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

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On July 4, 2025 President Donald J. Trump signed into law H.R.1 – One Big Beautiful Bill Act (“OBBBA”).  OBBBA contains hundreds of provisions including permanently extending the individual tax rates Trump signed into law in 2017, which were originally set to expire at the end of 2025.

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

Prior Law

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

New Law – Deduction for overtime pay

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

New Law – Deduction for tips

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

Impact on employers

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

Transition penalty relief for tax year 2025

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

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

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

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

But beware on the deduction for overtime pay …

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

But beware on the deduction for tips …

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

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

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

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

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. It is advisable to consult with a tax professional to understand how these tips and overtime deduction changes might affect your specific tax situation, especially if your income relies on tips and/or overtime or you are an employer. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles, San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

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

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On July 4, 2025 President Donald J. Trump signed into law H.R.1 – One Big Beautiful Bill Act (“OBBBA”).  The OBBBA contains hundreds of provisions including permanently extending the individual tax rates Trump signed into law in 2017, which were originally set to expire at the end of 2025.

New Threshold For Issuance Of 1099’s

Effective with tax year 2026, Section 70433 of the OBBBA increases the $600 threshold for reporting payments to non-employees for personal services to $2,000, which will then be adjusted for inflation beginning in 2027. This change is expected to provide significant relief for rideshare platforms, auction sites, online marketplaces and others that have historically issued Forms 1099-K and should also alleviate the administrative burden of filing forms for casual sellers, gig workers and others with minimal amounts of income and transactions during the year. Tax year 2025 will be the last year that the lower $600 threshold amount will apply.

While amounts below the new reporting thresholds will still constitute income subject to taxation, a payor will no longer be required to issue a 1099 or engage in backup withholding at the lower amounts. This could significantly reduce the number of 1099s that payors are required to issue.  Regardless of whether income received by a taxpayer is evidenced by a Form 1099, taxpayers are required to declare such income on their tax returns.  If a tax return is filed and does not reflect all Form 1099’s used under the taxpayer’s social security number, the IRS computers using a “matching program” will uncover the discrepancy and send out a notice or tax bill that will include accruals of interest and penalties.

Impact To Taxpayers In The “Gig Economy”

From renting spare rooms and vacation homes to car rides or using a bike…name a service or a craft & handmade item marketplace and it’s probably available through the gig economy which is proliferating through many digital platforms like Uber, Lyft, Doordash, Postmates, Instacart and Airbnb.

And if you use payment apps like PayPal, Venmo, Square, and other third-party electronic payment networks to pay for goods and services, you should be aware of a tax reporting change that was to go into effect in January 2022.  However, following feedback from taxpayers, tax professionals and payment processors and to reduce taxpayer confusion, the IRS announced on November 21, 2023 in Notice 2023-74 to delay the new $600 Form 1099-K reporting threshold for third party settlement organizations for calendar year 2023.

However, starting with the 2024 calendar year, payment app providers had to start reporting to the IRS a user’s business transactions if, in aggregate, they total $600 or more for the year.

The expansion of the reporting rule was the result of a provision in the American Rescue Plan, which was signed into law in 2021. The IRS was looking to use this information to uncover unreported income and recover lost tax revenues.

Under this reporting rule, payments to non-employees for personal services must be reported on an “information return,” commonly called a Form 1099-NEC, if the payment is $600 or more in a calendar year. Similarly, payments of non-wages, such as for a settlement that includes penalties or emotional distress-type damages, are reportable on Form 1099-MISC if the payment is $600 or more.

Transactions that may apply or not apply to reporting requirements

Reporting requirements do not apply to personal transactions such as birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another for a household bill. These payments are not taxable and should not be reported on Form 1099-K.

However, the casual sale of goods and services, including selling used personal items like clothing, furniture and other household items for a loss, could generate a Form 1099-K for many people, even if the seller has no tax liability from those sales.

This complexity in distinguishing between these types of transactions factored into the IRS decision to delay the reporting requirements an additional year and to plan for a threshold of $5,000 for 2024 in order to phase in implementation. The IRS invites feedback on the threshold of $5,000 for tax year 2024 and other elements of the reporting requirement, including how best to focus reporting on taxable transactions.

Other details can be found at IRS.gov including frequently asked questions (FAQs) for Form 1099-K Payment Card and Third Party Network Transactions, in Fact Sheet 2024-03. These FAQs provide more general information for taxpayers, including common situations some taxpayers may be in, such as ticket sales or seasonal crafts business. The FAQs are in addition Understanding your Form 1099-K on IRS.gov page.

Federal Government’s Independent Contractor Ruling

The U.S. Department of Labor on January 6, 2021 announced a final rule to define whether workers are employees or independent contractors making it easier for companies to classify workers as independent contractors.

The change bases worker classification on an “economic reality test” focused primarily on whether a worker is economically dependent on an employer. Under the test, individuals are classified as employees if they are economically dependent on the employer; but if an individual is in business for themselves and not economically dependent on someone else’s business, that individual should be classified as an independent contractor.

Independent contractors are not entitled to benefits for companies they render work for and independent contractors are responsible to pay self-employment taxes on their income.

California law updated in 2020 to expand independent contractor status

California Assembly Bill (“AB”) 5 codified the California Supreme Court holding in Dynamex Operations West, Inc. v. Superior Court and adopted the “ABC” test to determine whether independent contractors should be treated as employees with various exceptions.  Effective January 1, 2020 under the “ABC” test, workers are presumed to be employees unless they satisfy three conditions:

  1. The worker is free from the employer’s control and direction in connection with the work performed, both under the contract and in fact;
  2. The work performed is outside the usual course of the employer’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Under AB 5, certain occupations were excluded from the ABC test, including doctors, lawyers, dentists, licensed insurance agents, accountants, architects and engineers, private investigators, real estate agents, and hairstylists.

Since the enactment of AB 5, the California Legislature introduced subsequent legislation (AB 257) to allow more workers to be treated as independent contractors by increasing the availability of exemptions to the ABC test as follows:

  • Translators, appraisers, home inspectors and registered foresters.
  • For the entertainment industry to include recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers, musicians, vocalists, music album photographers, independent radio promoters, and certain publicists.
  • For referral agencies to include consulting, youth sports coaching, caddying, wedding and event planning, and interpreting services.

Lastly, in November 2020, California voters passed Proposition 22 which allows workers in the gig economy that serve as app-based drivers to be treated as independent contractors.

Four tips you should know about how the gig economy might affect your taxes:

  1. The activity is taxable.

If you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you do it as a side job or just as a part time business and even if you are paid in cash and to minimize how much you need to pay in taxes, it is imperative that you keep track of your business expenses.

  1. Some expenses are deductible.

The tax code allows you to deduct certain costs of doing business from gross income. For example, a taxpayer who uses their car for business may qualify to claim the standard mileage rate, which is 70 cents per mile for 2025. Generally, you cannot deduct personal, living or family expenses. You can deduct the business part only, such as supplies, cell phones, auto expenses, food and drinks for passengers, car washes, parking fees, tolls, roadside assistance plans, taxes, and incentives associated with certain electric and hybrid vehicles.

Example: You used your car only for personal purposes during the first 6 months of the year. During the last 6 months of the year, you drove the car a total of 15,000 miles of which 12,000 miles were driven to provide transportation services through a company that provides such services through requests to its app. This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Your business use for the year is 40% (80% × 6/12).

Example: You use your car both for personal purposes and to provide transportation arranged through a company that provides transportation service through its app. You must divide your personal and business expenses based on actual mileage. You can deduct the business part of these actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Depending on the facts and circumstances, you may be providing the services either in a self-employed capacity or as an employee. If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate.

  1. You Could Be Subject To Self Employment Tax

The net income from your service-related activity with the sharing economy facilitator is subject to Self-Employment taxes, (Social Security and Medicare), at a 15.3% rate.  Now you will get to deduct one-half of these Self Employment taxes on your Form 1040 but if you consider that you still have income taxes to pay as well, the effective tax rate can easily exceed 30% and you will also have your state’s income tax on top of that.

So whether you are using your personal car for business or part of your residence as a home office, you will need to have good personal records of your expenses. In a situation where you are using your personal car for business you typically can deduct either “actual” costs for the percentage of business use, (though cell phone and food probably are not pertinent) or you can deduct mileage at a standard rate for business use. If you go the “simple” route and deduct mileage instead of “actual” expenses your Schedule C would consist of exactly 2 lines so it’s not very hard – but you will lose out on a lot of deductions and pay a lot more in taxes.

  1. Beware Of Requirement To Make Estimated Tax Payments.

Remember you are not an “employee” of the sharing economy facilitators; you are an “independent contractor”.  As such, there is no withholding of any taxes from your checks; you are responsible for all taxes – Self Employment taxes and income taxes – on your net earnings.  The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year. These payments for the 2026 tax year are due on April 15, 2026, June 15, 2026, September 15, 2026 and January 15, 2027. Taxpayers use Form 1040-ES to figure these payments.

Why The IRS Likes The Gig Economy.

Unlike traditional transactions where two parties directly deal with each other and nothing is reported to the IRS, gig economy facilitators who connect the two parties, collect the money from the paying party and transmit the revenue to the service provider will report the sale to IRS using Form 1099. The IRS now has a tool by which they can match up the amount of income you report on your tax return and if the Form 1099 amount is greater, you can be sure that the IRS will catch this and send you a tax bill.

What Should You Do?

As the gig economy continues to grow, so do the associated tax problems. The IRS obviously is interested in folks who earn money using their autos as on-call car services or rent their homes to out-of-towners. That is why it’s important to keep good records. Choose a recordkeeping system suited to your business that clearly shows your income and expenses. The business you’re in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions. Your records must also show your gross income, as well as your deductions and credits. Federal law sets statutes of limitations that can affect how long you need to keep tax records.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you need help with your tax return preparation, tax planning or you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

 

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

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

What are crypto ETPs and how does staking work?

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

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

Compliance Requirements

To qualify, the ETP must follow specific rules –

1) Hold only one digital asset type and cash;

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

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

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

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

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

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

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

What To Report To IRS On Your Income Tax Return?

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

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

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

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

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

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

What is a digital asset?

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

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

Everyone must answer the question

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

When to check “Yes”

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

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

How to report digital asset income

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

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

When to check “No”

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

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

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

How The IRS Finds Noncompliant Taxpayers

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

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

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

IRS Access To Cryptocurrency Transactions.

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

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

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

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

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

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

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

Voluntary Disclosure – The Way To Avoid Criminal Fines & Punishment

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

What Should You Do?

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

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

IRS Math Error Notices – Why You Need To Respond

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If you receive a math error notice from the IRS, it means the agency found a discrepancy on your tax return and automatically corrected it but do not assume that the IRS computers are right.  Instead, you should review the notice carefully and respond within 60 days if you disagree.

Common Types of “Math Errors” –

  • Arithmetic Mistakes: Errors in addition, subtraction, multiplication, or division on the return.
  • Inconsistent Entries: When information on one part of your return conflicts with another or with data the IRS has on file (e.g., W-2 forms).
  • Incorrect Use of Tax Tables: Using the wrong tax table or schedule for your filing status.
  • Omission of Required Information: Failing to attach a necessary form or schedule, such as Form 8863, Education Credits.
  • Exceeding Statutory Limits: Claiming a deduction or credit that exceeds an annual or lifetime limit (e.g., IRA contribution limits).
  • Missing or Incorrect Taxpayer Identification Numbers (TINs): An incorrect or missing Social Security Number for a dependent or spouse can lead to the disallowance of related credits.

Authority Of IRS To Assess For Math Errors

Under IRC § 6213(b) the IRS may make a summary assessment of tax arising from a mathematical or clerical error, as defined in IRC § 6213(g). Summary assessment is often referred to as “math error” authority. When the IRS makes a math error adjustment, IRC § 6213(b)(1) requires it to send the taxpayer a notice describing “the error alleged and an explanation thereof.” By law, the taxpayer has 60 days from the date of the notice to request that the summary assessment be abated. If the taxpayer does not make an abatement request within 60 days, the assessment becomes final, and the taxpayer has generally lost their right to challenge the IRS’s position in the U.S. Tax Court. If the taxpayer requests abatement within the 60-day period, the IRS must abate the summary assessment. If the IRS continues to believe the taxpayer owes the tax, it may audit the taxpayer and propose an adjustment by issuing a notice of deficiency. If the IRS does so, the taxpayer will have the right to challenge the IRS’s position in the U.S. Tax Court.

IRC § 6213 does not require the IRS to send a math error notice by certified or registered mail. While the taxpayer by law had 60 days from the date of notice to request the summary assessment to be abated, the IRS was not required to inform taxpayers that they must dispute the adjustments within 60 days if they disagree or generally forfeit their right to do so.

Internal Revenue Service Math and Taxpayer Help Act

Each year, the IRS sends out “math error” notices to taxpayers that propose to adjust their tax liabilities. Unfortunately, these notices very often did not explain the reasons for the adjustments.  Additionally, in some cases they are never received by the taxpayer whom later on will receive tax bills and be subject to collection action.

So to address these issues, Congress in October 2025 passed H.R. 998, the Internal Revenue Service Math and Taxpayer Help Act (the “Act”) requiring the IRS on math error adjustments to provide a clear description of the error and the affected line(s) of the return.  The Act requires the IRS to provide taxpayers with details on notices related to a math or clerical error. Other changes in the Act include that the IRS send a notice related to an abatement of taxes assessed due to a math or clerical error; provide procedures for requesting such an abatement; and implement a pilot program for sending notices of a math or clerical error.

The Act requires that an IRS notice about a math or clerical error include:

  • A clear description of the error, including the type of error and the specific federal tax return line on which the error was made;
  • An itemized computation of adjustments required to correct the error;
  • The telephone number for the automated transcript service; and
  • The deadline for requesting an abatement of any tax assessed due to the error.

The IRS also must send a notice related to an abatement of tax assessed due to a math or clerical error that clearly describes the abatement and includes an itemized computation of adjustments to be made to the items described in the notice of the error.

The Act also requires the IRS to:

  • Provide procedures for requesting in writing, electronically, by phone, or in person an abatement of tax assessed due to a math or clerical error;
  • Implement a pilot program to send notices of a math or clerical error by certified or registered mail; and
  • Report certain information about the pilot program to Congress.

The Act expands access to abatement procedures, establishes better communication, and offers taxpayers improved access to remedies while trying to get rid of confusion.

The Act has yet to become law as it waits for signature by President Trump.

Responding To An IRS Math Error Notice

Should you receive an IRS Notice informing you of a math error on your income tax return (such as a CP11 or CP12 Notice), you should take the following steps –

  1. Review the Notice: Compare the changes detailed in the notice with your original tax return and supporting documents. The notice should specify the error and the line number on which it occurred.
  2. Agree with the Changes? – If you agree with the IRS’s correction, no response is typically needed. If you owe money, you should pay the amount by the date on the notice.
  3. Disagree with the Changes? – If you disagree, you must request an abatement within 60 days from the date of the notice.

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 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. We can help you understand and handle changes in tax law.  Also if you are involved in cannabis, check out what our cannabis tax attorneys can do for you. And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

One Big Beautiful Bill Tax Act – How Can You Benefit?

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Focus: Bonus Depreciation
On July 4, 2025 President Donald J. Trump signed into law H.R.1 – One Big Beautiful Bill Act (“OBBBA”).  The OBBBA contains hundreds of provisions including permanently extending the individual tax rates Trump signed into law in 2017, which were originally set to expire at the end of 2025.
Prior law

Before the One Big Beautiful Bill Act (OBBBA), bonus depreciation was in a phasedown period initiated by the Tax Cuts and Jobs Act (TCJA) of 2017.

The TCJA had temporarily allowed businesses to deduct 100% of the cost of eligible property, but this was designed to decline in the years that followed.

The bonus depreciation rates in effect prior to the OBBBA were:

  • 2022: 100%
  • 2023: 80%
  • 2024: 60%
  • January 1–19, 2025: 40%

New law

The OBBBA permanently reinstated 100% bonus depreciation for most qualified property acquired after January 19, 2025 and reversed the prior scheduled phaseout. This includes tangible property with a class life of 20 years or less, consistent with prior bonus depreciation rules.

Property acquisitions for which a written binding contract was entered into before January 20, 2025, is treated as acquired on written binding contract date, which may cause otherwise eligible property to not be eligible for the expanded 100% bonus depreciation.

Also, the OBBBA introduces a new, temporary full expensing provision for “qualified production property”—a category of building property typically excluded from bonus depreciation due to its 39-year class life. To qualify, the property must meet all the following criteria:

  • Used by the taxpayer as an integral part of a qualified production activity
  • Placed in service in the United States, or any possession of the United States
  • Its original use commenced with the taxpayer
  • Construction began after January 19, 2025, and before January 1, 2029
  • Designated by election
  • Placed in service before January 1, 2031

The return of 100% bonus depreciation means that capital investments—whether in machinery, equipment, or qualifying facilities—can be deducted in full in the year they are placed in service.

The new provision for qualified production property is important for manufacturers, refiners, and producers. It allows them to fully expense the cost of constructing or acquiring production facilities—an option that was previously unavailable.

But Beware …

Leased property does not qualify, and portions of buildings used for nonproduction purposes (e.g., offices, research and development, sales) are excluded. A special rule allows certain used property to qualify if it hasn’t been used in a production activity since January 1, 2021.

Therefore, businesses must carefully assess whether their property qualifies, especially when it comes to mixed-use buildings or repurposed facilities. The 10-year recapture rule also means that if the property ceases to be used in a qualified production activity, some of the tax benefits may be clawed back.

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 OBBBA’s restoration of 100% bonus depreciation and its expansion to certain building property represent a powerful incentive for businesses to invest in production assets. With careful planning and strategic execution, businesses can turn this tax change into a competitive advantage. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles, San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

How The 2025 Federal Government Shutdown Is Creating Opportunity For Taxpayers With IRS Debt.

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At midnight on October 1, 2025, funding for Federal government agencies lapsed triggering a partial shutdown of the federal government. The date when funding will be restored by Congress has not been established but under plans established by each Federal agency, as the lapse in funding continues more Federal government functions will be shutdown.

The Anti-Deficiency Act.

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

Department Of Justice’s Contingency Plan.

The Department of Justice has issued guidance, which gives priority to continuing work on criminal cases. Consequently, no employees in the Tax Division of the Department Of Justice will be authorized to work on CIVIL MATTERS during a lapse in appropriations.

Internal Revenue Service’s Contingency Plan.

The IRS being an agency under the Department Of Treasury in late November issued a fiscal year 2019 “Lapsed Appropriations Contingency Plan” that governs what will happen at the IRS during a government shutdown.

This initial plan covered only a five-day shutdown and was formulated for 2018/2019. But given that we are in 2025 and the shutdown could last longer than five business days, the IRS may have to reassess ongoing activities and identify necessary adjustments of excepted positions and personnel.

The initial plan identified 9,946 IRS employees as “excepted/exempt” employees who would not be furloughed. The rest of the IRS’s 79,868 employees (as of November 10, 2018) would be furloughed, meaning they will be put on leave of absence without pay, under 5 C.F.R. Section 752.402.

The initial plan identified the following activities of IRS that will continue which are necessary for safety of human life or protection of government property:

  • Continuing to complete and test upcoming filing year programs
  • Processing electronic returns, up to the point of refund
  • Processing paper tax returns through “batching”
  • Processing remittances; and
  • Maintaining criminal law enforcement operations.

When funds are appropriated to the IRS, furloughed employees will return to work (they are expected to return within four hours after the reactivation is announced if it occurs on a scheduled work day).  However, the Trump Administration announced that in lieu of furloughed employees eventually coming back to work, certain of these employees may be permanently discharged.

An Opportunity For Taxpayers Who Owe The IRS.

Do not think that if you owe the IRS your tax problem will disappear because the IRS is not fully operational.  Instead you should be utilizing this valuable time to get yourself prepared so that when IRS re-opens for business, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

The last government shutdown was during Trump’s first term and lasted 35 days (December 22, 2018 to January 25, 2019).  While there is no certainty when the current shutdown will end, here are some things that you should consider the makes this shutdown different from the last shutdown:

  1. IRS does not have an IRS Commissioner leading the agency. Instead Treasury Secretary Scott Bessent is designated as the acting IRS Commissioner.
  2. Year-end holidays (Veteran’s Day, Thanksgiving, Christmas and New Year’s Day) will be upon us.
  3. The time between Christmas and New Year’s Day is reserved by IRS to get their computer systems ready for next year’s filing season.
  4. The longer the shutdown, the greater amount of backlog in mail, faxes and voice messages that IRS officials will need to go through.
  5. No guarantee that all those employees who were furloughed during the shutdown will be coming back to work, thus resulting in further staffing shortages.

Considering the foregoing, it may not be until 1st quarter 2026 that IRS operations are back to a normal status.

As a prerequisite to any proposal to the IRS, you must be in current compliance.  That means if you have any outstanding income tax returns, they must be completed and submitted to IRS.  Also, if you are required to make estimated tax payments, you must be current in making those payments.  As we are in the last quarter of 2025, taxpayers who expect to owe for 2025 should start organizing their records for 2025 so that in early 2026, their 2025 income tax returns can be completed and the 2025 liability can be rolled over into any proposal.  Under such a scenario you would not be required to make estimated tax payments until 2026.

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 and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Also if you are involved in cannabis, check out what our cannabis tax attorneys can do for you. And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

One Big Beautiful Bill Tax Act – How Can You Benefit?

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Focus: Increase In Unified Credit (Estate & Gift Tax)

On July 4, 2025 President Donald J. Trump signed into law H.R.1 – One Big Beautiful Bill Act (“OBBBA”).  The OBBBA contains hundreds of provisions including permanently extending the individual tax rates Trump signed into law in 2017, which were originally set to expire at the end of 2025.

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

Prior law

The Tax Cuts and Jobs Act (TCJA) of 2017 doubled the estate tax exemption but included a “sunset” provision, which meant the higher amount was temporary and set to revert to the pre-2018 level (roughly $7 million), adjusted for inflation, at the end of 2025.

New law

OBBBA permanently repealed the TCJA’s sunset provision by doubling the exclusion while maintain the 40% estate tax rate and permanently increasing the federal lifetime gift and estate tax exemption. The OBBBA permanently increases the unified federal estate and lifetime gift tax exemption to $15 million per individual ($30 million for married couples), indexed for inflation starting in 2026. This secures the elevated threshold, preventing a drop to approximately $7 million per individual, which was anticipated if the TCJA provisions expired. This stability allows ultra-high-net-worth individuals to accelerate lifetime gifting and fund dynasty trusts efficiently.

The generation-skipping transfer (GST) tax exemption is now aligned with the $15 million per individual exemption, also indexed for inflation. This paves the way for robust multi-generational planning through dynasty trusts and other strategic vehicles.

This exclusion applies to estates and gifts made after December 31, 2025, and the exclusion will continue to rise with inflation.

But Beware …

Taxpayers still benefit from the annual gift tax exclusion, which remains separate from the lifetime exemption.

For 2025, the annual exclusion is $19,000 per recipient, up from the long-standing $10,000 base amount due to inflation adjustments. That means you can give $19,000 to each person without reducing your $15 million lifetime exemption.

What is Estate Planning?

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

What does an Estate Plan Include?

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

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

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

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

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

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

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

What Should You Do?

Estate plans that were created when the Unified Credit was lower than the net value of the estate should be redone and simplified as those estates are now non-taxable.

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

How The Federal Government’s Shutdown Is Creating Opportunity For Taxpayers With IRS Debt.

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At midnight on October 1, 2025, funding for Federal government agencies lapsed triggering a partial shutdown of the federal government. The date when funding will be restored by Congress has not been established but under plans established by each Federal agency, as the lapse in funding continues more Federal government functions will be shutdown.

The Anti-Deficiency Act.

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

Department Of Justice’s Contingency Plan.

The Department of Justice has issued guidance, which gives priority to continuing work on criminal cases. Consequently, no employees in the Tax Division of the Department Of Justice will be authorized to work on CIVIL MATTERS during a lapse in appropriations.

Internal Revenue Service’s Contingency Plan.

The IRS being an agency under the Department Of Treasury in late November issued a fiscal year 2019 “Lapsed Appropriations Contingency Plan” that governs what will happen at the IRS during a government shutdown.

This initial plan covered only a five-day shutdown and was formulated for 2018/2019. But given that we are in 2025 and the shutdown could last longer than five business days, the IRS may have to reassess ongoing activities and identify necessary adjustments of excepted positions and personnel.

The initial plan identified 9,946 IRS employees as “excepted/exempt” employees who would not be furloughed. The rest of the IRS’s 79,868 employees (as of November 10, 2018) would be furloughed, meaning they will be put on leave of absence without pay, under 5 C.F.R. Section 752.402.

The initial plan identified the following activities of IRS that will continue which are necessary for safety of human life or protection of government property:

  • Continuing to complete and test upcoming filing year programs
  • Processing electronic returns, up to the point of refund
  • Processing paper tax returns through “batching”
  • Processing remittances; and
  • Maintaining criminal law enforcement operations.

When funds are appropriated to the IRS, furloughed employees will return to work (they are expected to return within four hours after the reactivation is announced if it occurs on a scheduled work day).  However, the Trump Administration announced that in lieu of furloughed employees eventually coming back to work, certain of these employees may be permanently discharged.

An Opportunity For Taxpayers Who Owe The IRS.

Do not think that if you owe the IRS your tax problem will disappear because the IRS is not fully operational.  Instead you should be utilizing this valuable time to get yourself prepared so that when IRS re-opens for business, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

As a prerequisite to any proposal to the IRS, you must be in current compliance.  That means if you have any outstanding income tax returns, they must be completed and submitted to IRS.  Also, if you are required to make estimated tax payments, you must be current in making those payments.  As we are in the last quarter of 2025, taxpayers who expect to owe for 2025 should start organizing their records for 2025 so that in early 2026, their 2025 income tax returns can be completed and the 2025 liability can be rolled over into any proposal.  Under such a scenario you would not be required to make estimated tax payments until 2026.

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), 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 our cannabis tax attorneys can do for you. And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

IRS Announces Tax Relief For Eligible Taxpayers Affected By Ongoing Events In Israel.

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Due dates for eligible returns and payments postponed to September 30, 2026.

On September 30, 2025 the Internal Revenue Service (IRS) announced tax relief for individuals and businesses affected by the ongoing conflict in the State of Israel. These taxpayers now have until September 30, 2026, to file various federal returns, make tax payments and perform other time-sensitive tax-related actions.

This guidance follows up on prior guidance. Notice 2023-71 originally provided relief to taxpayers affected by the October 7, 2023 attacks in Israel, and Notice 2024-72 provided relief to taxpayers affected by terroristic action in Israel throughout 2023 and 2024.

The September 30, 2026, deadline will now apply to:

  • Individuals who had a valid extension to file their 2024 return due to run out on October 15, 2025. However, tax payments related to these 2024 returns that were due on April 15, 2025 are not eligible for this relief. Essentially, in these cases individuals just get more time to file.
  • Calendar-year corporations whose 2024 extensions run out on October 15, 2025. Similarly, these corporations have more time to file, but not to pay.
  • 2025 individual and business returns and payments normally due on March 16 and April 15, 2026. So, these individuals and businesses have both more time to file and more time to pay.
  • Quarterly estimated income tax payments normally due on January 15, April 15, June 15 and September 15, 2026.
  • Quarterly payroll and excise tax returns normally due on October 31, 2025, and January 31, April 30 and July 31, 2026.
  • Calendar-year tax-exempt organizations whose extensions run out on November 15, 2025.
  • Retirement plan contributions and rollovers.

Who Qualifies for Relief?

  • Any individual whose principal residence or business entity or sole proprietor whose principal place of business is in Israel, the West Bank or Gaza (the covered area).
  • Any individual, business or sole proprietor, or estate or trust whose books, records or tax preparer is located in the covered area.
  • Anyone killed, injured, or taken hostage due to the terrorist attacks.
  • Any individual affiliated with a recognized government or philanthropic organization and who is assisting in the covered area, such as a relief worker.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Tips On Reconstructing Records

Reconstructing records after a disaster is important for several reasons including insurance reimbursement and taxes. Most importantly, records can help people prove their disaster-related losses. More accurately estimated losses can help people get more recovery assistance like loans or grants.

Whether it’s personal or business property that has been lost or destroyed, here are some steps that can help people reconstruct important records.

Tax records

Get free tax return transcripts immediately using the Get Transcript on IRS.gov or through the IRS2Go app.  Tax return transcripts show line-by-line the entries made on your Federal income tax returns.  The most three recent tax years are available.

Financial statements

People can gather past statements from their credit card company or bank. These records may be available online. People can also contact their bank to get paper copies of these statements.

Property records

  • To get documents related to property, homeowners can contact the title company, escrow company or bank that handled the purchase of their home or other property.
  • Taxpayers who made home improvements can get in touch with the contractors who did the work and ask for statements to verify the work and cost. They can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, taxpayers can contact the attorney who handled the trust.
  • When no other records are available, people should check the county assessor’s office for old records that might address the value of the property.
  • Car owners can research the current fair-market value for most vehicles. Resources are available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association and Edmunds.

Develop And Implement Your Backup Plan

If you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Also if you are involved in cannabis, check out what 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.

U.S. Tax Court Strikes Another Blow Against Cannabis Businesses

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The U.S. Tax Court’s recent decision in Ayla A. Savage v. Commissioner (165 T.C. No. 5, September 11, 2025) delivers a setback to cannabis businesses, by shutting them out of tax benefits available to other industries. The Tax Court’s ruling demonstrates how Section 280E’s restrictions limits cannabis operators’ access to newer tax advantages.

Internal Revenue Code Section 280E disallows all deductions or credits for any amount paid or incurred in carrying on any trade or business that consists of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act.  This applies to businesses that sell cannabis, even if they operate in states that have legalized the sale of cannabis. Section 280E does not, however, prohibit a participant in the cannabis industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.

In Savage, the Tax Court considered whether cannabis businesses can use their total W-2 wages, including wages that aren’t deductible under Section 280E, to calculate their qualified business income (QBI) deduction under Section 199A. This deduction allows eligible taxpayers to deduct up to 20% of their qualified business income, subject to various limitations including a cap based on W-2 wages paid. The taxpayers who are shareholders in three S corporations (two cannabis-related), argued they should be able to use all wages reported on W-2 forms when calculating their Section 199A wage limitation, even though Section 280E prevented them from deducting many of these wages for income tax purposes.

The Tax Court disagreed and ruled that only wages deductible after applying Section 280E can count toward the Section 199A calculation. The Tax Court relied and cited Section 199A (b)(4)(B), which states, “Section 199A(b)(4)(B) states that “W-2 wages” for purposes of the QBI deduction cannot include amounts that are “not properly allocable to qualified business income.” The Tax Court found that qualified business income is defined as the net amount of qualified items of income, gain, deduction, and loss; qualified items must be “included or allowed in determining taxable income; wages disallowed under Section 280E cannot be “qualified items” and therefore cannot be part of qualified business income; and non-qualifying wages cannot be “properly allocable” to qualified business income.

Planning Around The Limitations Of Section 280E.

 

With the limitations of Section 280E not going anywhere it is important for Cannabis businesses to consider careful entity structuring to separate business activities that might qualify for different treatment. Also, it is necessary to keep detailed record-keeping to maximize any wages that can be properly allocated to non-280E activities.

Further ways to possibly get around the Section 280E limitations would be to include the cost of goods sold with indirect expenses.

For cultivators and producers: These businesses have the most flexibility. Under the “full absorption” method of accounting, they can capitalize many indirect production costs into inventory. These costs are then recognized as cost of goods sold when the product is sold. Examples include:

  • Wages and salaries of employees involved in production, supervision, quality control, and inspection.
  • Rent and utilities for the cultivation and manufacturing facilities.
  • Repairs and maintenance of production equipment.

For dispensaries and retailers: These businesses face much tighter restrictions and are generally limited to including the direct cost of acquiring the product. In a retail environment, most operating expenses like rent, advertising, and sales salaries are not considered part of cost of goods sold and remain nondeductible under Section 280E.

Possible Legislative Or Executive Changes In The Application Of Section 280E

The Associated Press reported on April 30, 2024 that the Drug Enforcement Administration (“DEA”) will propose a rule to reschedule cannabis to Schedule III under the Controlled Substance Act. The proposed rule has since been reviewed by the Department Of Justice and on May 16, 2024 has been published in the Federal Register. Next the DEA will take public comment on the plan to move cannabis from its current classification as a Schedule I drug, alongside heroin and LSD. It moves pot to Schedule III, alongside ketamine and some anabolic steroids, following a recommendation from the federal Health and Human Services Department. After the public comment period and a review by an administrative judge, the agency would eventually publish the final rule in the Federal Register.

The IRS announced on June 28, 2024 that until a final federal rule is published, cannabis remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code.  The law with respect to the schedule or classification of cannabis has not changed; therefore, taxpayers seeking a refund of taxes paid related to Internal Revenue Code Section 280E by filing amended returns are not entitled to a refund or payment.

Although the law has not changed, the IRS says that some taxpayers are filing amended returns. The IRS also says that while the grounds for filing such claims vary, these claims are not valid. The IRS says it will be taking steps to address these claims.

The Growing Trend In Legalizing Cannabis – Current Standings:

Medical cannabis is legal in 39 states.

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

Recreational cannabis is legal in 23 states and Washington DC.

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

Recreational cannabis is legal in 6 tribal nations.

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

The New Rule If Approved Will Result In A Tax Regime Similar To What Non-Cannabis Businesses Face.

Currently, under Federal law (Controlled Substances Act 21 U.S.C. 801) cannabis 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.

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 currently prohibited by Federal law. Cannabis, including medical cannabis, is a controlled substance. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.  Therefore, under current law, the Internal Revenue Code which treats businesses in the cannabis industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

The New Rule If Approved DOES NOT Change Reporting Of Cash Payments.

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

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

Cannabis-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the cannabis 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?

While the Federal government is still considering whether to reschedule cannabis, it is premature to file any amended income tax returns before the rule to reschedule has been finalized.  Given that cannabis is still illegal under existing Federal law you need to protect yourself and your cannabis business from all challenges created by the U.S. government.  Additionally, assuming that this new rule is approved – ONLY LICENSED cannabis operators can benefit. 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.