering that Israel is already known as an agricultural heavyweight and first allowed patients with qualifying conditions to use cannabis in the early 1990’s. Additionally, Israel does not have the federal law prohibition we have to endure. Israel’s embrace to allow for medical cannabis and medical cannabis research has opened the doors to allow scientists to conduct research without the fear of interruption by the government. The Israelis have been so successful in developing high quality cannabis strains that you cannot get anywhere else that they are posed to export this crop which some analysts believe could bring in as much as $4 billion in yearly revenue and improve the quality of ongoing medical research involving cannabis.  Also, in 2020 its government authorized the exports of medical cannabis which the government figures will contribute to the growth of this industry.

Now You Can Invest In Israeli Cannabis Companies.

The Jerusalem Post reported that the Tel Aviv Stock Exchange launched on December 28, 2020 a new index for nine medical cannabis companies.  The new index includes nine companies that are “primarily engaged in the fields of research, cultivation, sale or production and marketing of medical cannabis products”.  The index has a relatively low market cap of 1.7 billion shekels ($529 million) and is expected to serve as a “benchmark for active mutual funds that offer exposure to this emerging and growing sector”.

The Growing Trend Of American States And Indian Tribes In Legalizing Cannabis.

Medical marijuana is legal in 37 states.

The medical use of cannabis is legal (with a doctor’s recommendation) in 37 states and Washington DC. Those 37 states being Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 18 states.

Eighteen states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those 18 states being Alaska, Arizona, California, Colorado, Connecticut, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada, New Jersey, New Mexico, New York, Oregon, Vermont, Virginia and Washington and the territories of the Northern Mariana Islands and Guam.

Recreational marijuana is legal in 6 tribal nations.

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

In Contrast – Look At 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, former 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.

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.

U.S. Tax Law Unfavorable To Cannabis

The Internal Revenue Code treats businesses in the cannabis 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.

U.S. Banking Law Unfavorable To Cannabis

Cannabis-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry.  A tiny fraction of banks and alternative financial institutions are willing to work with cannabis companies.

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.  So it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

IRS Making It Easier For Taxpayers To Come Into The Voluntary Disclosure Program

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IRS Making It Easier For Taxpayers To Come Into The Voluntary Disclosure Program

A tax crime is complete on the day the false return was filed.

It is a federal crime for anyone to knowingly and willfully file an income tax return that he or she knows to be false in some material way. 26 U.S.C. § 7207 provides:

Any person who willfully delivers or discloses to the Secretary any list, return, account, statement, or other document, known by him to be fraudulent or to be false as to any material matter, shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both. Any person required pursuant to section 6047 (b), section 6104(d), or subsection (i) or (j) of section 527 to furnish any information to the Secretary or any other person who willfully furnishes to the Secretary or such other person any information known by him to be fraudulent or to be false as to any material matter shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both.

In filing false tax return cases, the Government does not need to prove that it has been deprived of any tax by reason of such filing of the false return; even if it is shown that additional taxes may be due, the person can still be held accountable because they willfully filed a false tax return.

Avoiding Criminal Prosecution By Submitting To Voluntary Disclosure

The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal Investigation of taking timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted.  It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution.  When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.  However, if the IRS has initiated a civil examination, regardless of whether it relates to undisclosed foreign accounts or undisclosed foreign entities, the taxpayer will not be eligible to come in under the IRS’s Voluntary Disclosure Practice.

Required Elements Of A Qualified Disclosure

IRS administrative practice recognizes that a taxpayer may still avoid prosecution by voluntarily disclosing a tax violation, provided that there is a qualifying disclosure that is (1) timely and (2) voluntary. A disclosure within the meaning of the practice means a communication that is truthful and complete, and the taxpayer cooperates with IRS personnel in determining the correct tax liability. Cooperation also includes making good faith arrangements to pay the unpaid tax and penalties “to the extent of the taxpayer’s actual ability to pay”.

Timely.

A disclosure is timely if it is received before the IRS has begun an inquiry that is (1) “likely to lead to the taxpayer” and (2) the taxpayer is reasonably thought to be aware” of that inquiry; or the disclosure is received before some triggering or prompting event has occurred (1) that is known by the taxpayer and (2) that triggering event is likely to cause an audit into the taxpayer’s liabilities.

Voluntary.

Voluntari­ness is tested by the following factors: (1) how far the IRS has gone in determin­ing the tax investigation potential of the taxpayer; (2) the extent of the taxpayer’s knowledge or awareness of the Service’s interest; and (3) what part the triggering event played in prompting the disclosure (where the disclosure is prompted by fear of a triggering event, it is not truly a voluntary disclosure).

No voluntary disclosure can be made by a taxpayer if an investigation by the Service has already begun. Therefore, once a taxpayer has been contacted by any Service function (whether it be the Service center, office examiner, revenue agent, or a special agent), the taxpayer cannot make a qualifying voluntary dis­closure under IRS practice.

A voluntary disclosure can be made even if the taxpayer does not know that the Service has selected the return for examination or investigation may be too restrictive. Consequently, if there is no indi­cation that the Service has started an examination or investigation, Tax Counsel may send a letter to the Service stating that tax returns of the taxpayer have been found to be incorrect and that amended returns will be filed as soon as they can be accurately and correctly prepared. This approach has the advantage of putting the taxpayer on record as making a voluntary dis­closure at a time when no known investigation is pending. However, neither the taxpayer nor the lawyer can be completely certain that the volun­tary disclosure will prevent the recommendation of criminal prosecution.

Form 14457, Voluntary Disclosure Practice Preclearance Request and Application

Form 14457 has been revised by IRS permitting taxpayers who may face criminal prosecution for willful violation of tax law to voluntarily disclose information to the IRS that they failed to previously disclose.

Updates and additions to this form include:

  • IRS Criminal Investigation now accepts photocopies, facsimiles and scans of taxpayer signatures. Previously, Part II of Form 14457 had to be mailed.
  • An expanded section for reporting virtual currency.
  • A penalty structure for employment tax and estate and gift issues.
  • A check-box for inability to pay in full.

Doug O’Donnell, Deputy Commissioner Services and Enforcement stated “This is an important form and process for people who recognize it’s better to step forward and address their tax situations head-on, before facing IRS enforcement action.  The revised form includes a number of updates, and we encourage people to review the guidelines and consult a trusted tax professional.”

“Quiet Disclosure”

Where no IRS examination or investigation is pending a taxpayer’s alternative is the preparation and filing of delinquent or amended returns. Such action is called a “Quiet Disclosure”.  The advantage of filing delinquent or amended returns without a communication drawing attention to them is that the returns may not even be examined after being received at the Service Center. In such an event, the taxpayer not only will have made a voluntary disclosure but will have avoided an examination as well. The disadvantage is that during the time the returns are being prepared, the taxpayer may be contacted by the Service and a voluntary disclosure prevented.  Another disadvantage is that the IRS could use the filed amended income tax returns to constitute an admission that the correct income and tax were willfully not reported and institute criminal prosecution.

What Should You Do?

There is no set formula as to whether a taxpayer should pursue a Voluntary Disclosure or Quiet Disclosure.  It really depends on a case by case basis which is why you are best served by consulting with a criminal tax attorney expert in evaluating these matters.  Your financial well being, as well as your personal freedom may depend on the right answers. If you or your accountant even suspects that you might be subject to a criminal or civil tax fraud penalty, 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 can determine how to respond to these inquiries and formulate an effective strategy.  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

 

Funding Limits On Federal Prosecutions Of State-Legal Medical Cannabis

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On February 4, 2022, the Congressional Research Service (“CRS”) issued a report on how different federal courts across the country are interpreting a spending bill rider that has generally shielded state medical cannabis programs from interference by the Department of Justice (“DOJ”).

The Growing Trend In Legalizing Cannabis.

Medical marijuana is legal in 37 states.

The medical use of cannabis is legal (with a doctor’s recommendation) in 37 states and Washington DC. Those 37 states being Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 18 states.

Eighteen states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those 18 states being Alaska, Arizona, California, Colorado, Connecticut, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada, New Jersey, New Mexico, New York, Oregon, Vermont, Virginia and Washington and the territories of the Northern Mariana Islands and Guam.

Recreational marijuana is legal in 6 tribal nations.

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

The 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.

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

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 appropriations rider by the House is subject to renewal each year by Congress and while this has been renewed each year it has not extended to recreational cannabis.  Furthermore, Congress yet has changed any of the tax or banking laws that pose challenges to the cannabis industry.

Divergence Of Opinion Among The Federal Courts

On its face, the appropriations rider bars DOJ from taking legal action against the states directly in order to prevent them from promulgating or enforcing medical marijuana laws. In addition, federal courts have interpreted the rider to prohibit certain federal prosecutions of private individuals or organizations that produce, distribute, or possess marijuana in accordance with state medical marijuana laws. In those cases, criminal defendants have invoked the rider before trial, seeking the dismissal of their indictments or injunctions barring prosecution. By contrast, courts have generally declined to apply the rider outside the context of initial criminal prosecutions. The two Federal circuits that have taken up this issue are the 1st and 9th circuits.

In United States v. McIntosh (9th Cir, 2016), the U.S. Court of Appeals for the Ninth Circuit considered the circumstances in which the appropriations rider bars CSA prosecution of marijuana-related activities. The court held that the rider prohibits the federal government only from preventing the implementation of those specific rules of state law that authorize the use, distribution, possession, or cultivation of medical marijuana. DOJ does not prevent the implementation of [such rules] when it prosecutes individuals who engage in conduct unauthorized under state medical marijuana laws. Individuals who do not strictly comply with all state-law conditions regarding the use, distribution, possession, and cultivation of medical marijuana have engaged in conduct that is unauthorized, and prosecuting such individuals does not violate [the rider]. Relying on McIntosh, the Ninth Circuit has issued several decisions allowing federal prosecution of individuals who did not “strictly comply” with state medical marijuana laws, notwithstanding the appropriations rider, and several district courts have followed that reasoning.

In United States v. Bilodeau (1st Cir., 2022), the U.S. Court of Appeals for the First Circuit also considered the scope of the appropriations rider. The defendants in Bilodeau were registered with the State of Maine to produce medical marijuana, but DOJ alleged that they distributed large quantities of marijuana to individuals who were not qualifying patients under Maine law, including recipients in other states. Following indictment for criminal CSA violations, the defendants sought to invoke the appropriations rider to bar their prosecutions. They argued that the rider “must be read to preclude the DOJ, under most circumstances, from prosecuting persons who possess state licenses to partake in medical marijuana activity.” DOJ instead urged the court to apply the Ninth Circuit’s standard, allowing prosecution unless the defendants could show that they acted in strict compliance with state medical marijuana laws. The First Circuit declined to adopt either of the proposed tests. As an initial matter, the court agreed with the Ninth Circuit that the rider means “DOJ may not spend funds to bring prosecutions if doing so prevents a state from giving practical effect to its medical marijuana laws.” However, the panel declined to adopt the Ninth Circuit’s holding that the rider bars prosecution only in cases where defendants strictly complied with state law. The court noted that the text of the rider does not explicitly require strict compliance with state law and that, given the complexity of state marijuana regulations, “the potential for technical noncompliance [with state law] is real enough that no person through any reasonable effort could always assure strict compliance.” Thus, the First Circuit concluded that requiring strict compliance with state law would likely chill state-legal medical marijuana activities and prevent the states from giving effect to their medical marijuana laws. On the other hand, the court also rejected the defendants’ more expansive reading of the rider, reasoning that “Congress surely did not intend for the rider to provide a safe harbor to all caregivers with facially valid documents without regard for blatantly illegitimate activity.” Ultimately, while the First Circuit held that the rider bars CSA prosecution in at least some cases where the defendant has committed minor technical violations of state medical marijuana laws, it declined to “fully define [the] precise boundaries” of its alternative standard. On the record before it, the court concluded that “the defendants’ cultivation, possession, and distribution of marijuana aimed at supplying persons whom no defendant ever thought were qualifying patients under Maine law” and that a CSA conviction in those circumstances would not “prevent Maine’s medical marijuana laws from having their intended practical effect.”

What Should You Do?

Clearly, to avail yourself of the protections of the amendment, you must be on the medical cannabis side and you must be in strict 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.

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.

IRS To Consolidate Processing Centers Despite Huge Backlog Of Unanswered Taxpayer Inquiries

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IRS To Consolidate Processing Centers Despite Huge Backlog Of Unanswered Taxpayer Inquiries

On February 7, 2022 the Treasury Inspector General For Tax Administration (“TIGTA”) issued a report evaluating the IRS’s efforts to close the Fresno California Tax Processing Center and its continued planned closure of the Austin Texas Tax Processing Center.

The IRS entered this filing season with several million original and amended returns filed by individuals and businesses that have not been processed due to challenges of the COVID pandemic.  Yet despite the IRS facing a huge backlog, it continues with its September 2016 plan to consolidate Tax Processing Centers to two end-state sites (Kansas City, Missouri, and Ogden, Utah).

The IRS says that this consolidation is warranted because tax return projections show that electronic filing will continue to increase, resulting in decreased paper processing operations at the Tax Processing Centers. As a result, the IRS continues its Tax Processing Center consolidations and will end its Submission Processing operations in Fresno, California, by September 2021 and Austin, Texas, by September 2024. At the end of this consolidation process, two Tax Processing Center locations, Kansas City and Ogden, will remain.

What TIGTA Found –

As of August 2021, TIGTA estimates that the IRS is facing a total staffing deficiency in its Submission Processing function of around 2,598 employees. Although the IRS has several initiatives underway to help address its hiring shortages, to date these approaches have not been successful. Further, the hiring shortfalls have been exacerbated since the COVID pandemic and are resulting in millions of tax returns not being timely processed, refunds not being timely issued, and taxpayers not timely receiving assistance with their tax account issues.

In addition, the transfer of work not directly related to the processing of tax returns further hampers the Submission Processing function’s ability to deliver its core mission of processing tax returns and addressing tax accounts. For example, the Fresno Tax Processing Center transferred work related to three specialty programs to the Kansas City and Ogden Tax Processing Centers, each of which had and continue to have millions of returns not processed and other account work remaining unworked. This specialty program work requires resources which could otherwise be directed to process the backlogged work.

Finally, outdated mail processing equipment is contributing to the loss of millions of dollars in revenue and the inefficient use of limited resources. This places its operations at risk for inefficient and untimely execution of tax return processing. For example, this outdated equipment cannot properly detect remittances. In Calendar Year 2021 alone, the IRS reports $56 million in lost opportunity costs due to untimely check deposits. Yet the cost to replace or rebuild the current equipment is only a fraction of those lost costs, ranging from $360,000 to $650,000.

TIGTA’s Recommendations to IRS

TIGTA made six recommendations for improvements, including that the IRS postpone the closure of the Austin Tax Processing Center until hiring and backlog shortages are addressed.

Here are the recommendations and IRS’ responses …

# TIGTA Recommendation IRS Response
1 Allocate adequate funding to support Submission Processing function transition of its clerical staff to the new, higher graded position descriptions.

 

 The IRS agreed with this recommendation and has submitted a request for approximately $39 million under the Fiscal Year 2024 budget formulation process to provide a permanent increase in annual funding levels that will support the cost of upgrading the positions and maintaining them at the higher level. IRS management is also evaluating options and the associated trade-offs involved to upgrade the position descriptions from existing appropriations. Additionally, management stated that the recent 2.2% increase to the General Schedule Base Pay Scale, plus the adjustment for locality pay, raised a portion of the affected employees above the $15 per hour rate, which should alleviate some of the pressure of competing with outside employers for workers.

 
2 Postpone any further steps for closing the Austin Tax Processing Center until hiring shortages and backlogs of work at end-state sites are adequately addressed.

 

 The IRS disagreed with this recommendation. IRS management stated that the Submission Processing Center Consolidation revalidation is ongoing and a decision on the Austin consolidation will be made once the revalidation is completed. This decision will then be communicated to all Submission Processing employees.

 
3 Identify and implement interim solutions that will address the resource constraints currently being placed on the Submission Processing function due its backlog.

 

 The IRS agreed with this recommendation and plans to continue meeting with stakeholders on a regular basis to identify interim solutions that accommodate resource needs. IRS management also plans to continue pursuing potential opportunities for automation of data entry into the Treasury Financial Crimes Enforcement Network web portal throughout Fiscal Year 2022.

 
4 Ensure that timely advancements are made to the digital platform of Forms 3949-A, Information Referral To Report Suspected Tax Law Violations By A Person Or A Business, to develop automatic routing of the forms directly to the business units to alleviate the Submission Processing workload.

 

 The IRS agreed with this recommendation and plans to identify those capabilities required to support the implementation of automatic routing of Forms 3949-A directly to business units.

 
5 Evaluate the placement of USDA transcript work if the IRS does not meet its automation targets or the inventories do not continue to decline as anticipated.

 

 The IRS agreed with this recommendation. IRS management shares weekly updates with executive leadership to inform them of the program’s status and confirm proper placement of the USDA transcript program. As of September 20, 2021, automation for the USDA program is shown to be fully paperless, and 3,078 counties have suspended mailing Form CCC-941, Commodity Credit Corporation Average Adjusted Gross Income (AGI) Certification and Consent to Disclosure of Tax Information, requests to the IRS. IRS management has also suspended mailing reject notices to the USDA in lieu of electronic delivery. As anticipated, the inventories declined to the point that all electronic USDA inventory is current and timely.

 
6 Ensure that efforts to evaluate and purchase updated or new mail opening/sorting technology are timely executed.

 

 The IRS agreed with this recommendation and plans to take the actions necessary for the evaluation and purchase of a replacement for the equipment used for opening and sorting mail and ensure that those necessary actions are carried out timely. Because this procurement action is dependent on funding and is subject to competing priorities, IRS management will reevaluate continuing actions if implementation is not successful within three years.

 

An Opportunity For Taxpayers Who Owe The IRS

Do not think that if you owe the IRS your tax problem will disappear because of the measures being considered by the government. Instead you should be utilizing this valuable time to get yourself prepared so that when activity in this nation regains momentum, 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 2022, taxpayers who expect to owe for 2021 should have their 2021 income tax returns done now so that the 2021 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2021.

Remember that COVID 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.

Also, the IRS will continue to take steps where necessary to protect all applicable statutes of limitations. In instances where statute expirations might be jeopardized during this period and a taxpayer is not agreeing to extend such, the IRS will issue Notices of Deficiency and pursue other similar actions to protect the interests of the government in preserving such statute.

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

What Should You Do?

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

IRS Continues To Expand Tax Relief From COVID

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IRS Continues To Expand Tax Relief From COVID

On February 9, 2022 the IRS announced additional relief for taxpayers suspending the mailing of certain enforcement letters.

IRS Coronavirus Tax Relief

The IRS has established a special section focused on steps to help taxpayers, businesses and others affected by the coronavirus and as information becomes available, the IRS will be updating this special page on its website.

The executive branch of the Federal government declared the coronavirus pandemic a national emergency. Therefore, under Sec. 7508A, the declaration of an emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, P.L. 100-707, the IRS is allowed to delay certain tax filing and payment deadlines.  While the IRS has not delayed the filing deadlines for 2021 tax returns, as part of ongoing efforts to provide additional help for people during this period the IRS is suspending more than a dozen additional letters, including the mailing of automated collection notices normally issued when a taxpayer owes additional tax, and the IRS has no record of a taxpayer filing a tax return.

Suspended IRS Notices

The IRS entered this filing season with several million original and amended returns filed by individuals and businesses that have not been processed due to challenges of the COVID pandemic.  With the IRS facing a huge backlog, it had to take this step to help avoid confusion for taxpayers and tax professionals.

The suspended notices include:

Individual Taxpayer Notices
Notice/Letter Number Title Description
CP80 Unfiled Tax Return This notice is generally sent when the IRS credited payments and/or other credits to a taxpayer’s account for the tax period shown on the notice, but the IRS hasn’t received a tax return for that tax period.
CP59 and CP 759 (Spanish) Unfiled Tax Return(s) – 1st Notice IRS sends this notice when there is no record of a prior year return being filed.
CP516 and CP616 (Spanish) Unfiled Tax Returns – 2nd Notice Request for information on a delinquent return as there is no record of a return filed.
CP518 and CP618 (Spanish) Final Notice – Return Delinquency This is a final reminder notice when there is no record of a prior year(s) return filed.
CP501 Balance Due – 1st Notice This notice is a reminder that there is an outstanding balance on a taxpayer’s accounts.
CP503 Balance Due – 2nd Notice This notice is the second reminder that a there is an outstanding balance on a taxpayer’s accounts.
CP504 Final Balance Due Notice – 3rd Notice, Intent to Levy The IRS sends this notice when a payment has not been received for an unpaid balance. This notice is a Notice of Intent to Levy (Internal Revenue Code Section 6331 (d)).
2802C Withholding Compliance letter This letter is mailed to taxpayers who have been identified as having under-withholding of Federal tax from their wages. This letter provides instructions to the taxpayer on how to properly correct their tax withholding.
Business Notices
CP259 and CP959 (Spanish) Return Delinquency IRS sends this notice when there is no record of a prior year return being filed.
CP518 and CP618 (Spanish) Final Notice – Return Delinquency This is a final reminder notice that we still have no record of a prior year tax return(s).

These automatic notices have been temporarily stopped until the backlog is worked through. The IRS says it will continue to assess the inventory of prior year returns to determine the appropriate time to resume the notices.

While the suspension of these notices started February 9th, some taxpayers may still receive these notices during the next few weeks as they were in the works of being sent or generated prior to today. Also, keep in mind that this suspension does not cover all IRS notices as many are legally required to be issued within a certain timeframe.

An Opportunity For Taxpayers Who Owe The IRS

Do not think that if you owe the IRS your tax problem will disappear because of the measures being considered by the government. Instead you should be utilizing this valuable time to get yourself prepared so that when activity in this nation regains momentum, 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 2022, taxpayers who expect to owe for 2021 should have their 2021 income tax returns done now so that the 2021 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2021.

Remember that COVID 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.

Also, the IRS will continue to take steps where necessary to protect all applicable statutes of limitations. In instances where statute expirations might be jeopardized during this period and a taxpayer is not agreeing to extend such, the IRS will issue Notices of Deficiency and pursue other similar actions to protect the interests of the government in preserving such statute.

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

What Should You Do?

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

 

Justice Department Shuts Down Three Tax Return Preparation Businesses

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Justice Department Shuts Down Three Tax Return Preparation Businesses

Recently in three separate cases, the U.S. Justice Department (“DOJ”) successfully secured injunctions from U.S Federal District Courts barring certain tax return preparation businesses from preparing tax returns and in some cases ordering the tax return preparers to disgorge the fees they obtained by preparing false and fraudulent tax returns.

Terance Price – Mississippi

On January 28, 2022, DOJ announced that a federal court in the Southern District of Mississippi has permanently barred Terance Price, a Mississippi tax return preparer, from owning or operating a tax return preparation business and preparing tax returns for others.

The permanent injunction is against Terance Price, both individually and doing business as Superior Taxes. The court entered the injunction after Price failed to respond to the complaint the government served on him.

The complaint alleged that Price, who began operating his tax preparation business in 2015, knowingly took unreasonable positions on returns he prepared that understated the tax his customers owed, overstated the refunds owed to his clients, or both. In particular, the complaint alleged that Price prepared returns that falsely claimed residential energy credits, fuel tax credits and unreimbursed employee business expenses.

The government further alleged in the complaint that Price has filed hundreds of tax returns since 2015, and that he has filed tax returns using other tax preparers’ personal identifying information. According to the complaint, the IRS assessed penalties against Price for failing to make reasonable inquiries to ensure that his customers were legitimately entitled to various tax credits, and Price has not paid those penalties.

Karla Welch – Florida

On February 2, 2022, DOJ announced that it filed a civil injunction suit to bar Karla Welch and her businesses from owning or operating a tax preparation business and preparing tax returns. The complaint also requests that the court require the defendants to disgorge the fees they obtained by preparing false and fraudulent tax returns.

The complaint, filed in the U.S. District Court for the Middle District of Florida, alleges that Welch, through Karla R. Welch LLC and Kwik Services LLC, owns and operates a tax preparation business with as many as 12 stores in Florida, Georgia and North Carolina. According to the complaint, Welch and her businesses prepare and file tax returns to falsely increase their customers’ refunds, and profit through high and often undisclosed preparation fees at the expense of their customers and the Treasury. The complaint alleges that the defendants prepared returns for customers that:

  • Falsely claim the Earned Income Tax Credit
  • Report fabricated businesses and related business income and expenses
  • Report fabricated deductions, including for purported job-related expenses
  • Claim false education credits.

Wendell Devallon and Berald Dominique – Florida

On February 4, 2022, DOJ announced that a federal court in the Southern District of Florida permanently as of February 3, 2022 barred Wendell Devallon and Berald Dominique, co-owners of Tax Time Group Inc., from preparing federal income tax returns or operating any tax return preparation business in the future. The court also ordered the tax preparers to pay $353,000 in disgorgement to the United States.

The civil complaint filed in the case alleged that Wendell Devallon and Berald Dominique, co-owners of Tax Time Group Inc., prepared tax returns for customers that claimed fraudulent self-employment expenses, fictitious education credits, false fuel tax credits and fake charitable contributions, among other schemes. The complaint also alleged that Devallon and Dominique acted as “ghost” preparers, meaning that they acted as paid tax return preparers but did not sign the returns they prepared, as required by law.

In a June 2021 order, the court found the defendants in contempt for violating a preliminary injunction that restricted their tax preparation activities while this case was pending. Devallon, Dominique and Tax Time Group consented to entry of the court’s contempt order and admitted that sufficient evidence existed to show that they had violated the preliminary injunction. In August 2021, the court entered an order requiring the defendants to pay $211,000 in sanctions for their violations of the preliminary injunction.

The February 3rd permanent injunction, to which Devallon, Dominique and Tax Time Group consented, forever bars them from any involvement in the preparation of federal tax returns. They must immediately close and cease all operations at any Tax Time Group office location, including the company’s North Lauderdale offices located at 995 Rock Island Road and 1675 S State Rd 7. They must also pay an additional $142,000 to the United States for their fraudulent return preparation activities that pre-dated the complaint. The permanent injunction requires Devallon and Dominique to give up their ownership of the “Tax Time Group” brand. If they sell the business, all proceeds will be applied to the $353,000 they must pay the United States. If Devallon, Dominique or Tax Time Group is found to have prepared another return, they must pay the United States $2,000 plus any fees they received for preparing the return.

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

“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”.

The Office of the Chief of IRS Criminal Investigation (“CI”) has previously stated that “Millions of taxpayers put their trust in tax professionals to prepare accurate and lawful returns. Unfortunately, a few bad apples take advantage of that trust for their own greed and profit. CI’s special agents are highly skilled at unraveling fraudulent schemes. With our partners in other agencies and the private sector, we are dismantling these crooked enterprises and enforcing our tax laws.”

What Should You Do?

Whether you are a victim of 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

Mississippi Becomes The 37th State To Legalize Medical Cannabis

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In 2020, voters in Mississippi approved Initiative 65, a ballot measure to legalize medical cannabis; however, last year the state’s Supreme Court overturned it and invalidated the ballot initiative.  That then set the state for the state legislature to pass legalization.  On January 26, 2022, both the Mississippi House of Representatives and the state’s Senate voted overwhelmingly to approve SB 2095, the bill that will legalize medical cannabis in the state. The House voted 104-13 and the Senate voted 46-4 to approve the bill, sending it to Governor Tate Reeves’ desk who signed the bill into law on February 2, 2022.

The Growing Trend In Legalizing Cannabis.

Medical marijuana is legal in 37 states.

The medical use of cannabis is legal (with a doctor’s recommendation) in 37 states and Washington DC. Those 37 states being Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 18 states.

Eighteen states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those 18 states being Alaska, Arizona, California, Colorado, Connecticut, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada, New Jersey, New Mexico, New York, Oregon, Vermont, Virginia and Washington and the territories of the Northern Mariana Islands and Guam.

Recreational marijuana is legal in 6 tribal nations.

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

Conflict With Federal Law.

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.

Higher Taxes Still Remain

While the developments listed above are favorable for cannabis business, it still remains to be seen whether the Federal government will respond favorably and 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.  So it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

 

What Taxpayers Who Pay Business Expenses With A Credit Card Can Learn From A Recent Investigation Made By The Treasury Inspector General for Tax Administration

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What Taxpayers Who Pay Business Expenses With A Credit Card Can Learn From A Recent Investigation Made By The Treasury Inspector General for Tax Administration

On January 28, 2022, the Treasury Inspector General for Tax Administration (TIGTA) released its audit report citing violations of IRS officials improperly charging expenses on credit cards.

Why TIGTA Did This Audit

This audit was initiated because the Government Charge Card Abuse Prevention Act of 2012 (Charge Card Act), signed into law on October 5, 2012, requires each agency with more than $10 million in annual purchase card spending to submit semiannual reports of employee purchase card violations and the disposition of those violations, including any disciplinary actions taken. These semiannual reports (Purchase Card Violations Reports) are prepared by the agency head, e.g., the Department of the Treasury, and reviewed by the Inspectors General prior to the agency submitting the report to the Office of Management and Budget. The overall objective of this review was to assess whether the IRS complied with the Charge Card Act requirements for the period April 1, 2021, through September 30, 2021, and the status of prior Government charge card recommendations.

What The TIGTA Found –

The TIGTA reviewed the IRS’s purchase card program finding that controls are generally effective, and the number of purchase card violations identified by the IRS Credit Card Services Branch were minimal and generally for nominal amounts.

For the period of April 1, 2021, through September 30, 2021, the IRS identified 11 instances of confirmed purchase card violations totaling approximately $6,255, including the purchase of items such as toner cartridges and desktop supplies without prior management funding approval. There were nine instances in which the purchase cardholder did not receive required funding approvals prior to conducting the transaction, one that exceeded the single transaction purchase limit, and one personal use item. The 11 employees received disciplinary and nondisciplinary actions ranging from cautionary letters or notices to suspension.

Summary of IRS Purchase Card Violations 

Source: TIGTA analysis of IRS purchase card violations in the Automated Labor and Employee Relations Tracking System.

The Credit Card Services Branch also identified three purchase card transactions, totaling approximately $231, that did not comply with the IRS’s internal charge card policy guidance (for example, information technology items such as computer adaptors must be purchased by the Information Technology organization).

Impact on Taxpayers

Federal audits of agency charge card programs have found varying degrees of fraud, waste, and abuse. The Charge Card Act requires Executive Branch agencies to establish and maintain safeguards and internal controls for Government charge card programs. Additionally, inappropriate use of Government charge cards does not promote economic and efficient use of publically funded resources.

Taxpayers Using Credit Cards To Pay Business Expenses

Taxpayers who are selected for audit by the IRS and pay business expenses with a credit card will face the same scrutiny as IRS officials who were audited by the TIGTA.

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 distributor and this was paid using a credit card, you have proof that you paid the expense even if by the end of the calendar year you have not paid off the credit card.  This rule applies whether you are a cash or an accrual basis taxpayer.

Step Two: Deductibility Of The Expense.

Next you must prove that an expense is actually tax deductible. This is when having a copy of the bill or invoice is essential as it will show what was purchased and should support its business purpose.  If you do not have a copy of the bill or invoice, there are other ways to support deductibility such as the taxpayer’s testimony or advocating that a business could not operate unless it paid this essential expense (an example would be bills for electricity).

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.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.