Hearings continue into missing IRS emails

The saga on the IRS inquiry over tea party tax exempt applications continues.   This week IRS Commissioner John Koskinen appeared before the House Ways and Means Committee on June 20 and the House Oversight Committee on June 23 to defend the agency’s handling of employee emails. 

Before the Ways and Means Committee, Koskinen rebutted accusations that former IRS official Lois Lerner destroyed her computer in 2011 to avoid prosecution for targeting conservative groups seeking nonprofit status. Koskinen told lawmakers that the hard drive on Lerner’s work computer crashed before the current Congressional investigations began and the agency’s information technology department could not repair it.

Koskinen also indicated that the IRS Tax Exempt and Government Entities Division plans to restart audits of Code Sec. 501(c)(4) organizations that were selected for examination but set aside. "I think it is unfair to them to leave them in limbo, that they deserve to have closure," Koskinen explained. "Any request for information that was inappropriate, they do not have to respond to," he said.

As a former IRS employee at the IRS Office of Chief Counsel, I am aware of the type of computer systems and technology that the IRS uses.  The IRS has to store and protect confidential information for millions of taxpayers.  This is no small task given the enormous amount of data that needs to be protected.   As a result, the IRS maintains top of the line computers and has internal IT departments dedicated to keeping their systems safe and protected.  So it does strike me as curious that with all the technological advances and millions of dollars that taxpayers spend on IRS technologies, that the IRS cannot produce the information requested by Congress related to this matter.   

Isn't the meta data available?  I understand its nearly impossible to destroy electronic data.  Something just doesn't smell right about this one.  

Hearings continue into missing IRS emails

The saga on the IRS inquiry over tea party tax exempt applications continues.   This week IRS Commissioner John Koskinen appeared before the House Ways and Means Committee on June 20 and the House Oversight Committee on June 23 to defend the agency’s handling of employee emails. 

Before the Ways and Means Committee, Koskinen rebutted accusations that former IRS official Lois Lerner destroyed her computer in 2011 to avoid prosecution for targeting conservative groups seeking nonprofit status. Koskinen told lawmakers that the hard drive on Lerner’s work computer crashed before the current Congressional investigations began and the agency’s information technology department could not repair it.

Koskinen also indicated that the IRS Tax Exempt and Government Entities Division plans to restart audits of Code Sec. 501(c)(4) organizations that were selected for examination but set aside. "I think it is unfair to them to leave them in limbo, that they deserve to have closure," Koskinen explained. "Any request for information that was inappropriate, they do not have to respond to," he said.

As a former IRS employee at the IRS Office of Chief Counsel, I am aware of the type of computer systems and technology that the IRS uses.  The IRS has to store and protect confidential information for millions of taxpayers.  This is no small task given the enormous amount of data that needs to be protected.   As a result, the IRS maintains top of the line computers and has internal IT departments dedicated to keeping their systems safe and protected.  So it does strike me as curious that with all the technological advances and millions of dollars that taxpayers spend on IRS technologies, that the IRS cannot produce the information requested by Congress related to this matter.   

Isn't the meta data available?  I understand its nearly impossible to destroy electronic data.  Something just doesn't smell right about this one.  

Newport Beach Businessman Sentenced to Over 2 Years for Sales Tax Evasion and to Pay Restitution to Board of Equalization

Life's not always a beach, even for the Beach Cruiser business "Let It Roll" owner in Newport Beach and Costa Mesa.  On June 13, 2014, the Orange County Superior Court sentenced a local businessman, Douglas Lachman, to 27 months for sales tax evasion, according to a press release issued by the California Board of Equalization.  The business was a bike sales and rental shop that focused on the beach cruiser market for tourists.  Between 2002 and 2009 there was about $7 million under-reported sales, though this resulted in  a sales tax loss of only $553,478.

The State Board of Equalization is the California tax agency responsible for the administration of the sales taxes (among other types of taxes). The case was prosecuted by the Orange County District Attorney's Office, which is a reminder, as we know all too well from our experience in California Audits of Medical Marijuana Tax Dispensaries, tax problems can come from all sides and the state (and cities) wants that tax money just as bad as the IRS.  Of course, one of the purposes of this press release from the BOE is to encourage compliance, and both state and federal levels have  voluntary disclosure programs where you can pay the taxes and civil penalties instead of going to jail as long as they haven't already received information about you.

Newport Beach Businessman Sentenced to Over 2 Years for Sales Tax Evasion and to Pay Restitution to Board of Equalization

Life's not always a beach, even for the Beach Cruiser business "Let It Roll" owner in Newport Beach and Costa Mesa.  On June 13, 2014, the Orange County Superior Court sentenced a local businessman, Douglas Lachman, to 27 months for sales tax evasion, according to a press release issued by the California Board of Equalization.  The business was a bike sales and rental shop that focused on the beach cruiser market for tourists.  Between 2002 and 2009 there was about $7 million under-reported sales, though this resulted in  a sales tax loss of only $553,478.

The State Board of Equalization is the California tax agency responsible for the administration of the sales taxes (among other types of taxes). The case was prosecuted by the Orange County District Attorney's Office, which is a reminder, as we know all too well from our experience in California Audits of Medical Marijuana Tax Dispensaries, tax problems can come from all sides and the state (and cities) wants that tax money just as bad as the IRS.  Of course, one of the purposes of this press release from the BOE is to encourage compliance, and both state and federal levels have  voluntary disclosure programs where you can pay the taxes and civil penalties instead of going to jail as long as they haven't already received information about you.

The Southern California Criminal Tax News Round-Up

The Southern California Criminal Tax News Round-Up

IRS Suffers Defeat in Appeals Court as Jury's Finding of Return Preparer Penalty Reversed

The IRS suffered a major defeat last week in the Eleventh Circuit Court of Appeals, in Carlson v. United States, Case No. 12-13736 (June 13, 2014), as the appellate court reversed in part and vacated and remanded in part a decision from a Florida district court holding a tax preparer liable for penalties under Code Section 6701.  The eleventh circuit held that the burden of proof was not the usual minimum of a "preponderance of the evidence" (sometimes described as "more likely than not") but the higher "clear and convincing evidence" usually applied in civil fraud cases.  (Note: the clear/convincing standard is lower than the "beyond a reasonable doubt" standard.)  Appellant, Frances Carlson, was a return preparer for Jackson Hewitt tax services.

Section 6701(a) of the Internal Revenue Code, 26 U.S.C., provides for a penalty to be imposed on any person:

(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document,

(2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and

(3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person.

Under IRS Section 6701(b), the penalty is $1000 for essentially every return that the tax preparer knew was claiming a false understatement of tax, but the penalty is limited to one imposition for each year involving a particular taxpayer. For example, if a return preparer prepares knowingly false returns for Jimmy in 2010, 2011, and 2012,  and a knowingly false tax return and a false amended return for Jane in 2010, the return preparer would be penalized $3000 for Jimmy's three returns but only $1000 for the two filed for Jane.

In finding against the IRS, the Court noted several facts which implied that, even though Carlson prepared tax returns as her job for Jackson Hewitt, she was unsophisticated in tax matters and was not well educated or particularly well trained.  Rather, she relied mainly on a software program.  Nonetheless, she prepared 200-300 returns in her first year.  In her second year, she was promoted to corporate returns!  (Although the IRS is the loser in this case, it certainly doesn't reflect well on Jackson Hewitt either.  It does serve as a valuable reminder that a big name is no guarantee that the individual preparing your returns is very qualified.  The other big box preparation service, HR Block, on the other hand, if I recall right, spent a great deal of its advertising last year on how experienced some of its preparers were, perhaps trying to fight this perception.)

Her boss at JH was arrested in 2006 for drug and money laundering charges.  (Wow!)  The IRS later investigated the preparation business, at which time Carlson stopped working there, but had prepared more than a thousand returns during her tenure.  The IRS penalized her for 40 of those returns, she paid 15% down and sued in district court for a refund (which is unique to certain penalties).  The DOJ saw fit to defend only 27 of those 40 in a jury trial.

As you can see, Carlson is actually fairly sympathetic in this case.  The government's decision to litigate when there was a possible adverse decision on a purely legal issue was a hazardous one.  There is a saying in litigation that "bad facts make bad law."  If the DOJ was trying to avoid making bad law, this may have been the wrong case to push.

Contrary to the government’s argument, Section 6701, even though it doesn't use the word "fraud,"requires proof of fraud before penalties can be imposed.  Essentially, knowledge that a false item would make a false refund is fraud.

The case was remanded for a whole new trial.  The appeals court held the government was required to prove by clear and convincing evidence that the individual had actual knowledge that the returns she prepared for others contained an understatement of tax.  Thus, the instruction to the jury on the lower standard of proof was improper.  In a full sweep for the return preparer, the appeals court found the government's case wanting under any standard.  There was simply insufficient evidence to support the jury’s verdict that a tax preparer was liable for penalties under Section 6701.

 Further, government presented no evidence that the preparer knew that twelve of the returns understated the correct tax. The government was required to show that the preparer knew that the returns were fraudulent; it was insufficient for the government to show only that the returns contained errors.

In contrast, the preparer presented substantial evidence that she did not know the returns she prepared understated the correct tax. Moreover, the simple fact that many of the preparer's customers either failed to substantiate their deductions during the audit or were not cooperative during the IRS's later audit was not evidence that those clients had not presented substantiation to the preparer (or misled the preparer) at the time the returns were prepared.  A jury could not reasonably infer that the preparer knew the returns contained understatements based only on those clients' conduct during audits.

This case represents a major "win" legal victory for this particular return preparer and a terrible defeat for the government.  However, the "win" is not that great if you consider the public shame the IRS has brought on the return preparer and Jackson Hewitt and the likely loss of business it may have caused her practice.  Hopefully, this case gives enough guidance to prevent similar cases from being pushed forward by the DOJ and IRS unnecessarily.

The Wilson Tax Law Group has extensive experience in return preparer penalties and criminal defense of tax return preparers. Please feel free to contact our firm with any inquiries on similar issues or any other tax problems.

IRS Suffers Defeat in Appeals Court as Jury's Finding of Return Preparer Penalty Reversed

The IRS suffered a major defeat last week in the Eleventh Circuit Court of Appeals, in Carlson v. United States, Case No. 12-13736 (June 13, 2014), as the appellate court reversed in part and vacated and remanded in part a decision from a Florida district court holding a tax preparer liable for penalties under Code Section 6701.  The eleventh circuit held that the burden of proof was not the usual minimum of a "preponderance of the evidence" (sometimes described as "more likely than not") but the higher "clear and convincing evidence" usually applied in civil fraud cases.  (Note: the clear/convincing standard is lower than the "beyond a reasonable doubt" standard.)  Appellant, Frances Carlson, was a return preparer for Jackson Hewitt tax services.

Section 6701(a) of the Internal Revenue Code, 26 U.S.C., provides for a penalty to be imposed on any person:

(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document,

(2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and

(3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person.

Under IRS Section 6701(b), the penalty is $1000 for essentially every return that the tax preparer knew was claiming a false understatement of tax, but the penalty is limited to one imposition for each year involving a particular taxpayer. For example, if a return preparer prepares knowingly false returns for Jimmy in 2010, 2011, and 2012,  and a knowingly false tax return and a false amended return for Jane in 2010, the return preparer would be penalized $3000 for Jimmy's three returns but only $1000 for the two filed for Jane.

In finding against the IRS, the Court noted several facts which implied that, even though Carlson prepared tax returns as her job for Jackson Hewitt, she was unsophisticated in tax matters and was not well educated or particularly well trained.  Rather, she relied mainly on a software program.  Nonetheless, she prepared 200-300 returns in her first year.  In her second year, she was promoted to corporate returns!  (Although the IRS is the loser in this case, it certainly doesn't reflect well on Jackson Hewitt either.  It does serve as a valuable reminder that a big name is no guarantee that the individual preparing your returns is very qualified.  The other big box preparation service, HR Block, on the other hand, if I recall right, spent a great deal of its advertising last year on how experienced some of its preparers were, perhaps trying to fight this perception.)

Her boss at JH was arrested in 2006 for drug and money laundering charges.  (Wow!)  The IRS later investigated the preparation business, at which time Carlson stopped working there, but had prepared more than a thousand returns during her tenure.  The IRS penalized her for 40 of those returns, she paid 15% down and sued in district court for a refund (which is unique to certain penalties).  The DOJ saw fit to defend only 27 of those 40 in a jury trial.

As you can see, Carlson is actually fairly sympathetic in this case.  The government's decision to litigate when there was a possible adverse decision on a purely legal issue was a hazardous one.  There is a saying in litigation that "bad facts make bad law."  If the DOJ was trying to avoid making bad law, this may have been the wrong case to push.

Contrary to the government’s argument, Section 6701, even though it doesn't use the word "fraud,"requires proof of fraud before penalties can be imposed.  Essentially, knowledge that a false item would make a false refund is fraud.

The case was remanded for a whole new trial.  The appeals court held the government was required to prove by clear and convincing evidence that the individual had actual knowledge that the returns she prepared for others contained an understatement of tax.  Thus, the instruction to the jury on the lower standard of proof was improper.  In a full sweep for the return preparer, the appeals court found the government's case wanting under any standard.  There was simply insufficient evidence to support the jury’s verdict that a tax preparer was liable for penalties under Section 6701.

 Further, government presented no evidence that the preparer knew that twelve of the returns understated the correct tax. The government was required to show that the preparer knew that the returns were fraudulent; it was insufficient for the government to show only that the returns contained errors.

In contrast, the preparer presented substantial evidence that she did not know the returns she prepared understated the correct tax. Moreover, the simple fact that many of the preparer's customers either failed to substantiate their deductions during the audit or were not cooperative during the IRS's later audit was not evidence that those clients had not presented substantiation to the preparer (or misled the preparer) at the time the returns were prepared.  A jury could not reasonably infer that the preparer knew the returns contained understatements based only on those clients' conduct during audits.

This case represents a major "win" legal victory for this particular return preparer and a terrible defeat for the government.  However, the "win" is not that great if you consider the public shame the IRS has brought on the return preparer and Jackson Hewitt and the likely loss of business it may have caused her practice.  Hopefully, this case gives enough guidance to prevent similar cases from being pushed forward by the DOJ and IRS unnecessarily.

The Wilson Tax Law Group has extensive experience in return preparer penalties and criminal defense of tax return preparers. Please feel free to contact our firm with any inquiries on similar issues or any other tax problems.

IRS Increases the FBAR Penalty for People with Offshore Accounts

In efforts to increase offshore tax compliance, the IRS just made brand new changes to its current offshore disclosure programs. 

The streamlined procedures have been expanded to accommodate a wider group of U.S. taxpayers who have unreported foreign financial accounts.  This is a very good thing because now more people can use the procedures than could have before.

The original streamlined procedures announced in 2012 were available only to non-resident, non-filers. Taxpayer submissions were subject to different degrees of review based on the amount of the tax due and the taxpayer’s response to a “risk” questionnaire.

The expanded streamlined procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States. The changes include:

 • Eliminating a requirement that the taxpayer have $1,500 or less of unpaid tax per year;

 •  Eliminating the required risk questionnaire;

 •  Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.

For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.

 Offshore Voluntary Disclosure Program (OVDP) Modified: The changes announced today also make important modifications to the OVDP. The changes include:

 •  Requiring additional information from taxpayers applying to the program;

 •  Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;

  •  Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;

 • Enabling taxpayers to submit voluminous records electronically rather than on paper;

 • Increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice.

I will add more in a later post.  You can find the news release here.   Please contact the Wilson Tax Law Group if you have questions about offshore bank account disclosures or FBAR matters under the July 1, 2014 or transitional procedures.  We have handled numerous offshore cases.

Update:  The IRS has published FAQ's for the Transition Rules drawing a clear line as to who can qualify for the pre-July 1, 2014 penalty rates.

Q: What if I made a request for OVDP pre-clearance before July 1, 2014, but not a full voluntary disclosure? 

A: A taxpayer will not be considered to be currently participating in OVDP for purposes of receiving transitional treatment unless, as of July 1, 2014, he has mailed to IRS Criminal Investigation his voluntary disclosure letter and attachments as described in OVDP FAQ 24.  Thus, a taxpayer who makes an offshore voluntary disclosure as outlined in FAQ 24 on or after July 1, 2014 will not be eligible for transitional treatment under OVDP, even though he may have made a request for OVDP pre-clearance before July 1, 2014.

These transitional FAQs can be found here.

The FAQ for the effective-July 1, 2014 OVDP can be found here.

 

IRS Increases the FBAR Penalty for People with Offshore Accounts

In efforts to increase offshore tax compliance, the IRS just made brand new changes to its current offshore disclosure programs. 

The streamlined procedures have been expanded to accommodate a wider group of U.S. taxpayers who have unreported foreign financial accounts.  This is a very good thing because now more people can use the procedures than could have before.

The original streamlined procedures announced in 2012 were available only to non-resident, non-filers. Taxpayer submissions were subject to different degrees of review based on the amount of the tax due and the taxpayer’s response to a “risk” questionnaire.

The expanded streamlined procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States. The changes include:

 • Eliminating a requirement that the taxpayer have $1,500 or less of unpaid tax per year;

 •  Eliminating the required risk questionnaire;

 •  Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.

For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.

 Offshore Voluntary Disclosure Program (OVDP) Modified: The changes announced today also make important modifications to the OVDP. The changes include:

 •  Requiring additional information from taxpayers applying to the program;

 •  Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;

  •  Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;

 • Enabling taxpayers to submit voluminous records electronically rather than on paper;

 • Increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice.

I will add more in a later post.  You can find the news release here.   Please contact the Wilson Tax Law Group if you have questions about offshore bank account disclosures or FBAR matters under the July 1, 2014 or transitional procedures.  We have handled numerous offshore cases.

Update:  The IRS has published FAQ's for the Transition Rules drawing a clear line as to who can qualify for the pre-July 1, 2014 penalty rates.

Q: What if I made a request for OVDP pre-clearance before July 1, 2014, but not a full voluntary disclosure? 

A: A taxpayer will not be considered to be currently participating in OVDP for purposes of receiving transitional treatment unless, as of July 1, 2014, he has mailed to IRS Criminal Investigation his voluntary disclosure letter and attachments as described in OVDP FAQ 24.  Thus, a taxpayer who makes an offshore voluntary disclosure as outlined in FAQ 24 on or after July 1, 2014 will not be eligible for transitional treatment under OVDP, even though he may have made a request for OVDP pre-clearance before July 1, 2014.

These transitional FAQs can be found here.

The FAQ for the effective-July 1, 2014 OVDP can be found here.

 

Tax Problems Facing Marijuana Dispensaries, This Time From the City of Los Angeles

The LA times published an interesting article about marijuana dispensaries operating in Los Angeles.  The article focuses on the interesting fact that as Los Angeles tries to clamp down on the number of marijuana dispensaries operating in Los Angeles by making them follow Proposition D requirements, more than 450 medical marijuana shops filed business tax renewals with the Office of Finance.  This number is more than three times as many stores than what is estimated to be allowed to stay open.  So while local lawmakers are troubled by the number of medical marijuana shops that still exist in Los Angeles, the Office of Finance has no problem cashing in on all the taxes being collected from them.  The article states that Los Angeles collected roughly $2.1 million from medical marijuana tax renewals this year, an Office of Finance staffer told a City Council committee Monday.

The interesting thing about this article is that City Council is upset that these people are paying business taxes because now the City cannot use tax evasion statutes as a method to shut them down.   It seems to me that these people are trying to comply with the tax code so whether or not they comply with Proposition D is not the tax-collecting agencies' business.   The City is so upset at all the business tax renewals, but has no problem collecting the roughly $2.1 million in revenues from medical marijuana shops.  Nor should they have any problem with it - Council members would be forfeiting their jobs if they took the position that the illegal businesses should be issued refunds.

In reality, the juxtaposition between collecting taxes from someone while turning a blind eye to the source of the money is hardly a new story.  This happens every time the IRS comes in to count the drug money after the DEA makes a big bust.  Even illegal businesses have to pay taxes.  Nonetheless, you don't usually see the opposite scenario - e.g., the DEA swooping in after the IRS audits a tax return - as the City Council members seem to support here.   The sharing of tax information between taxing and law enforcement agencies is usually a one-way street.  In non-tax cases, the Federal tax privacy law, IRC Section 6103(i)(1), provides that the IRS can share return information with another federal investigative agency only with a court order.

The government relies on taxes to operate and it would inhibit people from filing true tax returns if they thought that the information would be made public or would be shared with other government agencies.  The privacy of tax return information was also a qualified privilege under Federal common law before Congress enacted Section 6103.  In this situation, it would behoove whoever is advocating and lobbying on behalf of the dispensaries to not only be familiar with the medical marijuana laws and business laws, but also tax law and policy.

As an attorney who understands criminal law and tax law, I can tell you that medical marijuana dispensaries get no breaks that other businesses get under the state tax code.  They are treated as illegal drug trafficking activities under the California Revenue and Taxation Code. So what does this mean? 

It means both the Feds and California will disallow all the business expenses of a marijuana dispensary that a normal business is entitled to deduct.  As a result, marijuana dispensaries will be taxed on their gross receipts for income tax purposes. California's tax code is basically "monkey see, monkey do," adopting the Federal tax code almost rule for rule.  Under Federal law, if a business violated public policy or is illegal, then it cannot take advantage of deductions or credits under the tax code.  Because federal tax law deems these activities as illegal drug trafficking activities, so does California.  These rules are completely screwed up because they encourage these types of businesses to operate under the radar for tax purposes.   Fortunately, it is not an entirely slam dunk case for the tax authorities because there are some legitimate tax "loopholes."  There are ways to operate so as to legitimately minimize these tax burdens.

Much of this is covered in a recent article I wrote on the Taxation Of Medical Marijuana Dispensaries.  I suggest any marijuana dispensary contact an experienced tax attorney who knows the marijuana dispensary tax rules inside and out.  There are ways to follow the tax rules and not have to pay taxes on the gross receipts of the dispensary.  Feel free to contact the Wilson Tax Law Group, if you have any questions. Our firm has significant experience addressing tax problems facing marijuana dispensaries.

Tax Problems Facing Marijuana Dispensaries, This Time From the City of Los Angeles

The LA times published an interesting article about marijuana dispensaries operating in Los Angeles.  The article focuses on the interesting fact that as Los Angeles tries to clamp down on the number of marijuana dispensaries operating in Los Angeles by making them follow Proposition D requirements, more than 450 medical marijuana shops filed business tax renewals with the Office of Finance.  This number is more than three times as many stores than what is estimated to be allowed to stay open.  So while local lawmakers are troubled by the number of medical marijuana shops that still exist in Los Angeles, the Office of Finance has no problem cashing in on all the taxes being collected from them.  The article states that Los Angeles collected roughly $2.1 million from medical marijuana tax renewals this year, an Office of Finance staffer told a City Council committee Monday.

The interesting thing about this article is that City Council is upset that these people are paying business taxes because now the City cannot use tax evasion statutes as a method to shut them down.   It seems to me that these people are trying to comply with the tax code so whether or not they comply with Proposition D is not the tax-collecting agencies' business.   The City is so upset at all the business tax renewals, but has no problem collecting the roughly $2.1 million in revenues from medical marijuana shops.  Nor should they have any problem with it - Council members would be forfeiting their jobs if they took the position that the illegal businesses should be issued refunds.

In reality, the juxtaposition between collecting taxes from someone while turning a blind eye to the source of the money is hardly a new story.  This happens every time the IRS comes in to count the drug money after the DEA makes a big bust.  Even illegal businesses have to pay taxes.  Nonetheless, you don't usually see the opposite scenario - e.g., the DEA swooping in after the IRS audits a tax return - as the City Council members seem to support here.   The sharing of tax information between taxing and law enforcement agencies is usually a one-way street.  In non-tax cases, the Federal tax privacy law, IRC Section 6103(i)(1), provides that the IRS can share return information with another federal investigative agency only with a court order.

The government relies on taxes to operate and it would inhibit people from filing true tax returns if they thought that the information would be made public or would be shared with other government agencies.  The privacy of tax return information was also a qualified privilege under Federal common law before Congress enacted Section 6103.  In this situation, it would behoove whoever is advocating and lobbying on behalf of the dispensaries to not only be familiar with the medical marijuana laws and business laws, but also tax law and policy.

As an attorney who understands criminal law and tax law, I can tell you that medical marijuana dispensaries get no breaks that other businesses get under the state tax code.  They are treated as illegal drug trafficking activities under the California Revenue and Taxation Code. So what does this mean? 

It means both the Feds and California will disallow all the business expenses of a marijuana dispensary that a normal business is entitled to deduct.  As a result, marijuana dispensaries will be taxed on their gross receipts for income tax purposes. California's tax code is basically "monkey see, monkey do," adopting the Federal tax code almost rule for rule.  Under Federal law, if a business violated public policy or is illegal, then it cannot take advantage of deductions or credits under the tax code.  Because federal tax law deems these activities as illegal drug trafficking activities, so does California.  These rules are completely screwed up because they encourage these types of businesses to operate under the radar for tax purposes.   Fortunately, it is not an entirely slam dunk case for the tax authorities because there are some legitimate tax "loopholes."  There are ways to operate so as to legitimately minimize these tax burdens.

Much of this is covered in a recent article I wrote on the Taxation Of Medical Marijuana Dispensaries.  I suggest any marijuana dispensary contact an experienced tax attorney who knows the marijuana dispensary tax rules inside and out.  There are ways to follow the tax rules and not have to pay taxes on the gross receipts of the dispensary.  Feel free to contact the Wilson Tax Law Group, if you have any questions. Our firm has significant experience addressing tax problems facing marijuana dispensaries.

IRS (Probably) Spent More Money than Tax Owed in Symbolic Tax Court Victory

Symbolic of what?  I'll leave that to you.  From a Tax Court opinion released earlier this week, file this under Ridiculous Things the IRS Does:

Taxpayers filed a perfectly correct return listing their taxable social security income on the correct line.  IRS received the return and, using its big brain, decided the social security income was nontaxable, recalculates the tax, and issued the taxpayers an additional $548 refund.  Somehow, the IRS later realized the taxpayers were right and they shouldn't have sent the extra dollar bills, so they audited the couple and demanded they repay the $548.  When the couple declined, the IRS issued a notice of deficiency, on which the couple appealed to the tax court.  Somehow, probably driven by the couple's righteous indignation, the case went all the way to trial, where it was decided in a judicial opinion.  The taxpayers argued they shouldn't have to pay for the IRS's mistake, but the court found in favor of the government.

Granted, the taxpayers were technically in the wrong under the law - a "rebate refund" can be reclaimed by the IRS through examination procedures.  Also, "easy come, easy go" should prevail here.

But the real losers here are the American taxpayers.  Someone in the IRS decided it would be worthwhile to take this thing all the way, over a few measly dollars, and issue a notice of deficiency, giving appeal rights - a ticket to the Tax Court - to these taxpayers.  Hours of some IRS auditor's time dealing with these taxpayers, hours of time spent by paralegals, secretaries, and attorneys at the IRS Office of Chief Counsel to prepare and try the case, and hours spent by the judge, his/her staff, and the judicial clerk to arrive at this opinion. (And don't forget the cost of gas to Tax Court for the IRS Attorney, mailing costs for pleadings, and the cost of flying the judge to Texas and setting him/her up in a hotel to try the case.) Chances this cost the government and, by extension, the American people, far more than its worth are pretty high.  The full opinion can be found here.

Posted by our Newport Coast Tax Attorney at wilsontaxlaw.com.

IRS (Probably) Spent More Money than Tax Owed in Symbolic Tax Court Victory

Symbolic of what?  I'll leave that to you.  From a Tax Court opinion released earlier this week, file this under Ridiculous Things the IRS Does:

Taxpayers filed a perfectly correct return listing their taxable social security income on the correct line.  IRS received the return and, using its big brain, decided the social security income was nontaxable, recalculates the tax, and issued the taxpayers an additional $548 refund.  Somehow, the IRS later realized the taxpayers were right and they shouldn't have sent the extra dollar bills, so they audited the couple and demanded they repay the $548.  When the couple declined, the IRS issued a notice of deficiency, on which the couple appealed to the tax court.  Somehow, probably driven by the couple's righteous indignation, the case went all the way to trial, where it was decided in a judicial opinion.  The taxpayers argued they shouldn't have to pay for the IRS's mistake, but the court found in favor of the government.

Granted, the taxpayers were technically in the wrong under the law - a "rebate refund" can be reclaimed by the IRS through examination procedures.  Also, "easy come, easy go" should prevail here.

But the real losers here are the American taxpayers.  Someone in the IRS decided it would be worthwhile to take this thing all the way, over a few measly dollars, and issue a notice of deficiency, giving appeal rights - a ticket to the Tax Court - to these taxpayers.  Hours of some IRS auditor's time dealing with these taxpayers, hours of time spent by paralegals, secretaries, and attorneys at the IRS Office of Chief Counsel to prepare and try the case, and hours spent by the judge, his/her staff, and the judicial clerk to arrive at this opinion. (And don't forget the cost of gas to Tax Court for the IRS Attorney, mailing costs for pleadings, and the cost of flying the judge to Texas and setting him/her up in a hotel to try the case.) Chances this cost the government and, by extension, the American people, far more than its worth are pretty high.  The full opinion can be found here.

Posted by our Newport Coast Tax Attorney at wilsontaxlaw.com.

Tax Court Draws Bright Line in Completed Contract Method of Accounting Cases

What the Tax Court gives with one hand, it can take away with the other.

That's the lesson one can learn from the pair of cases issued this year dealing with the completed contract method of accounting (CCM).  The Tax Court's opinion in Shea Homes, Inc. v. Commissioner, 142 T.C. No.3 (2014) was a great win for large-scale home developers like Shea Homes whose contracts to build and develop entire communities can take several years to complete.  The IRS had taken the unfortunate position that Shea Homes' contracts were not long term contracts and that the infrastructure improvements to the roads and building community areas were not included in determining when the contract was completed - which would have forced Shea Homes to recognize all of its income before knowing how much it would ultimately have in expenses.  It was a resounding victory for Shea Homes, though, as the Tax Court found that they were long term home-construction contracts and the contracts were not completed in earlier years when the contracts closed escrow.  The Tax Court relied on the facts that the community areas and the infrastructure were part of their contracts with the ultimate home purchasers and held that those costs were properly included in the tests to determine whether the CCM could be used and when the contracts were completed.  A broad reading of that opinion could have been used to support the proposition that builders who only did infrastructure and community improvements could also use the CCM.

That is, until the Tax Court issued its recent opinion in Howard Hughes Company, LLC v. Commissioner, 142 T.C. No. 20 (2014).  In what appeared to be less of a sequel and more of a two-part movie, the Tax Court drew a bright line to exclude builders who build infrastructure and community areas, but don't also construct homes, from the test.  The Tax Court made no bones about it, saying:

"Our Opinion today draws a bright line.  A taxpayer's contract can qualify as a home construction contract only if the taxpayer builds... or installs integral components to dwelling units... .  It is not enough for the taxpayer to merely pave the road leading to the home, though that may be necessary to the ultimate sale and use of a home."

While there is some logic to the Tax Court's opinion, a plain reading of the regulations and the statute don't give this tax attorney the sense that they are so narrow.  Especially in light of the proposed regulations which would broaden the costs that can be included.  Proposed Income Tax Regs., 73 Fed. Reg. 45182 (Aug. 4, 2008) (I don't buy the idea that the IRS can, on the one hand, issue regulations but, on the other hand, say that the regulation is not supported by the terms of the statute.  Chevron, anyone?  Separation of powers?).  I think we can expect the taxpayers in Hughes to appeal, so there will certainly be more to the story.  Stay posted.

If you are in need of an attorney on this or any other tax issue, you can contact our Newport Beach Tax Lawyer at wilsontaxlaw.com

Tax Court Draws Bright Line in Completed Contract Method of Accounting Cases

What the Tax Court gives with one hand, it can take away with the other.

That's the lesson one can learn from the pair of cases issued this year dealing with the completed contract method of accounting (CCM).  The Tax Court's opinion in Shea Homes, Inc. v. Commissioner, 142 T.C. No.3 (2014) was a great win for large-scale home developers like Shea Homes whose contracts to build and develop entire communities can take several years to complete.  The IRS had taken the unfortunate position that Shea Homes' contracts were not long term contracts and that the infrastructure improvements to the roads and building community areas were not included in determining when the contract was completed - which would have forced Shea Homes to recognize all of its income before knowing how much it would ultimately have in expenses.  It was a resounding victory for Shea Homes, though, as the Tax Court found that they were long term home-construction contracts and the contracts were not completed in earlier years when the contracts closed escrow.  The Tax Court relied on the facts that the community areas and the infrastructure were part of their contracts with the ultimate home purchasers and held that those costs were properly included in the tests to determine whether the CCM could be used and when the contracts were completed.  A broad reading of that opinion could have been used to support the proposition that builders who only did infrastructure and community improvements could also use the CCM.

That is, until the Tax Court issued its recent opinion in Howard Hughes Company, LLC v. Commissioner, 142 T.C. No. 20 (2014).  In what appeared to be less of a sequel and more of a two-part movie, the Tax Court drew a bright line to exclude builders who build infrastructure and community areas, but don't also construct homes, from the test.  The Tax Court made no bones about it, saying:

"Our Opinion today draws a bright line.  A taxpayer's contract can qualify as a home construction contract only if the taxpayer builds... or installs integral components to dwelling units... .  It is not enough for the taxpayer to merely pave the road leading to the home, though that may be necessary to the ultimate sale and use of a home."

While there is some logic to the Tax Court's opinion, a plain reading of the regulations and the statute don't give this tax attorney the sense that they are so narrow.  Especially in light of the proposed regulations which would broaden the costs that can be included.  Proposed Income Tax Regs., 73 Fed. Reg. 45182 (Aug. 4, 2008) (I don't buy the idea that the IRS can, on the one hand, issue regulations but, on the other hand, say that the regulation is not supported by the terms of the statute.  Chevron, anyone?  Separation of powers?).  I think we can expect the taxpayers in Hughes to appeal, so there will certainly be more to the story.  Stay posted.

If you are in need of an attorney on this or any other tax issue, you can contact our Newport Beach Tax Lawyer at wilsontaxlaw.com

IRS "Adopts" Taxpayer Bill of Rights, Except No Actual Taxpayer Rights Adopted

The IRS issued a press releases this week, which can be found here, alerting taxpayers to the newly adopted Taxpayer Bill of Rights, which are outlined here.  Except there are no new rights and nothing can be "adopted" when it is a list of responsibilities and rights already belonging to the IRS and taxpayers.  Imagine if McDonald's put a customer "Bill of Rights" on their menu, which said that, when you pay for a hamburger, we'll give you a hamburger, except when we don't, in which case you can complain to your cashier and then to the manager to see if they care.  The IRS's Taxpayer Bill of Rights, included in Publication 1, which presumably will be sent to taxpayers during audits, provides the following:

The Right to Be Informed

The Right to Quality Service

The Right to Pay No More than the Correct Amount of Tax

The Right to Challenge the IRS’s Position and Be Heard

The Right to Appeal an IRS Decision in an Independent Forum

The Right to Finality

The Right to Privacy

The Right to Confidentiality

The Right to Retain Representation

The Right to a Fair and Just Tax System

The problem with this list of rights isn't just that they don't (and can't, as a matter of law) provide additional, substantive, judicially-enforceable rights to taxpayers than can be found in statutes, regulations, and case law.  Even outside of a court of law, parallel changes to the IRS's Internal Revenue Manual would be needed adding more responsibilities to IRS employees for this list to have any teeth when a taxpayer fights against the IRS. Without the force of law or a substantive change in internal IRS procedures, they are little more than PR Buzz.  It is as though they were trying to put a positive spin on something that intuitively sounds unpleasant.  I imaging the process went something like this:

     IRS Commissioner, to PR Guy: I want to make sure the taxpayers know that the IRS can collect every penny you owe in taxes, including interest and penalties, every cent of it! 

     PR Guy:  But that sounds pretty negative.  It won't come off well for us...

    IRS Commissioner:  How about, "The good news is the IRS can't collect more than you owe."

     PR Guy:  I don't know.  I think taxpayers will see right through it.

     IRS Commissioner:  Make it happen!

Even if that weren't the exchange, we still somehow ended up with "The Right to Pay No More than the Correct Amount of Tax."

According to the IRS, this means "Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly."  That sounds great!  But, what is "the amount of tax legally due?"  Under the law, when the IRS assesses a tax, that becomes tax legally due.  That amount grows with interest and penalties, and you have to pay those, too, because they are also legally due. Then, what does it mean to "apply all tax payments properly?"  Under well-established law, unless you specifically direct a tax payment you make to a specific tax year, the IRS can properly apply that payment to any of your tax liabilities for any year as the IRS sees fit.  So, this "right" amounts to this: "The IRS can collect all the taxes, penalties, and interest you owe until they are fully paid, and the IRS will apply your payments to your taxes, but will do so in a manner fits its own best interest in most cases."

Ultimately, there should be one item in the Taxpayer Bill of Rights, bolded for emphasis: You have the right to not blindly trust the IRS to act in your best interest.  Put that on a poster and slap it on the IRS walls.

Form more, visit Wilsontaxlaw.com, the best Newport Beach tax attorney.