Monthly Archives: October 2020

The IRS posted Marijuana Industry Frequently Asked Questions on its website:

My business is a marijuana dispensary that I operate in compliance with my state's laws. The federal government considers this an illegal activity. Do I have the same income and employment tax filing obligations as any other business?

Yes. Income from any source is taxable. Internal Revenue Code § 61(a). The Supreme Court has long held that income from illegal sources is taxable and is not exempt from taxation. James v. United States, 366 U.S. 213, 218 (1961). More recently, federal courts have consistently upheld Internal Revenue Service determinations that state compliant marijuana dispensaries have taxable income. E.g., Olive v. Commissioner, 792 F.3d 1146 (9th Cir. 2015); Feinberg v. Commissioner, 916 F.3d 1330 (10th Cir. 2019); Beck v. Commissioner, T.C. Memo. 2015-149. Similarly, illegal businesses have no exemption from their employment tax obligations.

If I can't fully pay the amount I owe, are payment plans available that I can afford?

If you can't pay the amount you owe in full, you may qualify for one of several options available to help taxpayers pay their balance over time or to temporarily delay collection until your financial situation improves. Visit the following links for more information about:

• Payment Plans - To meet your taxpayer obligation in monthly installments by applying for a payment plan. Most taxpayers will qualify to apply for a payment plan online.
• Temporary Delays of Collection - If you cannot pay any of your tax debt, you can request the IRS temporarily delay collection until your financial situation improves.

What penalties or additions to tax could a participant in the marijuana industry be subject to if adjustments are made during an income tax audit?

A participant in the marijuana industry is subject to the same penalties and additions to tax as any other business. A non-exhaustive list of penalties and additions to tax that might apply include: additions to tax under 6651 if a return is filed late or payments are made late; a penalty for failure to make estimated tax payments if sufficient estimated tax payments are not made; accuracy related penalties; and, in cases of fraud, penalties under section 6663. See generally Alternative Health Care Advocates v. Commissioner, 151 T.C. 225 (2018).

Will penalties under section 6662 be proposed if an audit ends with the IRS proposing adjustments for a participant in the marijuana industry?

Penalties will be considered on a case by case basis. The Tax Court has previously upheld a negligence penalty under section 6662 where a participant in the marijuana industry failed to keep adequate books and records. See Olive v. Commissioner, 139 T.C. 19 (2012), aff'd, 792 F.3d 1146 (9th Cir. 2015). The Tax Court more recently upheld section 6662 penalties when petitioners did not prove they had reasonable cause for significant omissions of income on their returns. Alternative Health Care Advocates v. Commissioner, 151 T.C. 225 (2018); Richmond Patients Group v. Commissioner, T.C. Memo. 2020-52.

I operate a business that consists of selling marijuana. Can I claim deductions to determine my taxable income?

Internal Revenue Code section 280E disallows all deductions or credits for any amount paid or incurred in carrying on any trade businesses that consist of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act. This applies to businesses that sell marijuana, even if they operate in states that have legalized the sale of marijuana, because trafficking marijuana remains illegal under the federal Controlled Substances Act. United States v. Oakland Cannabis Buyers' Co-op., 532 U.S. 483 (2001). Accordingly, section 280E disallows all deductions or credits for a business that sells or otherwise traffics marijuana. N. California Small Bus. Assistants Inc. v. Commissioner, 153 T.C. 65 (2019).

Section 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income. The Internal Revenue Service takes the position that section 280E-affected taxpayers must calculate their cost of goods sold pursuant to Internal Revenue Code section 471 and the associated Treasury Regulations. Generally, this means taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the business. For more detail, see Chief Counsel Advice 201504011 PDF (released 1/23/2015).

Accordingly, a marijuana dispensary may not deduct, for example, advertising or selling expenses. It may, however, reduce its gross receipts by its cost of goods sold, as calculated pursuant to Internal Revenue Code section 471.

What do I need to do for cash payments over $10,000 concerning information returns?

Trades or Business, including marijuana related businesses, must comply with IRC § 6050I and the regulations thereunder. These businesses must report cash receipts greater than $10,000, in a single transaction and/or related transactions.

The business(es) must also:

• Develop policies and procedures reasonably designed to identify and report cash receipts as required.
• Include in their policies and procedures the requirement to obtain and verify certain customer information to ensure the information included on the report is accurate and complete.
• Retain copies of forms filed for a period of five years. Depending on the type of business, other regulatory requirements may exist regarding how long certain documents must be retained.

More information can be found at About Publication 1544, Reporting Cash Payments of Over $10,000.

Read more at: Tax Times blog

On  November 26, 2018 we posted Decade Of Dodging US Taxes Gets UK Lawyer 20 Months in Prison where we discussed that English lawyer Michael Little was set to 20 months in prison on November 20, 2018 for helping the children of a deceased investor dodge taxes on their $14 million inheritance over a decade and for failing to pay his own taxes, ruling also that the former Royal Marine lied as he testified in his own defense.

U.S. District Judge P. Kevin Castel ordered Little, 68, to report to federal prison on Feb. 19. The sentence came in well below a request by prosecutors for a prison term in the range of 10 to 12 years as contemplated by official guidelines.

Judge Castel held off on the government’s request to order Little to pay roughly $4.4 million of restitution. Little contests the amount, and the matter will be briefed in coming weeks.

Now according to Law360, the Second Circuit ruled on September 30, 2020 upholding a lower court, the sufficient evidence existed to convict a U.K. attorney on charges he helped the children of a dead investor avoid taxes on their $14 million inheritance, 

The attorney, Michael Little, failed to support his argument on appeal that the lower court's jury instructions didn't match the charges in his indictment, a panel of judges ruled.

Little was sentenced to 20 months of incarceration and a one-year term of supervised release. He was also ordered to pay $4.4 million in restitution to the U.S. government.

Little appealed on various grounds. He argued that the jury instructions were so different from his original indictment that they violated his Fifth Amendment rights by amending the indictment.

The indictment had described Little's crime as assisting in the preparation of fraudulent Forms 1040 or Forms 706, the estate tax return. The court instructed the jury to determine whether Little had prepared fraudulent Forms 3520, which reports receipt of foreign gifts.

The Second Circuit disagreed. To prevail on a constructive amendment claim, defendants must show that the terms of an indictment are altered by the presentation of evidence and jury instructions, the court said. They must modify "essential elements" of the offense to the point that a defendant is indicted on one offense and convicted of another, the court said. The statute criminalizing aid in filing a false 1040 also criminalizes filing a false 3520, it said.

Little also argued his indictment charged him with failing to file a foreign bank account report for at least one bank in the Channel Islands, but the jury instructions referred to a second foreign account in the U.K. The court rejected that argument as well, finding the "essential element" of the offense was the same.

As for his failure to file FBARs, Little said evidence that he willfully failed to file the reports was insufficient. He had merely misunderstood a complex tax code, the attorney argued.

The court, however, said Little was an experienced attorney with a quarter-century of experience conducting international financial transactions. A reasonable juror could conclude his failure to comply with the law was willful, the decision said.

While agreeing with the lower court on most the merits of the case, the appeals court struck down part of the lower court's order of restitution. The trial court lacked the authority to order restitution immediately upon judgment, the Second Circuit said, citing U.S. v. Adams . 

The U.S. and U.K. governments also agreed that the U.S. had the authority to tax Little's income only for the years 2005 through 2008. The court vacated the finding that Little owed $134,000 and ordered the lower court to recalculate the amount.

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Read more at: Tax Times blog

In a Notice, IRS has announced that Form 1040-NR, U.S. Nonresident Alien Income Tax Return, for 2021 and later tax years, will, in most cases, be removed from the list of returns that are administratively exempt from the electronic filing requirement. The Notice also contains an update on how IRS will announce future changes to the list of returns that are administratively exempt from the electronic filing requirement.

In Notice 2011-26, 2011-17 IRB 720, sets forth the specific administrative exemptions to the electronic filing requirement. In Notice 2011-26 the IRS provided an exemption for Form 1040-NR. 

The IRS has announced in Notice 2020-70, 2020-43 IRB that, except as otherwise provided below, the exemption for Form 1040-NR from the electronic filing requirement under Code Sec. 6011(e)(3) is removed. 

Accordingly, a specified tax return preparer must electronically file a Form 1040-NR, unless (1) an exemption described below or (2) an exemption under Reg § 301.6011-7(c) or Notice 2011-26, as modified by this new Notice (the Notice), applies. 

IRS does not currently accept Form 1040-NR tax returns via electronic filing by certain taxpayers. Therefore, the exemption from the electronic filing requirement set forth in Code Sec. 6011(e) (3) remains in effect for a Form 1040-NR filed for the following taxpayers:

1. Dual-status taxpayers (taxpayers who have changed status between resident alien and nonresident alien during the tax year),

2. Fiscal-year taxpayers,

3. Trusts, and

4. Estates.

The exemption for Form 1040-NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents, also remains in effect.

The Notice does not affect the exemptions provided in Notice 2011-26 for certain categories of specified tax return preparers, including certain foreign tax return preparers. 

Foreign tax return preparers without a social security number, who live and work abroad, remain exempt from the electronic filing requirement if they are not a member of a firm that is eligible for electronic filing with IRS and they applied for a Preparer Tax Identification Number (PTIN) under one of the methods described in Notice 2011-26.

Updates to all other administrative exemptions described in Notice 2011-26 (aside from exemptions due to IRS e-file limitations) will continue to be announced in a Notice or other appropriate guidance, rather than in IRS Publication 4164.

The Notice is effective for individual tax returns filed for tax years ending on or after December 31, 2020.  

Have IRS Tax Problem?

 Contact the Tax Lawyers at
Marini & Associates, P.A. 

Read more at: Tax Times blog