IRS Commits Tax Evasion with Immunity

On May 6th the Treasury Inspector General for Tax Administration  ("TIGTA" or internal government watchdog over the IRS) issued a scathing report that found, from 2003 through 2013, 1,580 IRS employees committed willful tax violations.   These cases included willful overstatement of expenses, claiming the First-Time Homebuyer Tax Credit without buying a home, and repeated failure to timely file required Federal tax returns.  

It should be noted that a willful act is the voluntary intentional violation of a known legal duty (timely filing of a tax return or accurate reporting of a tax obligation).   A willful violation of tax law is a criminal act.  This means jail time to the average person, but not IRS employees according to the TIGTA report.   

Current law requires that the IRS terminate employees who are found to have willfully violated tax law.  However, the law also gives the IRS Commissioner the sole authority to mitigate cases to a lesser penalty.  The TIGTA report disclosed that the IRS Commissioner exercised his sole authority on numerous occasions to mitigate termination of IRS employees who committed tax evasion.  

Although the IRS concluded their own employees committed criminal tax acts, 61 percent of these criminal tax evaders continue to work for the IRS.   In fact, some employees received promotions and awards within one year after their willful tax noncompliance cases were closed. The report does not disclose that any of these criminals were referred for prosecution.  The IRS Commissioner made sure these employees, some whom had significant and sometimes repeated tax noncompliance issues, and a history of other conduct issues, kept their positions and remained out of the media spotlight.   

As a reformed federal prosecutor and current tax defense attorney, I personally find it alarming that the IRS can prosecute every day citizens for the same exact acts it allows its own employees to commit with carte blanche immunity.  This leaves a curiously strong bad taste.  

If you need assistance concerning taxes or an IRS investigation, do not hesitate to contact a tax lawyer in Orange County.   According to the TIGTA report only IRS employees - not everyone else - are immune to the efforts being taken by the US government.  The Orange County Tax Attorneys at Wilson Tax Law Group have experience in federal tax prosecutions and IRS and state tax matters. You can reach the Wilson Tax Law Group at 714-463-4430.

IRS Commits Tax Evasion with Immunity

On May 6th the Treasury Inspector General for Tax Administration  ("TIGTA" or internal government watchdog over the IRS) issued a scathing report that found, from 2003 through 2013, 1,580 IRS employees committed willful tax violations.   These cases included willful overstatement of expenses, claiming the First-Time Homebuyer Tax Credit without buying a home, and repeated failure to timely file required Federal tax returns.  

It should be noted that a willful act is the voluntary intentional violation of a known legal duty (timely filing of a tax return or accurate reporting of a tax obligation).   A willful violation of tax law is a criminal act.  This means jail time to the average person, but not IRS employees according to the TIGTA report.   

Current law requires that the IRS terminate employees who are found to have willfully violated tax law.  However, the law also gives the IRS Commissioner the sole authority to mitigate cases to a lesser penalty.  The TIGTA report disclosed that the IRS Commissioner exercised his sole authority on numerous occasions to mitigate termination of IRS employees who committed tax evasion.  

Although the IRS concluded their own employees committed criminal tax acts, 61 percent of these criminal tax evaders continue to work for the IRS.   In fact, some employees received promotions and awards within one year after their willful tax noncompliance cases were closed. The report does not disclose that any of these criminals were referred for prosecution.  The IRS Commissioner made sure these employees, some whom had significant and sometimes repeated tax noncompliance issues, and a history of other conduct issues, kept their positions and remained out of the media spotlight.   

As a reformed federal prosecutor and current tax defense attorney, I personally find it alarming that the IRS can prosecute every day citizens for the same exact acts it allows its own employees to commit with carte blanche immunity.  This leaves a curiously strong bad taste.  

If you need assistance concerning taxes or an IRS investigation, do not hesitate to contact a tax lawyer in Orange County.   According to the TIGTA report only IRS employees - not everyone else - are immune to the efforts being taken by the US government.  The Orange County Tax Attorneys at Wilson Tax Law Group have experience in federal tax prosecutions and IRS and state tax matters. You can reach the Wilson Tax Law Group at 714-463-4430.

Marijuana Dispensaries Who Pay Taxes in Cash Get Penalized

If you are a marijuana business, regardless of whether you are operating within state law, you have major tax and banking headaches.  Banking and most tax laws are governed by Federal law, which deems these activities illegal.  One challenge commonly faced by marijuana businesses is the lack of access to the banking system, because banks don't want to deal with businesses illegal under federal law.

Without banks, dispensaries pay the government in cash, but face a penalty for the cash payments.  This situation highlights the hypocrisy of the government's tax and drug policies, requiring payment on the one hand, punishing you for paying on the other.  A recent case filed in U.S. Tax Court by a Colorado dispensary, Allgreens LLC, is the most recent challenge to this Catch-22 created by the government. Unfortunately, the IRS is probably going to win because it is just following the letter of the law here - a change to the tax or the drug laws is necessary for a fix.

Financial institutions generally refuse to open accounts for marijuana businesses due to the intersection with federal law and, once the bank finds out a customer is involved in marijuana activities, will also drop accounts for the existing customers who have such businesses. 

Banks do not want to risk the FDIC revoking its deposit insurance and other federal agencies cracking down on them for knowingly depositing monies from businesses deemed illegal drug trafficking activities under federal law.

Without many banking options, marijuana businesses are forced to operate primarily in cash. As a result, these businesses may have little option other than to make their tax payments in cash.  This means they are unable to make their deposits through the Electronic Federal Tax Payment System.  The IRS penalizes businesses and people who pay their payroll taxes in cash.   The IRS is assessing a ten percent penalty on marijuana dispensaries for paying their federal employee the only way they can.  

The IRS cannot efficiently deal with large amounts of cash, so it imposes penalties in the payroll tax situation.  This is confounding because these businesses are simply paying their taxes using the same currency created by our federal government, which would be acceptable in other situations (e.g., auctions and individual income tax payments under IRM 21.3.4.7).   Dispensaries want to follow the law and pay over payroll taxes and, due to no fault on the part of the dispensaries, the IRS penalizes them an additional ten percent.  While the IRS has suggested alternative methods for paying their taxes, these are likely inconsistent with federal anti-money laundering laws, requiring the use of unnecessary third parties (the use of additional steps that mask the true nature of illegal income in certain situations can be considered money laundering).

Given these current challenges, the IRS should waive this ten percent penalty for marijuana businesses at least on a temporary basis until there is greater clarity whether a reasonable cause exception is available.  Unless and until these businesses have sufficient access to the banking system to meet their obligations under the Internal Revenue Code, the IRS's imposition of penalties is simply unfair.

If you have any questions, please do not hesitate to contact the Wilson Tax Law Group.

Marijuana Dispensaries Who Pay Taxes in Cash Get Penalized

If you are a marijuana business, regardless of whether you are operating within state law, you have major tax and banking headaches.  Banking and most tax laws are governed by Federal law, which deems these activities illegal.  One challenge commonly faced by marijuana businesses is the lack of access to the banking system, because banks don't want to deal with businesses illegal under federal law.

Without banks, dispensaries pay the government in cash, but face a penalty for the cash payments.  This situation highlights the hypocrisy of the government's tax and drug policies, requiring payment on the one hand, punishing you for paying on the other.  A recent case filed in U.S. Tax Court by a Colorado dispensary, Allgreens LLC, is the most recent challenge to this Catch-22 created by the government. Unfortunately, the IRS is probably going to win because it is just following the letter of the law here - a change to the tax or the drug laws is necessary for a fix.

Financial institutions generally refuse to open accounts for marijuana businesses due to the intersection with federal law and, once the bank finds out a customer is involved in marijuana activities, will also drop accounts for the existing customers who have such businesses. 

Banks do not want to risk the FDIC revoking its deposit insurance and other federal agencies cracking down on them for knowingly depositing monies from businesses deemed illegal drug trafficking activities under federal law.

Without many banking options, marijuana businesses are forced to operate primarily in cash. As a result, these businesses may have little option other than to make their tax payments in cash.  This means they are unable to make their deposits through the Electronic Federal Tax Payment System.  The IRS penalizes businesses and people who pay their payroll taxes in cash.   The IRS is assessing a ten percent penalty on marijuana dispensaries for paying their federal employee the only way they can.  

The IRS cannot efficiently deal with large amounts of cash, so it imposes penalties in the payroll tax situation.  This is confounding because these businesses are simply paying their taxes using the same currency created by our federal government, which would be acceptable in other situations (e.g., auctions and individual income tax payments under IRM 21.3.4.7).   Dispensaries want to follow the law and pay over payroll taxes and, due to no fault on the part of the dispensaries, the IRS penalizes them an additional ten percent.  While the IRS has suggested alternative methods for paying their taxes, these are likely inconsistent with federal anti-money laundering laws, requiring the use of unnecessary third parties (the use of additional steps that mask the true nature of illegal income in certain situations can be considered money laundering).

Given these current challenges, the IRS should waive this ten percent penalty for marijuana businesses at least on a temporary basis until there is greater clarity whether a reasonable cause exception is available.  Unless and until these businesses have sufficient access to the banking system to meet their obligations under the Internal Revenue Code, the IRS's imposition of penalties is simply unfair.

If you have any questions, please do not hesitate to contact the Wilson Tax Law Group.

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.