IRS Looking For Taxpayers To Report Gig Economy Income, Virtual Currency Transactions, And Foreign Source Income And Assets

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IRS Looking For Taxpayers To Report Gig Economy Income, Virtual Currency Transactions, And Foreign Source Income And Assets

Chances are you are involved in one of these areas –

  1. Income from the Gig Economy,
  2. Dealing with Virtual Currency, or
  3. Having Foreign Source Income And Assets.

If so, pay particular attention to what the IRS will be looking for on your 2021 income tax return.

Gig economy earnings are taxable

Generally, income earned from the gig economy is taxable and must be reported to the IRS. The gig economy is activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website. Taxpayers must report income earned from the gig economy on a tax return, even if the income is:

  • From part-time, temporary or side work,
  • Not reported on an information return form – like a Form 1099-K, 1099-MISC, W-2 or other income statement or
  • Paid in any form, including cash, property, goods or virtual currency.

TAX TIP – If you incurred expenses to produce this income, those expenses should be reported on your tax return so you do not pay more in tax than what the law requires.

Virtual currency reporting and tax requirements

Again for 2021, there is a question at the top of Form 1040 and Form 1040-SR asking about virtual currency transactions. All taxpayers filing these forms must check the box indicating either “yes” or “no.” A transaction involving virtual currency includes, but is not limited to:

  • The receipt of virtual currency as payment for goods or services provided;
  • The receipt or transfer of virtual currency for free (without providing any consideration) that does not qualify as a bona fide gift;
  • The receipt of new virtual currency as a result of mining and staking activities;
  • The receipt of virtual currency as a result of a hard fork;
  • An exchange of virtual currency for property, goods or services;
  • An exchange/trade of virtual currency for another virtual currency;
  • A sale of virtual currency; and
  • Any other disposition of a financial interest in virtual currency.

If an individual disposed of any virtual currency that was held as a capital asset through a sale, exchange or transfer, they should check “Yes” and use Form 8949 to figure their capital gain or loss and report it on Schedule D (Form 1040).

If they received any virtual currency as compensation for services or disposed of any virtual currency they held for sale to customers in a trade or business, they must report the income as they would report other income of the same type (for example, W-2 wages on Form 1040 or 1040-SR, line 1, or inventory or services from Schedule C on Schedule 1).

TAX TIP – Make sure to report the basis of any virtual currency disposed of which will reduce your gain so you do not pay more in tax than what the law requires.

Reporting Foreign Source Income

A U.S. citizen or resident alien’s worldwide income is generally subject to U.S. income tax, regardless of where they live. They’re also subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States.

U.S. citizens and resident aliens must report unearned income, such as interest, dividends, and pensions, from sources outside the United States unless exempt by law or a tax treaty. They must also report earned income, such as wages and tips, from sources outside the United States. An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income Exclusion or the Foreign Tax Credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.

TAX TIP – Make sure you file a tax return on a timely basis to claim these benefits. If both your tax home and abode are outside the United States and Puerto Rico, you have until June 15, 2022 to file your tax return or file an extension (to October 15, 2022).  Those serving in the military outside the U.S. and Puerto Rico on the regular due date of their tax return also have until June 15, 2022 to file your tax return or file an extension (to October 15, 2022).

Reporting required for foreign accounts and assets

Federal law requires U.S. citizens and resident aliens to report their worldwide income, including income from foreign trusts and foreign bank and other financial accounts. 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.

In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.

Further, separate from reporting specified foreign financial assets on their tax return, taxpayers with an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2020, must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-filing System website.

TAX TIP – The deadline for filing the annual Report of Foreign Bank and Financial Accounts (FBAR) is the same as that of Form 1040. FinCEN grants filers who missed the original deadline an automatic extension until October 15, 2022, to file the FBAR. There is no need to request this extension.

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?

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), the San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you and if you are involved in crypto-currency, check out what a Bitcoin tax attorney can do for you.

Getting Ready For Tax Season 2022 – Did You Receive Your Third Round of Economic Impact Payments from IRS?

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Getting Ready For Tax Season 2022 – Did You Receive Your Third Round of Economic Impact Payments from IRS?

The IRS announced that as of February 26, 2022 all third-round Economic Impact Payments (EIP) have been issued and reminds people how to claim any remaining stimulus payment they’re entitled to on their 2021 income tax return as part of the 2021 Recovery Rebate Credit.

The third round of EIP is authorized by the American Rescue Plan Act (ARPA) of 2021 which expanded the Child Tax Credit (CTC) for tax year 2021 only. Generally, this credit will increase the amount of your tax refund or decrease the amount of the tax you owe.

For tax year 2021, the Child Tax Credit is increased from $2,000 per qualifying child to:

  • $3,600 for children ages 5 and under at the end of 2021; and
  • $3,000 for children ages 6 through 17 at the end of 2021.

Parents of a child born in 2021 – or parents and guardians who added a new child to their family in 2021 – did not receive a third-round Economic Impact Payment for that child and may be eligible to receive up to $1,400 for the child by claiming the Recovery Rebate Credit.

Who can claim the Recovery Rebate Credit?

Eligible individuals who did not receive the full amount of EIP may claim the Recovery Rebate Credit on their 2021 Form 1040 or 1040-SR. To determine whether you are an eligible individual or the amount of your Recovery Rebate Credit, complete the Recovery Rebate Credit Worksheet in the Instructions for Form 1040 and Form 1040-SR.

Generally, you are eligible to claim the Recovery Rebate Credit if you were a U.S. citizen or U.S. resident alien in 2021, cannot be claimed as a dependent of another taxpayer for tax year 2021, and have a Social Security number valid for employment that is issued before the due date of your 2021 tax return (including extensions).

You must file Form 1040 or Form 1040-SR to claim the Recovery Rebate Credit even if you are normally not required to file a tax return.

Be On The Look0Out For ATC Letter From IRS

To help taxpayers reconcile and receive all of the Child Tax Credits to which they are entitled, the IRS will send Letter 6419, 2021 advance CTC, starting late December, 2021 and continuing into January 2022. The letter will include the total amount of advance Child Tax Credit payments taxpayers received in 2021 and the number of qualifying children used to calculate the advance payments. Taxpayers should provide this letter to their tax preparer along with their 2021 tax documents.

Families who received advance payments will need to file a 2021 tax return and compare the advance Child Tax Credit payments they received in 2021 with the amount of the Child Tax Credit they can properly claim on their 2021 tax return.

Eligible families who did not receive any advance Child Tax Credit payments can claim the full amount of the Child Tax Credit on their 2021 federal tax return, filed in 2022. This includes families who don’t normally need to file a tax return.

Your Recovery Rebate Credit amount will be phased out if your adjusted gross income for 2021 exceeds:

$150,000 if you are married filing a joint return or filing as a qualifying widow or widower,

$112,500 if you are using the head of household filing status, or

$75,000 if you are using any other filing status.

What If I Received More Than What I Was Entitled To?

If you received more than you were entitled to, the IRS does not require you to pay the money back nor is any such ineligible amount added on to your 2021 taxes.  Taxpayers whose incomes increased in 2021 compared with their earlier tax returns which the IRS relied on to determine whether they qualified for the payments, may be in this situation.

Will I owe taxes on the stimulus checks?

No, because the stimulus checks are not considered income by the IRS but instead are prepaid tax credits for your 2021 tax return, authorized by the ARPA of 2021.

Beware Of New IRS Scam!

You get a call from someone claiming to be working for the IRS claiming:

 “We need your personal information in order for you to claim the coronavirus stimulus money.”

This appears to be an identity theft scheme to obtain recipients’ personal and financial information so the scammers can provide the IRS with their banking information to get your economic impact payment deposited into their account.  In reality, the IRS WILL NOT CALL YOU! Federal aid will either be deposited via account information the IRS already has from your tax filings or they will send you a check.

Where can I get more information?

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.  You can also check out the KahnTaxLaw Coronavirus Resource Center.

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. With the passing of 2021, taxpayers who expect to owe for 2021 should have their 2021 income tax returns done as early as possible in 2022 so that the 2021 liability can be rolled over into any proposal and the requirement to make estimated tax payments will start for 2022.

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

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.

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 crypto currency, check out what a bitcoin tax attorney can do for you.

 

Getting Ready For Tax Season 2022 – What You Need To Know About Reporting Cryptocurrency.

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Getting Ready For Tax Season 2022 – What You Need To Know About Reporting Cryptocurrency.

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

The IRS thinks this is the case which is why the IRS has stepped up its investigation efforts to uncover non-compliant taxpayers just like the IRS successfully did in its investigation of the Swiss banks leading Congress to enact the Foreign Account Tax Compliance Act (“FATCA”).  FATCA forces foreign banks to disclose information on U.S. account holders which the IRS receives and matches the information reported by U.S. taxpayers.  No longer can taxpayers avoid reporting income on their foreign bank accounts.  No longer can taxpayers avoid disclosing their foreign bank accounts.

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

How To Report Cryptocurrency On Your 2021 Income Tax Return.

The IRS treats cryptocurrencies like property, meaning that anytime you spend, exchange, or sell your cryptocurrency, you create a taxable event. So just like stocks, you would look at how much you paid for your cryptocurrency, which is the cost basis, and the market value at the time you spent it or sales price when you sold it. That difference if disposed at a gain is subject to tax.  If disposed at a loss, that loss can offset your capital gains.  You would report these transactions on Form 8949, Sales And Other Dispositions Of Capital Assets.

In determining the cost basis of the cryptocurrency disposed, you get to pick and choose which cryptocurrency acquisition was the source of the disposition.  To show the smallest gain (or largest loss), you should pick the most expensive acquisition of that cryptocurrency later disposed.  This accounting method is known as “HIFO” accounting.  HIFO stands for “highest in, first out”.   By keeping detailed records of your cryptocurrency transactions and cost basis to employ this method of accounting, a taxpayer should be able to save on taxes.

How IRS Targets Cryptocurrency.

The IRS has one of the most extensive data collections in the world. Traditionally its power to enforce has come through the matching of data. For example, you received a W-2 Form from your employer showing how much you earned. That same form is submitted by your employer to the IRS. Now the IRS can match your return to that form to make sure you are reporting the income. The same thing goes for 1099 forms showing your earnings from miscellaneous income, gambling winnings, interest and dividend income, sales of assets, deductions, and so on.

But with Bitcoin and other cryptocurrencies, there is no such third-party reporting.  Digital exchanges are not broker-regulated by the IRS. Exchanges do not issue a 1099 form, nor do they calculate gains or cost basis for the trader.

On May 20, 2021, U.S. Department Of Treasury released a report that included a set of proposed tax compliance initiatives with the goal of closing the gap between taxes owed and taxes actually paid. These measures are encompassed in the American Families Plan, which establishes rules for the proper reporting of cryptocurrency including a new rule that would require businesses to file a current transaction report when they receive cryptocurrency worth more than $10,000, just as most businesses are required to report cash payments in these amounts.

On August 10, 2021, H.R. 3684, known as the Infrastructure Investment and Jobs Act, was passed by the Senate.  Although this bill has yet to be considered by the House of Representatives, it includes a provision that would require broker reporting of crypto-asset transfers. Section 80603 of the bill imposes new crypto-assets information reporting requirements on brokers. The Sec. 6045(c)(1) definition of “broker” is expanded to include anyone who for consideration effectuates “transfers of digital assets on behalf of another person”.  For these purposes, “digital asset” is defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology.”  Furthermore, the bill would amend Sec. 6045A to require brokers to provide information returns reporting any transfers of digital assets to accounts that are not maintained by a broker.

But the IRS does not stop there …

Chainalysis Reactor Software

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

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

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

IRS Access To Cryptocurrency Transactions.

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

ON MARCH 16, 2018 COINBASE COMPLIED WITH THIS SUMMONS AND TURNED OVER DATA OF 14,355 ACCOUNT HOLDERS TO IRS.

Now while this net may not pick up taxpayers whose accounts have less than $20,000 in any one transaction type (buy, sell, send, or receive) in any one year from 2013 to 2015, it should be clear that this is the first step for the IRS to crush non-compliance for all taxpayers involved with cryptocurrency just like the IRS was successful in battling taxpayers having undisclosed foreign bank accounts.

10,000 Cryptocurrency Owners Receiving Warning Letters From The IRS

After years of analyzing data from third parties involved in the cryptocurrency exchanges, the IRS announced in a press release on July 26, 2019 that it has started sending letters to cryptocurrency owners advising them to report their cryptocurrency transactions and pay their taxes. More than 10,000 taxpayers have been identified by IRS as being involved in cryptocurrency transactions but who the IRS believes may not have been compliant in reporting these transactions on their tax returns.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

Notices Being Sent To Taxpayers Are The First Step In IRS Enforcement Action

The IRS is using three types of notices to send to more than 10,000 taxpayers by the end of August 2019 – notices 6173, 6174 or 6174-A. All three notices indicate the IRS has information that the taxpayer receiving the notice currently has or has had virtual currency. However, it is Letter 6173 that is most serious as it requires a signature from the recipient under perjury that they are compliant with the U.S. tax code or requiring taxpayers to respond to the IRS and either file delinquent returns for tax years 2013 through 2017 or amend previously filed returns and include the applicable forms or schedules reporting cryptocurrency transactions. If you receive a Letter 6173, it should be a virtual certainty that you will be selected for examination.

If you receive Letter 6173, you should consult with a tax attorney as the submission of a statement signed under penalties of perjury that is false can result in serious consequences including criminal prosecution.

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

Since 2019, Form 1040 includes the following checkbox question:

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

Taxpayers will now be required to check the appropriate box to answer the virtual currency question. This requirement is similar to how the IRS includes questions on Schedule B inquiring whether a taxpayer has foreign bank accounts.

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

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

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

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

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

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

Civil Fraud – Normally the IRS will impose a negligence penalty of 20% of the underpayment of tax (Code Sec. 6662(b)(1) and 6662(b)(2)) but violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty. In lieu of the 20% negligence penalty, the civil fraud penalty is 75% of the underpayment of tax (Code Sec. 6663). The imposition of the Civil Fraud Penalty essentially doubles your liability to the IRS! And this is why the IRS is first sending Letter 6173 requiring a signature from the recipient under perjury that the taxpayer is compliant with the U.S. tax code BEFORE the IRS then decides to audit the taxpayer.

Voluntary Disclosure – The Way To Avoid Criminal Fines & Punishment

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

What Should You Do?

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

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

Tips For Cannabis Businesses To Prepare for the 2021 Tax Filings

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On January 10, 2022, the Internal Revenue Service (IRS) announced that it will process 2022 tax returns beginning January 24, 2022 (last year the opening date was February 12, 2021).

April 18th Filing Deadline.

The filing deadline to submit 2021 tax returns or an extension to file and pay tax owed is Monday, April 18, 2022.  By law, Washington D.C., holidays impact tax deadlines for everyone in the same way federal holidays do. The due date is April 18th, instead of April 15th because of the Emancipation Day holiday in the District of Columbia for everyone except taxpayers who live in Maine or Massachusetts. Taxpayers in Maine or Massachusetts have until April 19, 2022, to file their returns due to the Patriots’ Day holiday in those states. Taxpayers requesting an extension will have until Monday, October 17, 2022, to file.

Since the IRS will begin processing tax returns on January 24th there is no advantage to filing tax returns on paper before then as no processing of those returns will start.  However, tax returns that are e-filed starting on January 24th will be processed immediately.  Nevertheless, it makes sense to start organizing your information early and so when the IRS filing systems open on January 24th, you are ready to submit your tax return right away.

Yes – Cannabis Businesses Have to Report Income To IRS And Pay Taxes!

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

Additionally, while businesses can deduct ordinary and necessary business expenses under IRC Sec. 162, Under IRC Sec. 280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

A cannabis business can still deduct its Cost Of Goods Sold (“COGS”). Cost of goods sold are the direct costs attributable to the production of goods. For a marijuana reseller this includes the cost of cannabis itself and transportation used in acquiring cannabis. To the extent greater costs of doing business can be legitimately included in COGS that will that result in lower taxable income.

I.R.C. Section 280E IRS Tax Audits

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

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

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

Step One: Incurred And Paid The Expense.

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

Step Two: Deductibility Of The Expense.

Next you must prove that an expense is actually tax deductible. For a cannabis businesses this is challenging because of the I.R.C. §280E limitation; however a cannabis business can still deduct its Cost Of Goods Sold (“COGS”). Cost of goods sold are the direct costs attributable to the production of goods.

For a cannabis reseller this includes the cost of cannabis itself and transportation used in acquiring cannabis. To the extent greater costs of doing business can be legitimately included in COGS that will that result in lower taxable income. You can be sure the IRS agents in audits will be looking closely at what is included in COGS.

Tips For Cannabis Tax Return Preparation

Here are some tips for cannabis businesses to follow in the preparation of their 2021 tax returns.

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

Time Limits For Keeping Your Tax Records

Even though your 2021 income tax return is processed by the IRS and a refund is issued, that does not mean the IRS can later question or audit the tax return,  In fact the Statute Of Limitations allows the IRS three years to go back and audit your tax return.  That is why it’s a good idea to keep copies of your prior-year tax returns and supporting backup documentation for at least three years.

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 cannabis clients can save on taxes, minimize the impact of IRC Sec. 280E and limit audit risk. The cannabis tax attorneys and professionals at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Northern California (including San Francisco and Sacramento) and elsewhere in California are highly skilled in handling cannabis tax matters and can effectively represent at all levels with the IRS and State Tax Agencies. Also if you are involved in crypto-currency, check out what a Bitcoin tax attorney can do for you.

 

Getting Ready For The 2022 Tax Filing Season

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Getting Ready For The 2022 Tax Filing Season

This year taxpayers get at least 3 extra days to file!

On January 10, 2022, the Internal Revenue Service (IRS) announced that it will process 2022 tax returns beginning January 24, 2022 (last year the opening date was February 12, 2021).

The IRS states that the January 24th start date for individual tax return filers allows the IRS time to perform programming and testing that is critical to ensuring IRS systems run smoothly. Updated programming helps ensure that eligible people can claim the proper amount of the Child Tax Credit after comparing their 2021 advance credits and claim any remaining stimulus money as a Recovery Rebate Credit when they file their 2021 tax return.

April 18th Filing Deadline.

The filing deadline to submit 2021 tax returns or an extension to file and pay tax owed is Monday, April 18, 2022.  By law, Washington D.C., holidays impact tax deadlines for everyone in the same way federal holidays do. The due date is April 18th, instead of April 15th because of the Emancipation Day holiday in the District of Columbia for everyone except taxpayers who live in Maine or Massachusetts. Taxpayers in Maine or Massachusetts have until April 19, 2022, to file their returns due to the Patriots’ Day holiday in those states. Taxpayers requesting an extension will have until Monday, October 17, 2022, to file.

Since the IRS will begin processing tax returns on January 24th there is no advantage to filing tax returns on paper before then as no processing of those returns will start.  However, tax returns that are e-filed starting on January 24th will be processed immediately.  Nevertheless, it makes sense to start organizing your information early and so when the IRS filing systems open on January 24th, you are ready to submit your tax return right away.

Refunds in 2022.

Choosing e-file and direct deposit for refunds remains the fastest way to file an accurate income tax return and receive a refund.  The IRS still anticipates issuing at least 90%of tax refunds in less than 21 days, but there are some important factors to keep in mind for taxpayers that could cause delay.  Under the Protecting Americans from Tax Hikes (PATH) Act, the IRS is required to hold refunds for tax returns which include a claim of the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until mid-February 2022. Also consider that it would still take several days for these refunds to be released and processed through financial institutions, and factoring in weekends, and the President’s Day holiday, taxpayers claiming these credits may not have actual access to their refunds until the first week of March.

The status of your tax refund can be checked directly with IRS by using the Where’s My Refund? ‎on IRS.gov and the IRS2Go phone app.

Watch for IRS letters about advance Child Tax Credit payments and third Economic Impact Payments.

The IRS started sending Letter 6419, 2021 advance Child Tax Credit, in late December 2021 and continues to do so into January. The letter contains important information that can help ensure the return is accurate. People who received the advance CTC payments can also check the amount of the payments they received by using the CTC Update Portal available on IRS.gov.

Eligible taxpayers who received advance Child Tax Credit payments should file a 2021 tax return to receive the second half of the credit. Eligible taxpayers who did not receive advance Child Tax Credit payments can claim the full credit by filing a tax return.

The IRS will begin issuing Letter 6475, Your Third Economic Impact Payment, to individuals who received a third payment in 2021 in late January. While most eligible people already received their stimulus payments, this letter will help individuals determine if they are eligible to claim the Recovery Rebate Credit for missing stimulus payments. If so, they must file a 2021 tax return to claim their remaining stimulus amount. People can also use IRS online account to view their Economic Impact Payment amounts.

Both letters include important information that can help people file an accurate 2021 tax return. If the return includes errors or is incomplete, it may require further review while the IRS corrects the error, which may slow the tax refund. Using this information when preparing a tax return electronically can reduce errors and avoid delays in processing.

The fastest way for eligible individuals to get their 2021 tax refund that will include their allowable Child Tax Credit and Recovery Rebate Credit is by filing electronically and choosing direct deposit.

Time Limits For Keeping Your Tax Records

Even though your 2021 income tax return is processed by the IRS and a refund is issued, that does not mean the IRS can later question or audit the tax return,  In fact the Statute Of Limitations allows the IRS three years to go back and audit your tax return.  That is why it’s a good idea to keep copies of your prior-year tax returns and supporting backup documentation for at least three years.

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), the San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you and if you are involved in crypto-currency, check out what a Bitcoin tax attorney can do for you.

 

2021 Tax Filing Season – What High Income Taxpayers Should Know About Filing Late Tax Returns

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2021 Tax Filing Season – What High Income Taxpayers Should Know About Filing Late Tax Returns

Every year, about 9 million taxpayers miss tax deadline or fail to file their tax returns according to data from the Internal Revenue Service.

How To Handle Late Tax Returns?

The Treasury Inspector General for Tax Administration on May 29, 2020 issued a report finding that about 880,000 high-income nonfilers in tax years 2014 through 2016 had an estimated $45.7 billion in unpaid taxes.

The IRS has since announced that as part of a larger effort to ensure compliance and fairness, the IRS will step up efforts to visit high-income taxpayers making at least $100,000 who in prior years have failed to timely file one or more of their tax returns.

Following the recent and ongoing hiring of additional enforcement personnel and in anticipation of a COVID-19 pandemic being more manageable due to mitigation efforts and vaccinations, IRS Revenue Officers across the country will increase face-to-face visits with high-income taxpayers who haven’t filed tax returns in 2020 or previous years.

Failure to File vs. Failure to Pay

The IRS red flags taxpayers as “tax cheats” whether they are stop-filers, non-filers and under-filers.

“Stop Filer” is a term applied to taxpayers that consistently comply with tax filing requirements and then suddenly stop filing their returns. If your employer or client reports your income to the IRS on a 1099 or a W-2, the IRS will flag your information as a non-filer because they have access to tax forms that cannot be matched to tax returns. Understating your income, consciously or unintentionally, could result in a lower tax liability but make you liable for IRS penalties.

Failure to file means not filing the returns within the given time frame while failure to pay means filing the required paperwork but not turning in the full amount of tax obligation by the tax filing deadline. To force compliance with tax laws, the IRS is allowed to prepare a “substitute return” on behalf of those who failed to file, using data that was submitted by employers and applying customary exemptions and deductions. Substitute returns will always show a much higher liability than actual returns you have prepared and filed because substitute returns which are prepared by the IRS will not take into account your business expenses, basis in assets sold, itemized deductions, proper marital status, dependents and many tax credits.

Essentially, filing federal taxes late is better than not filing even if you cannot pay the tax dues at the time of submission. Penalties will still accrue for all unpaid tax obligations effective on the day after it is due until fully paid but by filing your tax return timely you avoid a late-filing penalty.

Why Taxpayers Should File Late Returns Now

There are important reasons why you should file your returns even if it is long past due. For one, penalties will continue to add up on any payments due. Also, if you are owed a refund due to exemptions, deductions and tax withheld, you only have three years from the original due date to claim the refund (and in certain cases this limitation is two years). When this period expires, you forfeit your refund to the IRS. Additionally, you would not be able to claim tax refunds for later years unless returns for the missing years are filed.

Loan applications, lease qualifications, scholarship applications and similar events require submission of tax returns from the previous years. Failure to present these documents that are used as proof of income may disqualify your application from moving forward. For self-employed taxpayers, filing a tax return is the only way that your credits for Social Security benefits can be reported and tracked. If you don’t comply with tax filing requirements, you would not build up enough retirement or disability credits.

Failure to respond and comply with an IRS tax bill will trigger the collection process, which may include tactics such as wage garnishment, an asset freeze or a federal tax lien.

IRS Penalties for Late Filing

The IRS assesses two different penalties for filing federal taxes late. The failure to file penalty is assessed at 5% for each month that the returns are late and is capped at 25%.

Assessments for failure to pay are 0.5% monthly for a maximum of 25%. If both penalties apply, the total amount is capped at 5% per month for a late tax return. If you qualify for a refund during the tax year in question, and you have not forfeited the refund, you may not be charged with penalties for taxes owed on a delinquent tax return.

Extending The Deadline To File

Starting with your 2021 tax return, if you will be unable to prepare your tax returns within the original deadline, file for an extension using the Form 4868, application for automatic extension of time to file U.S. individual income tax return on or before the deadline to file your Form 1040. Where an extension is timely filed, penalties for failure to file will not apply, but penalties will still be assessed on the balance due. With Form 4868, the revised deadline will be extended by six months for taxpayers in the U.S.

Additional IRS Civil Penalties For Non-compliance With Tax Laws

Criminal fraud refers to outright tax evasion. Penalties for tax evaders include hefty fines, imprisonment or both. Civil fraud charges applies to underpayment without intent to completely evade making tax payments. The penalty imposed may be as much as 75% of the portion of the underpayment. Negligence refers to inadvertent underpayment, and the penalty is 20% of the underpayment that is due to negligence. A frivolous return is one that intentionally excludes information that is crucial to processing the returns, and the penalty is $500 for each frivolous return.

What Should You Do?

Filing federal taxes late is a complicated matter. Let the 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) protect you from excessive fines and possible jail time. Also, if you are involved in cannabis, check out how a cannabis tax attorney can help you. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Getting Ready For Tax Season 2022 – What You Need To Know About Reporting Economic Impact Payments

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Getting Ready For Tax Season 2022 – What You Need To Know About Reporting Economic Impact Payments

The third round of the Recovery Rebate Credit is authorized by the American Rescue Plan Act (ARPA) of 2021 which expanded the Child Tax Credit (CTC) for tax year 2021 only. Generally, this credit will increase the amount of your tax refund or decrease the amount of the tax you owe.

For tax year 2021, the Child Tax Credit is increased from $2,000 per qualifying child to:

  • $3,600 for children ages 5 and under at the end of 2021; and
  • $3,000 for children ages 6 through 17 at the end of 2021.

Who can claim the Recovery Rebate Credit?

Eligible individuals who did not receive the full amount of the Economic Impact Payments may claim the Recovery Rebate Credit on their 2021 Form 1040 or 1040-SR. To determine whether you are an eligible individual or the amount of your Recovery Rebate Credit, complete the Recovery Rebate Credit Worksheet in the Instructions for Form 1040 and Form 1040-SR.

Generally, you are eligible to claim the Recovery Rebate Credit if you were a U.S. citizen or U.S. resident alien in 2021, cannot be claimed as a dependent of another taxpayer for tax year 2021, and have a Social Security number valid for employment that is issued before the due date of your 2021 tax return (including extensions).

You must file Form 1040 or Form 1040-SR to claim the Recovery Rebate Credit even if you are normally not required to file a tax return.

Be On The Look0Out For CTC Letter From IRS

To help taxpayers reconcile and receive all of the Child Tax Credits to which they are entitled, the IRS will send Letter 6419, 2021 advance CTC, starting late December, 2021 and continuing into January 2022. The letter will include the total amount of advance Child Tax Credit payments taxpayers received in 2021 and the number of qualifying children used to calculate the advance payments. Taxpayers should provide this letter to their tax preparer along with their 2021 tax documents.

Families who received advance payments will need to file a 2021 tax return and compare the advance Child Tax Credit payments they received in 2021 with the amount of the Child Tax Credit they can properly claim on their 2021 tax return.

Eligible families who did not receive any advance Child Tax Credit payments can claim the full amount of the Child Tax Credit on their 2021 federal tax return, filed in 2022. This includes families who don’t normally need to file a tax return.

Your Recovery Rebate Credit amount will be phased out if your adjusted gross income for 2021 exceeds:

  • $150,000 if you are married filing a joint return or filing as a qualifying widow or widower,
  • $112,500 if you are using the head of household filing status, or
  • $75,000 if you are using any other filing status.

What If I Received More Than What I Was Entitled To?

If you received more than you were entitled to, the IRS does not require you to pay the money back nor is any such ineligible amount added on to your 2021 taxes.  Taxpayers whose incomes increased in 2021 compared with their earlier tax returns which the IRS relied on to determine whether they qualified for the payments, may be in this situation.

Will I owe taxes on the stimulus checks?

No, because the stimulus checks are not considered income by the IRS but instead are prepaid tax credits for your 2021 tax return, authorized by the ARPA of 2021.

Beware Of New IRS Scam!

You get a call from someone claiming to be working for the IRS claiming:

 “We need your personal information in order for you to claim the coronavirus stimulus money.”

This appears to be an identity theft scheme to obtain recipients’ personal and financial information so the scammers can provide the IRS with their banking information to get your economic impact payment deposited into their account.  In reality, the IRS WILL NOT CALL YOU! Federal aid will either be deposited via account information the IRS already has from your tax filings or they will send you a check.

Where can I get more information?

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.  You can also check out the KahnTaxLaw Coronavirus Resource Center.

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. With the passing of 2021, taxpayers who expect to owe for 2021 should have their 2021 income tax returns done as early as possible in 2022 so that the 2021 liability can be rolled over into any proposal and the requirement to make estimated tax payments will start for 2022.

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

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.

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.

Facing A Surprise Tax Bill – Here Is Why You Should Still File Your 2020 Income Tax Return By May 17th.

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Facing A Surprise Tax Bill – Here Is Why You Should Still File Your 2020 Income Tax Return By May 17th.

Why You Should Not Disregard The May 17, 2021 Filing Deadline

The most important thing everyone with a tax liability should do is file a return by the May 17th due date, even if they can’t pay in full, or request a six-month extension to avoid higher penalties for failing to file on time. Though automatic tax-filing extensions are available to anyone who wants one but keep in mind that these extensions don’t change the payment deadline. They act an extension to file and not as an extension to pay. With the extension you can include payment for what you can pay now to help reduce a potential late-payment penalty and interest charges.

Usually anyone who owes tax and waits until after that date to file will be charged a late-filing penalty of 5% per month. So, if a tax return is done, filing it by May 17th is always less costly, even if the full amount due can’t be paid on time.

Pay what you can

Interest, plus the much smaller late-payment penalty, will apply to any payments made after May 17th.  Making a payment, even a partial payment, will help limit penalty and interest charges. You should also consider other options for payment, including getting a loan to pay the amount due. In many cases, loan costs may be lower than the combination of interest and penalties the IRS must charge under federal law. Normally, the late-payment penalty is one-half-of-one percent (0.5%) per month. The interest rate, adjusted quarterly, is currently 3% per year, compounded daily.

IRS payment plans

There are two main types of payment plans that do not require the submission of financial disclosures.

They are:

  • Short-term payment plan – The payment period is 120 days or less and the total amount owed is less than $100,000 in combined tax, penalties and interest. A 180-day payment plan is also possible. However, as you are financing a liability with IRS, interest and the late-payment penalty continue to apply.
  • Long-term payment plan – The payment period is longer than the short-term payment plan. Payments are made monthly, and the amount owed must be less than $50,000 in combined tax, penalties and interest. In addition, for anyone who filed their return on time, the late-payment penalty rate is cut in half while an installment agreement is in effect. This means that the penalty accrues at the rate of one-quarter-of-one percent (0.25%) per month, instead of the usual one-half-of-one percent (0.5%) per month.

Taxpayers who do not qualify for either of these plans would be requires to submit financial disclosures in order to arrange for a payment plan with IRS.

Other options to consider:

Delayed collection

If the IRS determines a taxpayer is unable to pay, it may delay collection until their financial condition improves. Sometimes this is referred to as putting a taxpayer’s account on a Currently Not Collectible (CNC) status.  Once the account is placed on a CNC status, the IRS does not pursue collection activity against the taxpayer and the statute of limitations on the tax liabilities will continue to run. Additionally, the total amount owed will still increase because penalties and interest are charged until paid in full or otherwise settled.  Generally, unless the taxpayer’s financial situation changes, the account will remain on a CNC status until the tax liabilities expire. However, if the taxpayer’s financial situation improves the account will be taken off of CNC status so that the IRS can collect the taxes through full payment or an Installment Agreement.

Penalty relief

Some taxpayers qualify to have their late-filing or late-payment penalties reduced or eliminated. This can be done on a case-by-case basis, based on “reasonable cause”. Alternatively, where a taxpayer has filed and paid on time during the past three years, the IRS can typically provide relief under the “First Time Abatement Program”.

Offer in Compromise 

Established by the Internal Revenue Service, the Offer in Compromise Program is a formal application to the IRS requesting that it accept less than full payment for what you owe in taxes, interest, and penalties.  An offer in compromise may allow you to settle back taxes or IRS liability at a substantial discount on the basis of doubt as to collectability, liability, or effective tax administration. In addition, while your offer is under consideration, the Internal Revenue Service is prohibited from instituting any levies of your assets and wages.

While an offer in compromise can help pay IRS debt for less, most people do not have the necessary skills or knowledge of the IRS collection process to make an offer in compromise that is in their best interest.  Many people fill out the forms incorrectly, overstate their assets and income, and offer too much. Government figures show that 75% of offers are returned at the beginning due to forms being filled out incorrectly, and of the 25% that are processed, approximately 50% are rejected.

What Should You Do?

Individual taxpayers can file an extension using Form 4868. Extensions can also be filed online, which has the benefit that you’ll receive a confirmation code from the IRS notifying you that your extension was received.  Then you should promptly contact tax counsel.  Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and offices elsewhere in California get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. If you are involved in cannabis, check out what else a cannabis tax attorney can do for you. Also, if you are involved in crypto currency, check out what a Bitcoin tax attorney can do for you.

Why Taxpayers Involved In Offshore Accounts, Cryptocurrency Or Cannabis Should Be Filing An Extension For Their 2020 Income Tax Returns.

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Why Taxpayers Involved In Offshore Accounts, Cryptocurrency Or Cannabis Should Be Filing An Extension For Their 2020 Income Tax Returns.

If you did not report your offshore accounts, cryptocurrency income or cannabis income earned before 2020, you should hold off on filing your 2020 taxes and instead file an extension.

An extension is your way of asking the IRS for additional time to file your tax return. The IRS will automatically grant you an additional time to file your return. While State Tax Agencies will also provide the same extension period, you need to check with your State to see if an extension must be filed with the State as well.  For example, California does not require that a State extension be filed as long as you timely file the Federal extension AND you will not owe any money to the State.

The deadline to file your 2020 federal individual income tax returns or request an extension of time to file the tax return is Monday, May 17, 2021 (normally would have been April 15th but extended due to COVID-19).  A timely filed extension will extend the filing deadline to Friday, October 15, 2021 thus giving you an extra five months to meet with tax counsel and determine how to address your pre-2020 tax reporting delinquencies and/or exposure and how to present your situation on your 2020 tax return.

While an extension gives you extra time to file your return, an extension does not give you extra time to pay your tax and if you do not pay what you owe with the extension, you will still be ultimately charged with late payment penalties when you file your tax return.

Offshore Accounts

Where a taxpayer does not come forward voluntarily though a Voluntary Disclosure Program and has now been targeted by IRS for failing to file the Foreign Bank Account Reports (FBAR), the IRS may now assert FBAR penalties that could be either non-willful or willful.  Both types have varying upper limits, but no floor.  The first type is the non-willful FBAR penalty.  The maximum non-willful FBAR penalty is $10,000.  The second type is the willful FBAR penalty.  The maximum willful FBAR penalty is the greater of (a) $100,000 or (b) 50% of the total balance of the foreign account.  In addition, the IRS can pursue criminal charges with the willful FBAR penalty.  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).

For the non-willful penalty, all the IRS has to show is that an FBAR was not filed.  Whether the taxpayer knew or did not know about the filing of this form is irrelevant.  The non-willful FBAR penalty is $10,000 per account, per year and so a taxpayer with multiple accounts over multiple years can end up with a huge penalty.

Since 2009, the IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.

Cryptocurrency

Many taxpayers think that their crypto transactions would remain a secret forever.  Digital exchanges are not broker-regulated by the IRS. Digital exchanges are not obligated to issue a 1099 form, nor are they obligated to report to the IRS calculate gains or cost basis for the trader. But that is now all changing sooner than you think!

As of March 16, 2018, the IRS has received information from Coinbase located in San Francisco which is the largest cryptocurrency exchange in the United States disclosing the names, addresses and tax identification numbers on 14,355 account holders. Coinbase pursuant to a Court Order issued by a Federal Magistrate Judge (United States v. Coinbase, Inc., United States District Court, Northern District Of California, Case No.17-cv-01431) had to produce the following customer information over the period of 2013 to 2015: (1) taxpayer ID number, (2) name, (3) birth date, (4) address, (5) records of account activity, including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and (6) all periodic statements of account or invoices (or the equivalent).

Furthermore, Coinbase starting with the 2017 tax years will be issuing 1099-K tax forms for some of its U.S. clients.  The IRS will receive copies of these forms.

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

With only several hundred people reporting their crypto gains each year, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns.

Cannabis

Over 300,000 Americans now work in the legal cannabis industry – these workers were declared “essential” during the COVID emergency. In the past few weeks, three more states have legalized bringing the total number of adult-use states to 18, along with the 35 medical states and the District of Columbia.  With the proliferation of licensed cannabis businesses sprouting across the country, a continued stream of cannabis business will be filing tax returns with the IRS.  But beware, the IRS is well aware that successful cannabis businesses don’t just sprout overnight and now that your business is on the radar screen you can bet that the IRS will be inquiring how you accumulated all that cash before 2020.

Cannabis is categorized as a Schedule I substance under the Controlled Substances Act. While more than half of the states in the U.S. have legalized some form of medicinal marijuana, and several others have passed laws permitting recreational cannabis use, under federal drug laws the sale of cannabis remains illegal.

Despite the disparity and Federal and State law, marijuana businesses still have to pay taxes.

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

A cannabis business that has not properly reported its income and expenses and not engaged in the planning to minimize income taxes can face a large liability proposed by IRS reflected on a Notice Of Deficiency or tax bill.  Likewise, where a taxpayer over the years has accumulated cash from cannabis sales and never reported any income to the IRS, you are looking at a serious problem.

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?

Individual taxpayers can file an extension using Form 4868. Extensions can also be filed online, which has the benefit that you’ll receive a confirmation code from the IRS notifying you that your extension was received.  Then you should promptly contact tax counsel.  Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and offices elsewhere in California get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. If you are involved in cannabis, check out what else a cannabis tax attorney can do for you. Also, if you are involved in crypto currency, check out what a Bitcoin tax attorney can do for you.

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

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

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

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

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

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

In making this announcement IRS Commissioner Chuck Rettig stated that:

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

State tax returns

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

Winter storm disaster relief for Louisiana, Oklahoma and Texas

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

An Opportunity For Taxpayers Who Owe The IRS

As a prerequisite to any proposal to the IRS, you must be in current compliance. That means if you have any outstanding income tax returns, they must be completed and submitted to IRS.

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

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

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

What Should You Do?

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