IRS Using Inflation Reduction Act Funding To Ramp Up Audits Of Corporate Aircraft Usage

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More than $482 million recovered from 1,600 millionaires who have not paid tax debts.

Under the Inflation Reduction Act the IRS is receiving $80 billion in new funding over nine years. The $80 billion price tag is more than six times the current annual IRS budget of $12.6 billion. The money will be distributed to IRS over nine years and comes with few strings attached.

IRS Claims Of Collection Enforcement And Examinations

On January 12, 2024 the IRS announced continued progress to expand enforcement efforts and increase scrutiny related to high-income individuals, large corporations, complex partnerships who do not pay overdue tax bills as a result of the additional funding it is receiving under the Inflation Reduction Act.

In its enforcement efforts and increasing scrutiny, the IRS is focusing on people using partnerships to avoid paying self-employment taxes. The IRS is also continuing to pursue millionaires that have not paid hundreds of millions of dollars in tax debt, with an additional $360 million collected on top of the $122 million reported in late October 2023. The IRS has now collected $482 million in ongoing efforts to recoup taxes owed by 1,600 millionaires with work continuing in this area.

The various and specific ways the IRS is pursuing higher scrutiny and expanding their enforcement efforts include, prioritization of high-income collection cases, pursuing multi-million-dollar partnership balance sheet discrepancies, ramp of audits of 76 largest partnerships leveraging artificial intelligence, compliance alerts for large foreign-owned corporations who use transfer pricing rules year after year to report losses and avoid reporting an appropriate amount of U.S. profits, expansion of large corporate compliance program, and IRS has been increasing compliance to ensure that Self-Employment Contributions Act (SECA) taxes are being properly reported and paid by wealthy individual partners who provide services and have inappropriately claimed to qualify as “limited partners” in state law limited partnerships (such as investment partnerships) not subject to SECA tax.

IRS Commissioner Danny Werfel noted Inflation Reduction Act resources allows the IRS “to increase scrutiny on high-income taxpayers as we work to reverse the historic low audit rates and limited focus that the wealthiest individuals and organizations faced in the years that predated the Inflation Reduction Act. We are adding staff and technology to ensure that the taxpayers with the highest income, including partnerships, large corporations and millionaires and billionaires, pay what is legally owed under federal law. At the same time, we are focused on improving our taxpayer service for hard-working taxpayers, offering them more in-person and online resources as part of our effort to deliver another successful tax season in 2024. The additional resources the IRS has received is making a difference for taxpayers, and we plan to build on these improvements in the months ahead.”

IRS begins audits of corporate aircraft usage to increase scrutiny related to high-income individuals and improve tax compliance  

On February 21, 2024 the IRS announced that more audits will focus on aircraft usage by large corporations, large partnerships and high-income taxpayers and whether for tax purposes the use of aircrafts is being properly allocated between business and personal reasons.

Business aircraft are often used for both business and personal reasons by officers, executives, other employees, shareholders and partners. In general, the tax code passed by Congress allows a business deduction for expenses of maintaining an asset, such as a corporate jet, if that asset is utilized for a business purpose. However, the use of a company aircraft must be allocated between business use and personal use.  Since personal use cannot be a business deduction, there must be an allocation between aircraft usage for business and personal reasons. This can make record-keeping challenging.

For someone such as an executive using the company jet for personal travel, the amount of personal usage impacts eligibility for certain business deductions. Use of the company jet for personal travel typically results in income inclusion by the individual using the jet for personal travel and could also impact the business’s eligibility to deduct costs related to the personal travel.

The examination of corporate jet usage is part of the IRS Large Business and International division’s “campaign” program. The IRS designated campaigns apply different compliance streams to help address areas that the IRS believes there is a high risk of non-compliance.  Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to shelter or manipulate their income to avoid taxes. Using the additional funding from the Inflation Reduction Act, the IRS says it is now taking swift and aggressive action to close this gap.

New examples of cases closed since the Inflation Reduction Act passed

  • In January 2024, two individuals were sentenced to 25 years and 23 years respectively in prison for conspiracy to commit wire fraud, aiding and assisting the filing of false tax returns and money laundering for their role in promoting a fraudulent tax shelter scheme involving syndicated conservation easements.
  • In December 2023, a Swiss Bank entered into a Deferred Prosecution Agreement (DPA) and agreed to pay approximately $122.9 million to the U.S. Treasury for their role in assisting U.S. taxpayer-clients with evading their U.S. taxes by opening and maintaining undeclared accounts. The bank also maintained accounts of certain U.S. taxpayer-clients in a manner that allowed them to further conceal their undeclared accounts from the IRS. In total, from 2008 through 2014, the bank held 1,637 U.S. Penalty Accounts, with aggregate maximum assets under management of approximately $5.6 billion in January 2008, on behalf of clients who collectively evaded approximately $50.6 million in U.S. taxes.
  • In December 2023, an individual was sentenced to 10 years and 10 months and ordered to pay more than $130,000 in restitution, another was sentenced to 102 months in prison and ordered to pay more than $2.5M in restitution and a third individual was sentenced to four years in prison and ordered to pay more than $2.5M in restitution for their involvement in a RICO Conspiracy for cyber intrusion and tax fraud. These individuals used the dark web to purchase server credentials for the computer servers of Certified Public Accounting and tax preparation firms across the country.
  • In December 2023, an individual was sentenced to 28 months in federal prison and ordered to pay over $470,000 in restitution to the IRS for filing a false tax return while working as a money mule for romance scams. The individual opened and maintained bank accounts to collect proceeds from the schemes and to send the money to himself and others overseas.
  • An individual was sentenced to 57 months in prison for their failure to pay more than $1.35 million of taxes arising from their operation of several restaurants in the Washington, D.C. area. The individual evaded taxes by concealing assets and obscuring the large sums of money they took from the businesses by purchasing property in the name of a nominee entity and causing false entries in the businesses’ books and records to hide personal purchases using business bank accounts.

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

Appealing Results Of An IRS Tax Audit

Now if your IRS tax audit is not resolved, the results may be challenged. After the Revenue Agent has concluded the tax examination, the agent will issue a copy of the examination report explaining the agent’s proposed changes along with notice of your appeals rights. Pay attention to the type of letter that is included as it will dictate the appeals process available to you.

The “30-day letter”

The “30-day letter” gives you the right to challenge the proposed adjustment in the IRS Office Of Appeals. To do this, you need to file a Tax Protest within 30 days of the date of the notice. The Appeals Office is the only level of appeal within the IRS and is separate from and independent of the IRS office taking the action you disagree with. Conferences with Appeals Office personnel are held in an informal manner by correspondence, by telephone, or at a personal conference.

The “Notice Of Deficiency”

If the IRS does not adopt your position, it will send a notice proposing a tax adjustment (known as a statutory notice of deficiency). The statutory notice of deficiency gives you the right to challenge the proposed adjustment in the United States Tax Court before paying it. To do this, you need to file a petition within 90 days of the date of the notice (150 days if the notice is addressed to you outside the United States). If you filed your petition on time, the court will eventually schedule your case for trial at the designation place of trial you set forth in your petition. Prior to trial you should have the opportunity to seek a settlement with IRS Area Counsel and in certain cases, such settlement negotiations could be delegated to the IRS Office Of Appeals. If there is still disagreement and the case does go to trial, you will have the opportunity to present your case before a Tax Court judge. The judge after hearing your case and reviewing the record and any post-trial briefs will render a decision in the form of an Opinion. It could take as much as two years after trial before an Opinion issued. If the Opinion is not appealed to a Circuit Court Of Appeals, then the proposed deficiency under the Opinion is final and your account will be sent to IRS Collections.

IRS Area Counsel are experienced trial attorneys working for the IRS whose job is to litigate cases in the U.S. Tax Court and look out for the best interests of the Federal government. So to level the playing field, it would be prudent for a taxpayer to hire qualified tax counsel as soon as possible to seek a mutually acceptable resolution without the need for trial, and if that does not happen, to already have the legal expertise in place to vigorously defend you at trial.

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.

California Cities Decriminalize Psychedelics While The California Legislature Considers Legalizing Psychedelics

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In February 2024, California Sen. Scott Wiener, and Assemblymember Marie Waldron, proposed Senate Bill 2012 named The Regulated Psychedelic-assisted Therapy Act and the Regulated Psychedelic Substances Control Act.

This new proposal follows Governor Newsom’s veto of a bill in October 2023 that would have decriminalized the possession of psychedelic drugs. Newsom stated that he would support a bill focused more on therapies and treatment: “California should immediately begin work to set up regulated treatment guidelines — replete with dosing information, therapeutic guidelines, rules to prevent against exploitation during guided treatments, and medical clearance of no underlying psychose.”

This new Senate Bill 1012 focuses more on therapies and treatment following Newsom’s comments and previous veto. Senate Bill 1012 would allow adults 21 and older to use the hallucinogenic drugs psilocybin mushrooms, MDMA, DMT and mescaline in a controlled setting and under the supervision of a licensed and trained facilitator. Furthermore, Senate Bill 1012 would require California to establish a licensing board that would develop training and oversight rules for therapy facilitators. Therapy Facilitators would have to screen individuals before they can participate. Also, the bill calls for the creation of a public-private fund to support grants for public health education related to psychedelics.

If this bill becomes law, California would be the third state in the nation to legalize psychedelics (following Colorado and Oregon).

There are four cities in California which have already decriminalized a range of psychedelic substances – Oakland, Berkeley, Santa Cruz and Eureka.

Oakland Decriminalizes Psychedelic Mushrooms – Oakland passed a resolution in July 2019 to effectively decriminalize psychedelic mushrooms and other psychoactive plants and fungi. The resolution says city money will not be used to assist in the enforcement of laws imposing criminal penalties for the use and possession of entheogenic plants by adults. It says that investigating people for growing, buying, distributing or possessing the substances shall be amongst the lowest law enforcement priority for the City of Oakland. The resolution however does not allow for commercial sale or manufacturing of the mushrooms.

Berkeley Decriminalizes Psychedelics – Berkeley decriminalized a range of psychedelic substances within city limits in July 2023. The resolution de-prioritizes enforcement of state and federal laws against entheogenic and psychedelic plants and fungi.  The resolution also forbids “giving away, sharing, distributing, transferring, dispensing, or administering” psychedelics. The council’s resolution, does not include psychedelics “produced through artificial synthesis,” it only includes “plant- or fungus-biosynthesized psychedelic drugs.”

Santa Cruz Decriminalizes Psychedelics – In January 2020, the Santa Cruz City Council voted to decriminalize adult use, possession and cultivation of entheogenic psychoactive plants and fungi. In the Resolution, a provision was inserted to clarify that “the sale, use and cultivation of Entheogenic Plants and Fungi to and by minors should be considered an exception that should require appropriate investigation by the Santa Cruz City Police Department.” Furthermore, the Resolution instructs the city’s state and federal lobbyists to “work in support of decriminalizing all entheogenic psychoactive plants, and plant and fungi-based compounds listed in the Federal Controlled Substances Act.”

Eureka City Council Decriminalizes Entheogenic Plants and Fungi – The Eureka City Council decriminalized Entheogenic Plants and Fungi in October 2023. The ordinance directs the police to deprioritize busting people 21 years and older for the personal use, cultivation or possession of entheogenic plants and fungi like psilocybin mushrooms, peyote and other hallucinogens. The ordinance does not decriminalize commercial sales or use by those under 21.

New research into psychedelic therapies

There is a lot of research being conducted in regard to how psychedelic drugs may positively impact and treat mental health illnesses, such as depression or PTSD. One such study was published by the Association of America Medical Colleges.  The U.S. Food and Drug Administration has not approved psychedelic-assisted therapies. However, in December 2023, the nonprofit research group Multidisciplinary Association for Psychedelic Studies applied for FDA review of its MDMA-assisted therapy for PTSD, which could come later this year. Furthermore, the Department of Veterans Affairs announced its intent to study psychedelics for the treatment of PTSD and depression.

A Complex Tax Landscape for Psychedelics and Cannabis

Similarly to Cannabis, where the Federal government has outlawed it but various states or cities have legalized Cannabis, a complex tax landscape may be created for legal businesses involved in psychedelic activities. Many psychedelics fall under the category of Schedule I substances under the Controlled Substances Act. This classification usually results in the disallowance of federal tax deductions related to the production and sale of these substances. IRS Code Section 280E, originally conceived for illegal drug trafficking organizations, has been used to restrict deductions for businesses engaged in the sale of controlled substances. But companies involved in legal psychedelic activities, specifically such as research or therapy, may not be subject to the same restrictions, potentially allowing them to claim deductions, such a Cannabis businesses do. For example, Cannabis business owners can deduct their cost of goods sold, which is basically the cost of their inventory. What isn’t deductible are the normal overhead expenses, such as advertising expenses, wages and salaries, and travel expenses. In addition, businesses operating in the psychedelics industry and Cannabis industry must navigate different state tax laws.

What Should You Do?

The nuance of this subject matter and different federal, state, and city tax laws can be a challenge for some business owners. 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. 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), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. 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.

California Looking to Legalize Psychedelics

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Currently there are two States that have legalized psychedelics, namely: Colorado and Oregon.  California is now considering to join these states as well.  In February 2024, California Sen. Scott Wiener, and Assemblymember Marie Waldron, proposed Senate Bill 2012 named The Regulated Psychedelic-assisted Therapy Act and the Regulated Psychedelic Substances Control Act.

This new proposal follows Governor Newsom’s veto of a bill in October 2023 that would have decriminalized the possession of psychedelic drugs. Newsom stated that he would support a bill focused more on therapies and treatment: “California should immediately begin work to set up regulated treatment guidelines — replete with dosing information, therapeutic guidelines, rules to prevent against exploitation during guided treatments, and medical clearance of no underlying psychose.”

This new Senate Bill 1012 focuses more on therapies and treatment following Newsom’s comments and previous veto. Senate Bill 1012 would allow adults 21 and older to use the hallucinogenic drugs psilocybin mushrooms, MDMA, DMT and mescaline in a controlled setting and under the supervision of a licensed and trained facilitator. Furthermore, Senate Bill 1012 would require California to establish a licensing board that would develop training and oversight rules for therapy facilitators. Therapy Facilitators would have to screen individuals before they can participate. Also, the bill calls for the creation of a public-private fund to support grants for public health education related to psychedelics.

New research into psychedelic therapies

There is a lot of research being conducted in regard to how psychedelic drugs may positively impact and treat mental health illnesses, such as depression or PTSD. One such study was published by the Association of America Medical Colleges.  The U.S. Food and Drug Administration has not approved psychedelic-assisted therapies. However, in December 2023, the nonprofit research group Multidisciplinary Association for Psychedelic Studies applied for FDA review of its MDMA-assisted therapy for PTSD, which could come later this year. Furthermore, the Department of Veterans Affairs announced its intent to study psychedelics for the treatment of PTSD and depression.

A Complex Tax Landscape for Psychedelics and Cannabis

Similarly to Cannabis, where the Federal government has outlawed it but various states have legalized Cannabis, a complex tax landscape may be created for legal businesses involved in psychedelic activities. Many psychedelics fall under the category of Schedule I substances under the Controlled Substances Act. This classification usually results in the disallowance of federal tax deductions related to the production and sale of these substances. IRS Code Section 280E, originally conceived for illegal drug trafficking organizations, has been used to restrict deductions for businesses engaged in the sale of controlled substances. But companies involved in legal psychedelic activities, specifically such as research or therapy, may not be subject to the same restrictions, potentially allowing them to claim deductions, such a Cannabis businesses do. For example, Cannabis business owners can deduct their cost of goods sold, which is basically the cost of their inventory. What isn’t deductible are the normal overhead expenses, such as advertising expenses, wages and salaries, and travel expenses. In addition, businesses operating in the psychedelics industry and Cannabis industry must navigate different state tax laws.

What Should You Do?

The nuance of this subject matter and different federal and state tax laws can be a challenge for some business owners. 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. 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), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. 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.

 

Michigan taxpayers impacted by August 2023 flooding and severe storms qualify for tax relief

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On February 15, 2024 the Internal Revenue Service (IRS) announced tax relief for individuals and businesses affected by severe storms, tornadoes and flooding that began on August 24, 2023 in parts of Michigan. These taxpayers now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

The June 17, 2024, deadline will now apply to:

  • Individual income tax returns and payments normally due on April 15, 2024. Anyone who needs an additional tax-filing extension, beyond June 17, for their 2023 federal income tax return should request it electronically by April 15. Though a disaster-area taxpayer qualifies to request an extension between April 15 and June 17, a request filed during this period can only be submitted on paper. Whether requested electronically or on paper, you will then have until October 15, 2024, to file, though payments are still due on June 17, 2024.
  • 2023 contributions to IRAs and health savings accounts for eligible taxpayers.
  • Quarterly estimated income tax payments normally due on September 15, 2023, January 16, 2024 and April 15, 2024.
  • Quarterly payroll and excise tax returns normally due on October 31, 2023, January 31, 2024 and April 30, 2024.
  • Calendar-year partnership and S corporation returns normally due on March 15, 2024.
  • Calendar-year corporation and fiduciary returns and payments normally due on April 15, 2024.
  • Calendar-year tax-exempt organization returns normally due on May 15, 2024.

In addition, individuals and businesses that had an extension to file their 2022 returns will also have until June 17, 2024, to file them. However, tax-year 2022 tax payments are not eligible for this relief because they were originally due last spring, before the disaster occurred.

In addition, penalties for failing to make payroll and excise tax deposits due on or after August 24, 2023, and before September 8, 2023, will be abated as long as the deposits are made by September 8, 2023.

Other Areas Having Extended Deadlines:

The IRS announced on December 22, 2023 that individuals and businesses affected by severe storms and tornadoes that began on December 9 in parts of Tennessee now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on January 22, 2024 that individuals and businesses affected by severe storms, flooding and a potential dam breach that began on January 10, 2024 in parts of Connecticut now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on January 30, 2024 that individuals and businesses affected by severe storms, flooding and tornadoes that began on September 10, 2023 in parts of Rhode Island now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on February 5, 2024 that individuals and businesses affected by severe storms and flooding that began on December 17, 2023 in parts of Maine now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance.

For Michigan – Currently, relief is available to affected taxpayers who live or have a business in Eaton, Ingham, Ionia, Kent, Livingston, Macomb, Monroe, Oakland and Wayne counties.

For Maine – Currently, relief is available to affected taxpayers who live or have a business in Androscoggin, Franklin, Hancock, Kennebec, Oxford, Penobscot, Piscataquis, Somerset, Waldo and Washington Counties.

For Rhode Island – Currently, relief is available to affected taxpayers who live or have a business in Providence County.

For Connecticut – Currently, relief is available to affected taxpayers who live or have a business in New London County, including the Mohegan Tribal Nation and Mashantucket Pequot Tribal Nation.

For Tennessee – Currently, relief is available to affected taxpayers who live or have a business in Davidson, Dickson, Montgomery and Sumner counties.

The current list of eligible localities is always available on the disaster relief page on IRS.gov.  The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area.

Tax Planning Tip

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2024 return normally filed next year), or the return for the current year (2023).

Be sure to write the FEMA declaration number on any return claiming a loss.  That number being: “4751-DR” for Tennessee or “3604-EM’ for Connecticut or “4753-DR” for Rhode Island or “4754-DR” for Maine.

Qualified disaster relief payments are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents.

Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow.

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

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), 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.

Can Daily Cannabis Use Help Subjects With Generalized Anxiety Sleep Better?

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According to data published in the journal Behavioral Sleep Medicine, patients with moderate anxiety report experiencing increased sleep quality following their use of cannabis.

Furthermore, researchers with the University of Colorado at Boulder studied the relationship between cannabis use and sleep quality in 348 adults with symptoms of generalized anxiety. Study participants were to ingest either cannabis flower or edibles that were either THC dominant, CBD dominant, or contained equal quantities of both. The participants in this study completed daily online surveys for 30 days and the participants reported that they slept better on those days when they consumed cannabis.

The study’s authors concluded: “We report on 30 days of daily cannabis use and sleep quality data among a community sample with mild-to-moderate anxiety. Our results suggest that cannabis use on a particular day is associated with better perceived sleep quality during the night and that these associations are stronger among those with higher negative affective symptoms and those using CBD dominant edible forms of cannabis.”

In addition, a study in the United Kingdom recently published data from an observational trial in the journal Neuropsychopharmacology Reports, which found that patients with generalized anxiety disorder show sustained symptom relief after their use of various cannabis products.

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

The Anti-Federal U.S. Climate

The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. Although you can still face federal criminal charges for using, growing, or selling weed in a manner that is completely lawful under California law, the federal authorities in the past have pulled back from targeting individuals and businesses engaged in medical marijuana activities. This pull back came from Department of Justice (“DOJ”) Safe Harbor Guidelines issued in 2013 under what is known as the “Cole Memo”.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

Since 2013, these guidelines provided a level of certainty to the marijuana industry as to what point could you be crossing the line with the Federal government.  But on January 4, 2018, then Attorney General Jeff Sessions revoked the Cole Memo.  Now U.S. Attorneys in the local offices throughout the country retain broad prosecutorial discretion as to whether to prosecute cannabis businesses under federal law even though the state that these businesses operate in have legalized some form of marijuana.

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

The medical use of cannabis is legal (with a doctor’s recommendation) in 38 states and Washington DC. Those 38 states being Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

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

Building on the DOJ’s issuance of the Cole Memo, in 2014 the House passed an amendment to the yearly federal appropriations bill that effectively shields medical marijuana businesses from federal prosecution. Proposed by Representatives Rohrabacher and Farr, the amendment forbids federal agencies to spend money on investigating and prosecuting medical marijuana-related activities in states where such activities are legal.

The amendment states that:

NONE OF THE FUNDS MADE AVAILABLE UNDER THIS ACT TO THE DEPARTMENT OF JUSTICE MAY BE USED, WITH RESPECT TO ANY OF THE STATES OF ALABAMA, ALASKA, ARIZONA, ARKANSAS, CALIFORNIA, COLORADO, CONNECTICUT, DELAWARE, FLORIDA, GEORGIA, HAWAII, ILLINOIS, INDIANA, IOWA, KENTUCKY, LOUISIANA, MAINE, MARYLAND, MASSACHUSETTS, MICHIGAN, MINNESOTA, MISSISSIPPI, MISSOURI, MONTANA, NEVADA, NEW HAMPSHIRE, NEW JERSEY, NEW MEXICO, NEW YORK, NORTH CAROLINA, NORTH DAKOTA, OHIO, OKLAHOMA, OREGON, PENNSYLVANIA, RHODE ISLAND, SOUTH CAROLINA, TENNESSEE, TEXAS, UTAH, VERMONT, VIRGINIA, WASHINGTON, WEST VIRGINIA, WISCONSIN, AND WYOMING, OR WITH RESPECT TO THE DISTRICT OF COLUMBIA, GUAM, OR PUERTO RICO, TO PREVENT ANY OF THEM FROM IMPLEMENTING THEIR OWN LAWS THAT AUTHORIZE THE USE, DISTRIBUTION, POSSESSION, OR CULTIVATION OF MEDICAL MARIJUANA.

This action by the House is not impacted by the change of position by the DOJ. However, unless this amendment gets included in each succeeding federal appropriations bill, the protection from Federal prosecution of medical marijuana businesses will no longer be in place.  Fortunately, Congress has included this amendment but yet has changed any of the tax or banking laws that pose challenges to the cannabis industry.

Clearly, to avail yourself of the protections of the amendment, you must be on the medical cannabis side and you must be in complete compliance with your State’s medical cannabis laws and regulations. You may not be covered under the amendment if you are involved in the recreational cannabis side even if legal in the State you are operating.

What Should You Do?

Given the illegal status of cannabis under Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  Although cannabis is legal in California, that is not enough to protect you. Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

IRS ramps up new initiatives using Inflation Reduction Act funding

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More than $482 million recovered from 1,600 millionaires who have not paid tax debts.

Under the Inflation Reduction Act the IRS is receiving $80 billion in new funding over nine years. The $80 billion price tag is more than six times the current annual IRS budget of $12.6 billion. The money will be distributed to IRS over nine years and comes with few strings attached.

IRS Claims Of Collection Enforcement And Examinations

On January 12, 2024 the IRS announced continued progress to expand enforcement efforts and increase scrutiny related to high-income individuals, large corporations, complex partnerships who do not pay overdue tax bills as a result of the additional funding it is receiving under the Inflation Reduction Act.

In its enforcement efforts and increasing scrutiny, the IRS is focusing on people using partnerships to avoid paying self-employment taxes. The IRS is also continuing to pursue millionaires that have not paid hundreds of millions of dollars in tax debt, with an additional $360 million collected on top of the $122 million reported in late October 2023. The IRS has now collected $482 million in ongoing efforts to recoup taxes owed by 1,600 millionaires with work continuing in this area.

The various and specific ways the IRS is pursuing higher scrutiny and expanding their enforcement efforts include, prioritization of high-income collection cases, pursuing multi-million-dollar partnership balance sheet discrepancies, ramp of audits of 76 largest partnerships leveraging artificial intelligence, compliance alerts for large foreign-owned corporations who use transfer pricing rules year after year to report losses and avoid reporting an appropriate amount of U.S. profits, expansion of large corporate compliance program, and IRS has been increasing compliance to ensure that Self-Employment Contributions Act (SECA) taxes are being properly reported and paid by wealthy individual partners who provide services and have inappropriately claimed to qualify as “limited partners” in state law limited partnerships (such as investment partnerships) not subject to SECA tax.

IRS Commissioner Danny Werfel noted Inflation Reduction Act resources allows the IRS “to increase scrutiny on high-income taxpayers as we work to reverse the historic low audit rates and limited focus that the wealthiest individuals and organizations faced in the years that predated the Inflation Reduction Act. We are adding staff and technology to ensure that the taxpayers with the highest income, including partnerships, large corporations and millionaires and billionaires, pay what is legally owed under federal law. At the same time, we are focused on improving our taxpayer service for hard-working taxpayers, offering them more in-person and online resources as part of our effort to deliver another successful tax season in 2024. The additional resources the IRS has received is making a difference for taxpayers, and we plan to build on these improvements in the months ahead.”

New examples of cases closed since the Inflation Reduction Act passed

  • In January 2024, two individuals were sentenced to 25 years and 23 years respectively in prison for conspiracy to commit wire fraud, aiding and assisting the filing of false tax returns and money laundering for their role in promoting a fraudulent tax shelter scheme involving syndicated conservation easements.
  • In December 2023, a Swiss Bank entered into a Deferred Prosecution Agreement (DPA) and agreed to pay approximately $122.9 million to the U.S. Treasury for their role in assisting U.S. taxpayer-clients with evading their U.S. taxes by opening and maintaining undeclared accounts. The bank also maintained accounts of certain U.S. taxpayer-clients in a manner that allowed them to further conceal their undeclared accounts from the IRS. In total, from 2008 through 2014, the bank held 1,637 U.S. Penalty Accounts, with aggregate maximum assets under management of approximately $5.6 billion in January 2008, on behalf of clients who collectively evaded approximately $50.6 million in U.S. taxes.
  • In December 2023, an individual was sentenced to 10 years and 10 months and ordered to pay more than $130,000 in restitution, another was sentenced to 102 months in prison and ordered to pay more than $2.5M in restitution and a third individual was sentenced to four years in prison and ordered to pay more than $2.5M in restitution for their involvement in a RICO Conspiracy for cyber intrusion and tax fraud. These individuals used the dark web to purchase server credentials for the computer servers of Certified Public Accounting and tax preparation firms across the country.
  • In December 2023, an individual was sentenced to 28 months in federal prison and ordered to pay over $470,000 in restitution to the IRS for filing a false tax return while working as a money mule for romance scams. The individual opened and maintained bank accounts to collect proceeds from the schemes and to send the money to himself and others overseas.
  • An individual was sentenced to 57 months in prison for their failure to pay more than $1.35 million of taxes arising from their operation of several restaurants in the Washington, D.C. area. The individual evaded taxes by concealing assets and obscuring the large sums of money they took from the businesses by purchasing property in the name of a nominee entity and causing false entries in the businesses’ books and records to hide personal purchases using business bank accounts.

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

Appealing Results Of An IRS Tax Audit

Now if your IRS tax audit is not resolved, the results may be challenged. After the Revenue Agent has concluded the tax examination, the agent will issue a copy of the examination report explaining the agent’s proposed changes along with notice of your appeals rights. Pay attention to the type of letter that is included as it will dictate the appeals process available to you.

The “30-day letter”

The “30-day letter” gives you the right to challenge the proposed adjustment in the IRS Office Of Appeals. To do this, you need to file a Tax Protest within 30 days of the date of the notice. The Appeals Office is the only level of appeal within the IRS and is separate from and independent of the IRS office taking the action you disagree with. Conferences with Appeals Office personnel are held in an informal manner by correspondence, by telephone, or at a personal conference.

The “Notice Of Deficiency”

If the IRS does not adopt your position, it will send a notice proposing a tax adjustment (known as a statutory notice of deficiency). The statutory notice of deficiency gives you the right to challenge the proposed adjustment in the United States Tax Court before paying it. To do this, you need to file a petition within 90 days of the date of the notice (150 days if the notice is addressed to you outside the United States). If you filed your petition on time, the court will eventually schedule your case for trial at the designation place of trial you set forth in your petition. Prior to trial you should have the opportunity to seek a settlement with IRS Area Counsel and in certain cases, such settlement negotiations could be delegated to the IRS Office Of Appeals. If there is still disagreement and the case does go to trial, you will have the opportunity to present your case before a Tax Court judge. The judge after hearing your case and reviewing the record and any post-trial briefs will render a decision in the form of an Opinion. It could take as much as two years after trial before an Opinion issued. If the Opinion is not appealed to a Circuit Court Of Appeals, then the proposed deficiency under the Opinion is final and your account will be sent to IRS Collections.

IRS Area Counsel are experienced trial attorneys working for the IRS whose job is to litigate cases in the U.S. Tax Court and look out for the best interests of the Federal government. So to level the playing field, it would be prudent for a taxpayer to hire qualified tax counsel as soon as possible to seek a mutually acceptable resolution without the need for trial, and if that does not happen, to already have the legal expertise in place to vigorously defend you at trial.

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.

West Virginia taxpayers impacted by severe storms, flooding, landslides and mudslides qualify for tax relief

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On February 7, 2024 the Internal Revenue Service (IRS) announced tax relief for individuals and businesses affected by severe storms, flooding, landslides and mudslides that began on August 28, 2023 in parts of West Virginia. These taxpayers now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

The June 17, 2024, deadline will now apply to:

  • Individual income tax returns and payments normally due on April 15, 2024. Anyone who needs an additional tax-filing extension, beyond June 17, for their 2023 federal income tax return should request it electronically by April 15. Though a disaster-area taxpayer qualifies to request an extension between April 15 and June 17, a request filed during this period can only be submitted on paper. Whether requested electronically or on paper, you will then have until October 15, 2024, to file, though payments are still due on June 17, 2024.
  • 2023 contributions to IRAs and health savings accounts for eligible taxpayers.
  • Quarterly estimated income tax payments normally due on September 15, 2023, January 16, 2024 and April 15, 2024.
  • Quarterly payroll and excise tax returns normally due on October 31, 2023, January 31, 2024 and April 30, 2024.
  • Calendar-year partnership and S corporation returns normally due on March 15, 2024.
  • Calendar-year corporation and fiduciary returns and payments normally due on April 15, 2024.
  • Calendar-year tax-exempt organization returns normally due on May 15, 2024.

In addition, penalties for failing to make payroll and excise tax deposits due on or after August 28, 2023, and before September 12, 2023, will be abated as long as the deposits are made by September 12, 2023.

Other Areas Having Extended Deadlines:

The IRS announced on August 18, 2023 that Hawaii wildfire victims in Maui and Hawaii counties have until February 15, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on August 30, 2023 that Idalia storm victims in various Florida counties have until February 15, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on September 13, 2023 that Idalia storm victims in Georgia have until February 15, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on September 25, 2023 that Hurricane Lee victims anywhere in Maine and Massachusetts have until February 15, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on September 29, 2023 that individuals and businesses affected by seawater intrusion in parts of Louisiana have until February 15, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on December 22, 2023 that individuals and businesses affected by severe storms and tornadoes that began on December 9 in parts of Tennessee now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on January 22, 2024 that individuals and businesses affected by severe storms, flooding and a potential dam breach that began on January 10, 2024 in parts of Connecticut now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on January 30, 2024 that individuals and businesses affected by severe storms, flooding and tornadoes that began on September 10, 2023 in parts of Rhode Island now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on February 5, 2024 that individuals and businesses affected by severe storms, flooding and tornadoes that began on December 17, 2023 in parts of Maine now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance.

For West Virginia – Currently, relief is available to affected taxpayers who live or have a business in Boone, Calhoun, Clay, Harrison and Kanawha counties.

For Maine – Currently, relief is available to affected taxpayers who live or have a business in Androscoggin, Franklin, Hancock, Kennebec, Oxford, Penobscot, Piscataquis, Somerset, Waldo and Washington Counties.

For Rhode Island – Currently, relief is available to affected taxpayers who live or have a business in Providence County.

For Connecticut – Currently, relief is available to affected taxpayers who live or have a business in New London County, including the Mohegan Tribal Nation and Mashantucket Pequot Tribal Nation.

For Tennessee – Currently, relief is available to affected taxpayers who live or have a business in Davidson, Dickson, Montgomery and Sumner counties.

For Louisiana – Currently, relief is available to affected taxpayers who live or have a business in Jefferson, Orleans, Plaquemines and St. Bernard parishes.

For Maine and Massachusetts – Currently, relief is available to affected taxpayers who live or have a business anywhere in Maine or Massachusetts.

For Georgia – Currently, relief is available to affected taxpayers who live or have a business anywhere in Appling, Atkinson, Bacon, Berrien, Brantley, Brooks, Bulloch, Camden, Candler, Charlton, Clinch, Coffee, Colquitt, Cook, Echols, Emanuel, Glynn, Jeff Davis, Jenkins, Lanier, Lowndes, Pierce, Screven, Tattnall, Thomas, Tift, Ware and Wayne counties.

For Florida – Currently, relief is available to affected taxpayers who live or have a business anywhere in Alachua, Baker, Bay, Bradford, Brevard, Calhoun, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Duval, Flagler, Franklin, Gadsden, Gilchrist, Gulf, Hamilton, Hardee, Hernando, Hillsborough, Jefferson, Lafayette, Lake, Lee, Leon, Levy, Liberty, Madison, Manatee, Marion, Nassau, Orange, Osceola, Pasco, Pinellas, Polk, Putnam, Sarasota, Seminole, St. Johns, Sumter, Suwannee, Taylor, Union, Volusia and Wakulla counties

For Hawaii – Currently, relief is available to affected taxpayers who live or have a business anywhere in Maui and Hawaii counties.

The current list of eligible localities is always available on the disaster relief page on IRS.gov.  The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area.

Tax Planning Tip

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2024 return normally filed next year), or the return for the current year (2023).

Be sure to write the FEMA declaration number on any return claiming a loss.  That number being: “DR-4724-HI” for Hawaii or “DR-3596-EM” for Florida or “4738-DR” for Georgia or “3598-EM” for Maine or “3599-EM” for Massachusetts or “3600-EM” for Louisiana or “4751-DR” for Tennessee or “3604-EM’ for Connecticut or “4753-DR” for Rhode Island or “4754-DR” for Maine (note the second listing of Main relates to the December 2023 disaster declaration) or “4756-DR” for West Virginia.

Qualified disaster relief payments are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents.

Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow.

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

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), 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.

New Tax Rule Affecting People Who Use Venmo, Paypal Or Other Payment Apps Put On Hold….. Again.

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IRS announces delay for implementation of $600 reporting threshold for third-party payment platforms’ Forms 1099-K

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.

IRS Commissioner Danny Werfel stated: “We spent many months gathering feedback from third party groups and others, and it became increasingly clear we need additional time to effectively implement the new reporting requirements.  Taking this phased-in approach is the right thing to do for the purposes of tax administration, and it prevents unnecessary confusion as we continue to look at changes to the Form 1040. It’s clear that an additional delay for tax year 2023 will avoid problems for taxpayers, tax professionals and others in this area.”

As the IRS continues to work to implement the new rule, the IRS is treating 2023 as an additional transition year, which applies to taxes filed this year. As a result, reporting will not be required unless the taxpayer receives over $20,000 and has more than 200 transactions in 2023, although taxpayers may still receive a form for amounts less than the required reporting amount.

Starting with the 2024 calendar year, payment app providers will have to start reporting to the IRS a user’s business transactions if, in aggregate, they total $600 or more for the year. The reporting form to use is a Form 1099-K.  A business transaction is defined as payment for a good or service.

Prior to this change, app providers only had to send the IRS a Form 1099-K if an individual account had at least 200 business transactions in a year and if those transactions combined resulted in gross payments of at least $20,000.  Form 1099-K is used to report certain payments that you received for selling goods or providing services, not making purchases.

The expansion of the reporting rule is 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.

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 57.5 cents per mile for the first 6 months of 2022 and 62.5 cents for the last 6 months of 2022. 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 2023 tax year are due on April 18, 2023, June 15, 2023, September 15, 2023 and January 15, 2024. 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 filing the 1099-K form, taxes, or 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), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. 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.

Maine taxpayers impacted by December 2023 flooding and severe storms qualify for tax relief

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On February 5, 2024 the Internal Revenue Service (IRS) announced tax relief for individuals and businesses affected by severe storms and flooding that began on December 17, 2023 in parts of Maine. These taxpayers now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

The June 17, 2024, deadline will now apply to:

  • Individual income tax returns and payments normally due on April 15, 2024. Anyone who needs an additional tax-filing extension, beyond June 17, for their 2023 federal income tax return should request it electronically by April 15. Though a disaster-area taxpayer qualifies to request an extension between April 15 and June 17, a request filed during this period can only be submitted on paper. Whether requested electronically or on paper, you will then have until October 15, 2024, to file, though payments are still due on June 17, 2024.
  • 2023 contributions to IRAs and health savings accounts for eligible taxpayers.
  • Quarterly estimated income tax payments normally due on January 16, 2024 and April 15, 2024.
  • Quarterly payroll and excise tax returns normally due on January 31, 2024 and April 30, 2024.
  • Calendar-year partnership and S corporation returns normally due on March 15, 2024.
  • Calendar-year corporation and fiduciary returns and payments normally due on April 15, 2024.
  • Calendar-year tax-exempt organization returns normally due on May 15, 2024.

In addition, penalties for failing to make payroll and excise tax deposits due on or after January 10, 2024, and before January 25, 2024, will be abated as long as the deposits are made by January 25, 2024.

Other Areas Having Extended Deadlines:

The IRS announced on August 18, 2023 that Hawaii wildfire victims in Maui and Hawaii counties have until February 15, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on August 30, 2023 that Idalia storm victims in various Florida counties have until February 15, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on September 13, 2023 that Idalia storm victims in Georgia have until February 15, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on September 25, 2023 that Hurricane Lee victims anywhere in Maine and Massachusetts have until February 15, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on September 29, 2023 that individuals and businesses affected by seawater intrusion in parts of Louisiana have until February 15, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on December 22, 2023 that individuals and businesses affected by severe storms and tornadoes that began on December 9 in parts of Tennessee now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on January 22, 2024 that individuals and businesses affected by severe storms, flooding and a potential dam breach that began on January 10, 2024 in parts of Connecticut now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on January 30, 2024 that individuals and businesses affected by severe storms, flooding and tornadoes that began on September 10, 2023 in parts of Rhode Island now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance.

For Maine – Currently, relief is available to affected taxpayers who live or have a business in Androscoggin, Franklin, Hancock, Kennebec, Oxford, Penobscot, Piscataquis, Somerset, Waldo and Washington Counties.

For Rhode Island – Currently, relief is available to affected taxpayers who live or have a business in Providence County.

For Connecticut – Currently, relief is available to affected taxpayers who live or have a business in New London County, including the Mohegan Tribal Nation and Mashantucket Pequot Tribal Nation.

For Tennessee – Currently, relief is available to affected taxpayers who live or have a business in Davidson, Dickson, Montgomery and Sumner counties.

For Louisiana – Currently, relief is available to affected taxpayers who live or have a business in Jefferson, Orleans, Plaquemines and St. Bernard parishes.

For Maine and Massachusetts – Currently, relief is available to affected taxpayers who live or have a business anywhere in Maine or Massachusetts.

For Georgia – Currently, relief is available to affected taxpayers who live or have a business anywhere in Appling, Atkinson, Bacon, Berrien, Brantley, Brooks, Bulloch, Camden, Candler, Charlton, Clinch, Coffee, Colquitt, Cook, Echols, Emanuel, Glynn, Jeff Davis, Jenkins, Lanier, Lowndes, Pierce, Screven, Tattnall, Thomas, Tift, Ware and Wayne counties.

For Florida – Currently, relief is available to affected taxpayers who live or have a business anywhere in Alachua, Baker, Bay, Bradford, Brevard, Calhoun, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Duval, Flagler, Franklin, Gadsden, Gilchrist, Gulf, Hamilton, Hardee, Hernando, Hillsborough, Jefferson, Lafayette, Lake, Lee, Leon, Levy, Liberty, Madison, Manatee, Marion, Nassau, Orange, Osceola, Pasco, Pinellas, Polk, Putnam, Sarasota, Seminole, St. Johns, Sumter, Suwannee, Taylor, Union, Volusia and Wakulla counties

For Hawaii – Currently, relief is available to affected taxpayers who live or have a business anywhere in Maui and Hawaii counties.

The current list of eligible localities is always available on the disaster relief page on IRS.gov.  The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area.

Tax Planning Tip

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2024 return normally filed next year), or the return for the current year (2023).

Be sure to write the FEMA declaration number on any return claiming a loss.  That number being: “DR-4724-HI” for Hawaii or “DR-3596-EM” for Florida or “4738-DR” for Georgia or “3598-EM” for Maine or “3599-EM” for Massachusetts or “3600-EM” for Louisiana or “4751-DR” for Tennessee or “3604-EM’ for Connecticut or “4753-DR” for Rhode Island or “4754-DR” for Maine (note the second listing of Main relates to the December 2023 disaster declaration).

Qualified disaster relief payments are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents.

Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow.

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

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), 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.

IRS Still Enforcing Rule Requiring Taxpayers To Report All Cryptocurrency And Digital Asset Income On Their 2023 Federal Income Tax Returns

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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 2023, 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.