IRS Responding To COVID-19 With Tax Relief – Tax Day Officially Changed To July 15th

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IRS Coronavirus Tax Relief

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

President Donald Trump declared the coronavirus pandemic a national emergency. Therefore, under Sec. 7508A, the declaration of an emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, P.L. 100-707, the IRS is allowed to delay certain tax filing and payment deadlines.

IRS And Treasury Department Initial Guidance

On March 18, 2020 the Treasury Department and the IRS issued the first formal guidance.  The Treasury Department and IRS are extending the due date for Federal income tax payments due April 15, 2020, to July 15, 2020, for payments due of up to $10 million for corporations and up to $1 million for individuals – regardless of filing status – and other unincorporated entities. Associated interest, additions to tax, and penalties for late payment will also be suspended until July 15, 2020.

Click here for the press release issued by the Treasury Department.

Click here for Notice 2020-17 issued by the IRS.

This relief is available solely with respect to:

  • Federal income tax payments (including payments of tax on self-employment income) due on April 15, 2020, in respect of an affected taxpayer’s 2019 taxable year, and
  • Federal estimated income tax payments (including payments of tax on self-employment income) due on April 15, 2020, for an affected taxpayer’s 2020 taxable year.

No extension is provided in this relief for the payment or deposit of any other type of Federal tax.  This did not however extend the April 15th filing deadline – until now …

Treasury Secretary Steve Mnuchin’s Announcement

On March 20, 2020 Treasury Secretary Steve Mnuchin tweeted “At @realDonaldTrump’s direction, we are moving Tax Day from April 15 to July 15. All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.”

Subsequently on March 21, 2020 the IRS issued a press release that that the federal income tax filing due date is automatically extended from April 15, 2020, to July 15, 2020.

Taxpayers can also defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed. This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax.

Taxpayers do not need to file any additional 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 July 15 deadline, can request a filing extension by filing Form 4868 for individuals and Form 7004 for corporations.

As a result of the postponement of the due date for making Federal income tax payments up to the applicable postponed payment amount from April 15, 2020, to July 15, 2020, the period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to pay the Federal income taxes postponed by this relief. Interest, penalties, and additions to tax with respect to such postponed Federal income tax payments will begin to accrue on July 16, 2020. In addition, interest, penalties and additions to tax will accrue, without any suspension or deferral, on the amount of any Federal income tax payments in excess of the applicable postponed payment amount due but not paid by an affected taxpayer on April 15, 2020.

But if you are due a refund you should file as soon as possible. The IRS states that most tax refunds are still being issued within 21 days.

California Coronavirus Tax Relief

The California Franchise Tax Board (“FTB”) on March 13, 2020 announced special tax relief for California taxpayers affected by the COVID-19 pandemic. Affected taxpayers are granted an extension to file 2019 California tax returns and make certain payments until June 15, 2020, in line with Governor Newsom’s March 12 Executive Order.

“During this public health emergency, every Californian should be free to focus on their health and wellbeing,” said State Controller Betty T. Yee, who serves as chair of FTB. “Having extra time to file their taxes helps allows people to do this, as the experts work to control the spread of coronavirus.”

This relief includes moving the various tax filing and payment deadlines that occur on March 15, 2020, through June 15, 2020, to June 15, 2020. This includes:

  • Partnerships and LLCs who are taxed as partnerships whose tax returns are due on March 15 now have a 90-day extension to file and pay by June 15.
  • Individual filers whose tax returns are due on April 15 now have a 60-day extension to file and pay by June 15.
  • Quarterly estimated tax payments due on April 15 now have a 60-day extension to pay by June 15.

The FTB’s June 15 extended due date may be pushed back even further if the Internal Revenue Service grants a longer relief period.  Given the IRS filing extension discussed above, that deadline should now be pushed out to July 15th.

Taxpayers claiming the special COVID-19 relief should write the name of the state of emergency (for example, COVID-19) in black ink at the top of the tax return to alert FTB of the special extension period. If taxpayers are e-filing, they should follow the software instructions to enter disaster information.

The FTB will also waive interest and any late filing or late payment penalties that would otherwise apply.

Other States

The American Institute Of Certified Public Accounts has put out a comprehensive list of what tax relief is being offered at the State level.

An Opportunity For Taxpayers Who Owe The IRS

Do not think that if you owe the IRS your tax problem will disappear because of the measures being considered by the government. Instead you should be utilizing this valuable time to get yourself prepared so that when activity in this nation regains momentum, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

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

Also, if you are required to make estimated tax payments, you must be current in making those payments. Fortunately, as we are now in 2020, taxpayers who expect to owe for 2019 should have their 2019 income tax returns done now so that the 2019 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2020.

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 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 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.

Are You Considering The IRS Offer in Compromise Program To Settle Your Tax Debt?

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It just got more expensive to settle your tax debt with the IRS. The Application Fee for Offers In Compromise submitted on or after April 27, 2020 increases from $186.00 to $205.00.

An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS to settle a tax debt for less than the full amount owed. Generally, it may be an option for taxpayers who can’t pay their full tax debt, or if doing so would create a financial hardship. The IRS considers the taxpayer’s overall financial circumstances when considering an OIC in an effort to administratively resolve the amount due.

Taxpayers who want to avail themselves of the IRS Offer in Compromise program file a formal application, in which they propose to pay less than their total obligation amount (taxes, interest and any associated penalties). That much is straightforward. But as another adage goes: “the devil is in the details,” and that is where many taxpayers head in the wrong direction, and make an already challenging and stressful financial situation exponentially worse.

Here are the four biggest pitfalls:

IRS Offer in Compromise Myth: Taxpayers only need to petition the Federal government to take advantage of the program.

The Facts: Many States have Offer In Compromise programs, and each has its own qualifying standards. Taxpayers who owe money to both the IRS and their respective State tax agency must coordinate the filings in order to facilitate a mutually acceptable resolution. Just dealing with the IRS is not enough, and the IRS is under no obligation (and will not) reach out to their State-level counterparts. The onus to do this is completely on each taxpayer.

IRS Offer in Compromise Myth: Filling out the proper forms is time consuming, but does not require expertise.

The Facts: The vast majority of taxpayers do not have requisite knowledge of the IRS collection process for their petition to be successful, regardless of how much time they allocate to their application. While the lists of common errors is long, among the most frequent are: overstating assets and income (and therefore offering the IRS too much); failing to submit the proper application fee and a deposit for the amount offered; and failing to include proper financial disclosure. And if you are still not convinced: the Federal government’s own figures show that 75 percent of applications are returned due to forms being filled out incorrectly, and of the 25 percent that are processed, approximately 50 percent are rejected.

IRS Offer in Compromise Myth: Third-party firms and consultants can help you settle your debt and enjoy a “big discount.”

The Facts: This is false advertising at its worst, since the consequences here can be life-altering. These firms and consultants have no idea what your tax situation is like, and therefore cannot even promise that the IRS will accept your petition, let alone allow you to enjoy a “big discount.” Only a qualified and experienced professional who has analyzed your specific financial details, and who knows the IRS rules and guidelines inside and out (including material that is not easily available to the public — or comprehensible even when it is) can determine your eligibility for an Offer In Compromise.

IRS Offer in Compromise Myth: If you owe money to the IRS, then you submit an application right away to stop collection action or interest while your case is being reviewed.

The Facts: Before the IRS will even consider your application, they will check to see where you are current with all filing requirements. If anything is overdue, or if you are in an open bankruptcy proceeding, then your application will be returned to you.

The Bottom Line

The IRS Offer in Compromise program has the potential to be substantially beneficial for qualifying taxpayers who (and this is the most critical part) complete and submit their application properly, completely and effectively. The IRS assesses applications on a case-by-case basis, and the more boxes you check, the more likely you are to be granted financial relief. Conversely, if you get trapped by any of the myths above — or dozens of others that endure — not only will your application be rejected and returned, but your debt will continue piling up by the day.

What Should You Do?

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. And if you are involved in cannabis, check out what a cannabis tax attorney can do for you. Additionally, if you are involved in crypto currency, check out what a Bitcoin Tax Attorney can do for you.

Better Late Than Never; What High Income Taxpayers Should Know About Filing Late Tax Returns

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How To Handle Late Tax Returns?

Every year, about 7 million taxpayers miss tax deadline or fail to file their tax returns according to data from the Internal Revenue Service. This figure constitutes roughly 5% of the taxpayer base in the U.S., resulting in government revenue losses of up to $28 billion annually. On February 19, 2020 the IRS announced that as part of a larger effort to ensure compliance and fairness, the IRS will step up efforts to visit high-income taxpayers 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, IRS Revenue Officers across the country will increase face-to-face visits with high-income taxpayers who haven’t filed tax returns in 2018 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 2019 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.

Former Silk Road Senior Advisor Pleads Guilty In Manhattan Federal Court

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Roger Thomas Clark Pleads Guilty In Manhattan Federal Court

On January 30, 2020, the United States Attorney for the Southern District of New York (SDNY) issued a press release that Roger Thomas Clark, who was also known as “Plural of Mongoose” or “Variety Jones,” pled guilty for conspiring to distribute illicit narcotics in mass quantities. The press release stated that Mr. Clark was the senior advisor to the owner and operator of the Silk Road online illicit black market and in committing his crime also used the online nicknames “CaptainSargeant”, “VJ,” and “Cimon”.

What Was “Silk Road”?

“Silk Road” was created by Ross Ulbricht in January 2011.  He owned and operated an underground website until it was shut down by law enforcement authorities in October 2013.  Silk Road emerged as the most sophisticated and extensive criminal marketplace on the Internet at the time, serving as a sprawling black-market bazaar where unlawful goods and services, including illegal drugs including cannabis, were bought and sold regularly by the site’s users.  While in operation, Silk Road was used by thousands of drug dealers and other unlawful vendors to distribute hundreds of kilograms of illegal drugs and other unlawful goods and services to well over 100,000 buyers, and to launder hundreds of millions of dollars deriving from these unlawful transactions.

Silk Road enabled its users to buy and sell drugs and other illegal goods and services anonymously and outside the reach of law enforcement.  Silk Road was operated on what is known as “The Onion Router,” or “Tor” network, a special network of computers on the Internet, distributed around the world, designed to conceal the true IP addresses of the computers on the network and thereby the identities of the network’s users.  Silk Road also included a Bitcoin-based payment system that served to facilitate the illegal commerce conducted on the site, including by concealing the identities and locations of the users transmitting and receiving funds through the site.

Mr. Ulbricht was eventually convicted and is serving a life sentence without the possibility of parole. His appeal to the Supreme Court of the United States was denied on June 28, 2018.  Already he has been languishing in prison for half a decade now.

Clark Guilty Plea

The press release stated that Mr. Clark was described by Mr. Ulbricht as a “real mentor” who advised Ulbricht about, among other things, security vulnerabilities in the Silk Road site, technical infrastructure, and the rules that governed Silk Road users and vendors, and the promotion of sales on Silk Road, including the sales of narcotics.  Clark also provided advice to Ulbricht on developing a “cover story” to make it appear as though Ulbricht had sold Silk Road.  Clark also assisted with hiring programmers to help improve the infrastructure of, and maintain, Silk Road.  Clark also was responsible for gathering information on law enforcement’s efforts to investigate Silk Road and Clark advised Ulbricht on how to protect the Silk Road Empire.  For instance, when a Silk Road staff member was suspected of stealing $350,000 in Bitcoin from the site, Clark suggested to Ulbricht that Ulbricht commission a murder-for-hire.  Ulbricht took that suggestion.  (Ultimately, unbeknownst to both men, the attempted murder-for-hire did not result in any harm to the target.) Clark was paid at least hundreds of thousands of dollars for his assistance in operating Silk Road.

Mr. Clark, age 56 and a citizen of Canada, pled guilty to one count of conspiracy to distribute narcotics, which carries a maximum sentence of 20 years in prison.  He is scheduled to be sentenced in Federal District Court on May 29, 2020.

Clark’s Troubles Could Spill Over To IRS

For individuals nabbed by the Federal Government, it is not surprising that the IRS gets involved and they are also charged with tax crimes.

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?

It is risky enough to be involved in cannabis (which is illegal under Federal law) or crypto-currency, so imagine how much riskier it is combining both.  It is important to control this risk which you can do by engaging a cannabis tax attorney or a bitcoin tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Inland Empire (Ontario and Palm Springs) 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.

Don’t Let A Simpler Form 1040 Fool You – Be Prepared For An IRS Audit.

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Don’t Let A Simpler Form 1040 Fool You – Be Prepared For An IRS Audit.

The Tax Cuts And Jobs Act Of 2017 (“TCJA”) was signed into law by President Trump on December 22, 2017. It has been a good 30 years since the last time the Internal Revenue Code received such a major update but for taxpayers.

Major Changes From The TCJA Include:

A Simpler Form 1040

There are major changes to the Form 1040 that started with 2018. The 2019 Form 1040 continues with the same format but with even more changes compared to previous years.

While it has not come down to being a postcard, the new Form 1040 does streamline the reporting process as follows:

  • The 2019 Form 1040 replaces Forms 1040, 1040A and 1040EZ with one Form 1040 that all taxpayers will file. 
  • Forms 1040A and 1040EZ continue to be unavailable. Taxpayers who used one of these forms sometime in the past will now have to file Form 1040.
  • The 2019 Form 1040 continues to use a “building block” approach and allows taxpayers to add only the schedules they need to their 2019 tax return.
  • The most commonly used lines on the prior year form are still on the form. Other lines are moved to new schedules and are organized by category. These categories include income, adjustments to income, nonrefundable credits, taxes, payments, and refundable credits.

Many taxpayers will only need to file Form 1040 and no schedules. Those with more complicated tax returns will need to complete one or more of the 2019 Form 1040 Schedules along with their Form 1040. These taxpayers include people claiming certain deductions or credits, or owing additional taxes.

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

Starting with the 2019 Form 1040, Schedule 1, Additional Income And Adjustments To Income, includes the following checkbox question:

At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency? 

 ◊ Yes            ◊ No

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

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

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. For California taxpayers, the Franchise Tax Board has up to four years to select a California State Income Tax Return for audit. In some cases these 3 and 4 year periods are extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

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

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

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

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

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.

Britain’s Tax Authority Updates Crypto Guidelines – Is IRS Next To Update Its Guidelines?

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Britain’s Tax Authority Updates Crypto Guidelines – Is IRS Next To Update Its Guidelines?

In December 2019, Her Majesty’s Revenue and Customs (HMRC) in the United Kingdom which would be the equivalent of IRS here in the United States published updated policy papers concerning crypto currency transactions undertaken by companies, other businesses such as sole traders and partnerships, and individuals.

The United Kingdom guidelines cover the applicable taxes as well and corporate entities conducting any crypto currency transactions are likely to be liable to pay one or more of the following taxes: capital gains tax, corporation tax, income tax, value added tax (VAT), and stamp taxes. National Insurance contributions are also due.

The United Kingdom guidelines also state that private individuals will be liable to pay capital gains tax when they sell crypto assets that have been acquired as a personal investment, or income tax and National Insurance contributions on coins they receive from employers, mining or airdrops. Traders may reduce their income tax liability by offsetting losses against future profits. The amount paid for an asset is considered a cost that can be allowed as a deduction. The loss of a private key, however, does not count as a disposal of the assets for capital gains tax purposes. Victims of theft cannot claim a loss either.

Crypto Currency Tax Enforcement In The United States

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.

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

Starting with the 2019 Form 1040, Schedule 1, Additional Income And Adjustments To Income, includes the following checkbox question:

At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?   ◊ Yes            ◊ No

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

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

U.S. Taxation Of Cryptocurrency

Cryptocurrency transactions are apparently wildly taxable – far more so than investors may think.

Although the IRS has not issued much formal guidance, the position of IRS is that any transaction involving virtual currency can trigger a taxable event including air drops and fork transaction as well as conversions or trades from one virtual currency to another virtual currency.

The IRS in 2014 issued Notice 2014-21 stating that it treats crypto currency as property for tax purposes. Therefore, selling, spending and even exchanging crypto for other tokens all likely have capital gain implications. Likewise, receiving it as compensation or by other means will be ordinary income. This notice has since been supplemented by Revenue Ruling 2019-24 and frequently asked questions (FAQ’s).

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

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

Here are the basic tax rules followed by IRS on specific crypto currency transactions:

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

Given the limited guidance by IRS, there are still tax positions that can be advocated or structured so that taxpayers dealing with crypto currency can defer gains and minimize taxes. That is why it is essential you seek qualified tax counsel.

U.S. 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?

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.

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 non-real estate transactions that occur after 2017, now is the ideal time to be proactive and come forward with voluntary disclosure to lock in your deferred gains through 2017, eliminate your risk for criminal prosecution, and minimize your civil penalties.  Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the bitcoin tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.

Could 2020 Be The Year That IRS Is Serious About Targeting Crypto Currency Traders?

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Could 2020 Be The Year That IRS Is Serious About Targeting Crypto Currency Traders?

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.

IRS Commissioner Chuck Rettig Appoints Former Criminal Investigation Official To Lead The Civil Small Business and Self-Employed (SB/SE) Division.

In July 2019, the Internal Revenue Service announced the selection of Eric Hylton to lead the Small Business and Self-Employed (SB/SE) division. Prior to this announcement, Mr. Hylton served as the deputy chief of IRS Criminal Investigation (CI). It is interesting that an official from the criminal side of IRS will take over as head of SB/SE which serves more than 50 million taxpayers including self-employed and small businesses with assets under $10 million. SB/SE handles the agency’s civil side audit issues.

As the deputy chief in CI, Mr. Hylton oversaw CI’s high-impact investigations of tax evasion, financial crimes, money laundering, bribery, international corruption, cybercrimes and terrorist financing.  Eric also served as the Executive Director of CI’s Office of International Operations.  While in this role, he was appointed as the Chairperson for the Organization for Economic Cooperation and Development (OECD)-Task Force for Tax Crimes and Other Financial Crimes. As Chairperson, Mr. Hylton led a multilateral commission of 40 international criminal tax organizations to develop methodologies and typologies on emerging global criminal tax and financial crimes threats. 

In announcing Mr. Hylton’s appointment, IRS Commissioner Chuck Rettig said “Eric’s background in criminal investigation will be an asset working with SB/SE leadership and focusing on civil enforcement strategies and initiatives.” So you can be sure that will include targeting crypto currency traders.

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

Starting with the 2019 Form 1040, Schedule 1, Additional Income And Adjustments To Income, includes the following checkbox question:

At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?   ◊ Yes            ◊ No

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

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

Taxation Of Cryptocurrency

Cryptocurrency transactions are apparently wildly taxable – far more so than investors may think.

Although the IRS has not issued much formal guidance, the position of IRS is that any transaction involving virtual currency can trigger a taxable event including air drops and fork transaction as well as conversions or trades from one virtual currency to another virtual currency.

The IRS in 2014 issued Notice 2014-21 stating that it treats crypto currency as property for tax purposes. Therefore, selling, spending and even exchanging crypto for other tokens all likely have capital gain implications. Likewise, receiving it as compensation or by other means will be ordinary income. This notice has since been supplemented by Revenue Ruling 2019-24 and frequently asked questions (FAQ’s).

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

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

Here are the basic tax rules followed by IRS on specific crypto currency transactions:

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

Given the limited guidance by IRS, there are still tax positions that can be advocated or structured so that taxpayers dealing with crypto currency can defer gains and minimize taxes. That is why it is essential you seek qualified tax counsel.

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?

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.

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 non-real estate transactions that occur after 2017, now is the ideal time to be proactive and come forward with voluntary disclosure to lock in your deferred gains through 2017, eliminate your risk for criminal prosecution, and minimize your civil penalties.  Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the bitcoin tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.

IRS Has A Plan To Crack Down On Crypto Tax Evaders

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IRS Has A Plan To Crack Down On Crypto Tax Evaders

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 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.

Virtual Currency Is An Ongoing Focus Area For IRS Criminal Investigation.

Last year 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.

The Proposed 2019 Form 1040 Makes It Harder For U.S. Taxpayers To Avoid Non-compliance Or Claim Ignorance.

The IRS has now issued the second early release draft of the 2019 Form 1040, Schedule1, Additional Income and Adjustments to Income, which includes the following checkbox question:

At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?   ◊ Yes            ◊ No

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

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

Taxation Of Cryptocurrency

Cryptocurrency transactions are apparently wildly taxable – far more so than investors may think. Although the IRS has not issued much formal guidance, the position of IRS is that any transaction involving virtual currency can trigger a taxable event including air drops and fork transaction as well as conversions or trades from one virtual currency to another virtual currency.

The IRS in 2014 issued Notice 2014-21 stating that it treats crypto currency as property for tax purposes. Therefore, selling, spending and even exchanging crypto for other tokens all likely have capital gain implications. Likewise, receiving it as compensation or by other means will be ordinary income. This notice has since been supplemented by Revenue Ruling 2019-24 and frequently asked questions (FAQ’s).

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

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

Here are the basic tax rules followed by IRS on specific crypto currency transactions:

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

Given the limited guidance by IRS, there are still tax positions that can be advocated or structured so that taxpayers dealing with crypto currency can defer gains and minimize taxes. That is why it is essential you seek qualified tax counsel.

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?

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.

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 non-real estate transactions that occur after 2017, now is the ideal time to be proactive and come forward with voluntary disclosure to lock in your deferred gains through 2017, eliminate your risk for criminal prosecution, and minimize your civil penalties.  Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the bitcoin tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.

IRS Issues Additional Guidance On Tax Treatment And Reporting Obligations For Crypto Currency

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IRS Issues Additional Guidance On Tax Treatment And Reporting Obligations For Crypto Currency

Since 2014 the only guidance issued by IRS on the taxation and reporting of crypto currency was Notice 2014-21. Expanding on this guidance, the IRS issued additional detailed guidance to help taxpayers better understand their reporting obligations for specific transactions involving virtual currency. The new guidance includes Revenue Ruling 2019-24 and frequently asked questions (FAQs).

In Notice 2014-21, the IRS applied general principles of tax law to determine that virtual currency is property for federal tax purposes. The Notice explained, in the form of 16 FAQs, the application of general tax principles to the most common transactions involving virtual currency.

The new revenue ruling addresses common questions by taxpayers and tax practitioners regarding the tax treatment of a cryptocurrency hard fork. In addition, a set of FAQs address virtual currency transactions for those who hold virtual currency as a capital asset.

Taxation Of Cryptocurrency

Here are the basic tax rules followed by IRS on specific crypto currency transactions:

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

IRS Enforcement Action

The IRS is aware that some taxpayers with virtual currency transactions may have failed to report income and pay the resulting tax or did not report their transactions properly. The IRS is actively addressing potential non-compliance in this area by starting audits and even criminal investigations.

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.

Given the limited guidance by IRS, there are still tax positions that can be advocated or structured so that taxpayers dealing with crypto currency can defer gains and minimize taxes. That is why it is essential you seek qualified tax counsel.

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?

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.

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 non-real estate transactions that occur after 2017, now is the ideal time to be proactive and come forward with voluntary disclosure to lock in your deferred gains through 2017, eliminate your risk for criminal prosecution, and minimize your civil penalties.  Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let a bitcoin tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.