How to Know if the Knock on Your Door is Actually Someone From the IRS

How to Know if the Knock on Your Door is Actually Someone From the IRS

People can avoid taking the bait and falling victim to a scam by knowing how and when the IRS does contact a taxpayer in person. This can help someone determine whether an individual is truly an IRS employee.

Here are eight things to know about in-person contacts from the IRS.

  • The IRS initiates most contacts through regular mail delivered by the United States Postal Service.
  • There are special circumstances when the IRS will come to a home or business. This includes:
    • When a taxpayer has an overdue tax bill
    • When the IRS needs to secure a delinquent tax return or a delinquent employment tax payment
    • To tour a business as part of an audit
    • As part of a criminal investigation
  • Revenue officers are IRS employees who work cases that involve an amount owed by a taxpayer or a delinquent tax return. Generally, home or business visits are unannounced. 
  • IRS revenue officers carry two forms of official identification.  Both forms of ID have serial numbers. Taxpayers can ask to see both IDs.
  • The IRS can assign certain cases to private debt collectors. The IRS does this only after giving written notice to the taxpayer and any appointed representative. Private collection agencies will never visit a taxpayer at their home or business.
  • The IRS will not ask that a taxpayer makes a payment to anyone other than the U.S. Department of the Treasury.
  • IRS employees conducting audits may call taxpayers to set up appointments, but not without having first notified them by mail. Therefore, by the time the IRS visits a taxpayer at home, the taxpayer would be well aware of the audit.
  • IRS criminal investigators may visit a taxpayer’s home or business unannounced while conducting an investigation. However, these are federal law enforcement agents and they will not demand any sort of payment.

Taxpayers who believe they were visited by someone impersonating the IRS can visit IRS.gov for information about how to report it.

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Happy Thanksgiving from NFS!

Happy Thanksgiving from NFS!



From All of us here at

Northeast Financial Strategies, Inc.

WE GIVE THANKS…

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Marijuana and the IRS

Currently, 29 states and the District of Columbia allow legal use of marijuana in some form. Several more will join in 2018, while advocates in other states are pushing to add marijuana initiatives to upcoming ballots. Marijuana sales are big business and generate needed tax revenue for the states. Although state law legalizes activities related to its production and sale, marijuana is considered a Schedule I drug under the Controlled Substances Act of 1970. As such, this activity continues to be illegal under federal law. This dichotomy of state and federal laws on the use and sale of marijuana presents unique challenges to the industry. 

Federal Taxation

As far as the IRS is concerned, all income is taxable, even illegal income. IRS publications state that “illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.” When no other crimes could be pinned to Al Capone, the Internal Revenue Service obtained a conviction for tax evasion. As the astonished Capone left the courthouse he said, “This is preposterous. You can’t tax illegal income!” But the fact is income from whatever source derived (legal or illegal) is taxable income.

State legalization often comes with heavy regulation and oversight. In addition, growers, distributors and dispensaries incur costs like any other business. They hire employees and pay overhead costs. For federal tax purposes a legitimate business is allowed to deduct all “ordinary and necessary” costs from revenue in order to compute their taxable income. This is not the case for the trafficking of controlled substances such as marijuana. Although all illegal income is taxable, not all expenses are deductible.


Code Sec. 280E specifically denies tax credits or deductions to businesses trafficking in controlled substances. However, the legislative history does not indicate that Congress intended to deny all of a taxpayer’s business expense deductions simply because the taxpayer was involved in trafficking in a controlled substance. Code Sec. 280E applies to deductions or credits that are taken against gross income. Therefore, the adjustment for cost of goods sold, which is subtracted from gross receipts to arrive at gross income, is allowed by Code Sec. 280E.

Subsequent to Code Sec. 280E, Congress amended Code Sec. 263A and added the UNICAP rules. The IRS has taken the position that costs that are not deductible under Code Sec. 280E are not capitalized under the UNICAP rules. On the other hand, excise tax is neither a deduction from gross income nor a tax credit and the IRS notes that Code Sec. 280E does not apply and is therefore included in the adjustment for cost of goods sold. Obviously the exclusion of credits and deductions results in a material distortion of taxable income and a higher effective rate of taxation.

There is little chance that Congress will act to exempt state-licensed marijuana suppliers from the rules under Code Sec. 280E anytime in the near future. One partial solution to this problem is to allocate appropriate expenses between two separate businesses. For example, a dispensary may also sell paraphernalia or provide counseling services. By segregating business activities, and isolating the sale of marijuana, businesses can use the benefit of the necessary and ordinary business expenses to their other operations. This approach has had mixed reaction from the IRS. Taxpayers should be cautious with this strategy and be diligent in recordkeeping and operations procedures, making certain that the expenses allocated to the legitimate operations cannot be expenses of the marijuana business. Any allocation must be supported in an IRS audit.

Cash

Because dealing in marijuana is illegal at the federal level, banks are prohibited from working with any marijuana business. Banks must adhere to FDIC regulations and refuse to accept money directly related to the sale of a controlled substance. There are some exceptions to this rule in Colorado, where some banks have found ways to work with the marijuana industry. But in general, these business have no access to bank accounts, and therefore, no check writing privileges.

While some businesses in the marijuana industry have begun accepting credit cards, it is still largely a cash-based industry.  Where retailers must deal exclusively in cash, their customers cannot use credit or debit cards for payment. All payments to suppliers, landlords, and employees are in cash. This not only presents a security issue, with large amounts of cash on site, but there is the practical issue of how to make payroll tax deposits and pay the tax on income.

The IRS recognized this problem and now offers a way to pay taxes at participating retail stores using PayNearMe. There is a small fee for the cash payment option. It usually takes two business days to post to the account so a taxpayer should plan ahead to avoid interest and penalties. Payment limits are up to $1,000 per day. This cash option is only available at participating 7-Eleven locations in 34 states. In Colorado, payments can be made in cash at local IRS offices by appointment. In addition, the IRS has also offered cash counting rooms during the recent tax filing season in Denver and Seattle.

Medical Deduction

Finally, there are tax implications for the medical user. Although patients, many with serious or life threatening illness, may derive benefit from the use of marijuana and have the full endorsement of their doctor, they cannot take a deduction for the cost of the cannabis treatment. Payments for illegal treatments are not deductible as a medical expense.

If you have any questions or concerns related to the marijuana industry, please call our office. We are here to assist you.

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2017 Year-End Tax Planning For Individuals

Year-end 2017 is shaping up as an important deadline to have tax strategies in place to take advantage of certain opportunities before they sunset along with the close of the tax year on December 31, 2017. A major challenge this year, of course, involves the uncertainty that will remain, likely into late November/early December, over pending tax reform legislation. This includes uncertainty regarding rate cuts, certain deductions, and much more. Effective strategies in response to any of these “tax reform” priorities involve close monitoring of any proposed tax bill as it moves through negotiations within the various Congressional tax committees and Trump administration officials, with year-end action steps ready to go based upon alternative legislative outcomes.

Although year-end 2017 may be unique because of possible tax reform, planning during the final weeks and months of this year involves much more –both in terms of traditional year-end strategies and strategies developed in response to developments that have taken place since last year. Here are some points to consider:

Data gathering. Year-end planning should start with data collection and a review of prior year returns. This includes information on losses or other carryovers, estimated tax installments, and items that were unusual. Conversations regarding next year should include discussions of any plans for significant purchases or dispositions, as well as any possible life cycle events.

Income tax rates. One of the most significant factors in tax planning for individuals is their tax bracket. The most direct control taxpayers have over their tax bracket rests in their ability to control the timing of income and deductible expenses. For example, taxpayers who expect to be in a lower tax bracket in 2018 should consider deferring income to 2018 and accelerating deductions into 2017. Also relevant are “tax reform” proposals that may compress tax brackets and lower tax rates. These changes could present year-end tax planning opportunities for taxpayers depending on when any proposed rate changes go into effect.


Investments. Taxpayers holding investments, whether in the form of securities, real estate, collectibles, or other assets, often have an opportunity to reduce their overall tax bill by some strategic buying and selling toward the end of the year, as well as, exchanging appreciated assets for like-kind property in order to defer gains. Balancing tax considerations with other factors is part of the challenge in dealing with investments, including: the ordinary income tax rates, the net investment income tax rate, the capital gain rates, and the alternative minimum tax (AMT).

Income caps on benefits. Monitoring adjusted gross income (AGI) at year-end can also pay dividends in qualifying for a number of tax benefits. Often tax savings can be realized by lowering income in one year at the expense of realizing a bit more in another year.

Life events. The biggest variables for many taxpayers impacting their year-end tax planning surrounds life events such as marriage, divorce, birth or adoption of a child, a new job or the loss of a job, and retirement. These life events may, for instance, result in a change in filing status that will affect tax liability. The possibility of significant changes and/or significant or unusual items of income or loss should also be part of a year-end tax strategy. Additionally, taxpayers need to take a look into the future and predict, if possible, any events that could trigger significant income, losses, or deductions.

2017 tax law changes. In addition to possible changes for the 2018 tax year, and more remotely for 2017, that may be part of recent “tax reform” efforts, other tax law changes by the IRS and the courts that have taken place during 2017 are worth a look in mapping out year-end strategies.

  • Charitable contribution substantiation. In response to concerns from some in Congress and the nonprofit community, the IRS withdrew proposed regulations that would have required more stringent reporting procedure for charitable contributions of $250 or more. In general, however, courts have offered various opinions during 2017 on how strictly taxpayers must meet the substantiation requirements for claiming various charitable contributions depending on the type of donation.
  • Relief for late rollovers. The IRS unveiled a new self-certification procedure for taxpayers who inadvertently miss the 60-day time limit for certain retirement plan distribution rollovers.
  • Per taxpayer mortgage deduction. The IRS announced that it would not contest a Ninth Circuit Court of Appeals defeat that found that multiple unmarried taxpayers co-owning a qualifying residence can double the normal $1.1 million mortgage debt limit for interest deduction purposes.
  • Hurricane disaster relief. For victims of Hurricanes Harvey, Irma and Maria in 2017, a variety of tax relief measures are now available, through a special Disaster Relief Act of 2017 and numerous IRS measures to extend compliance deadlines and other requirements.
  • Offers in compromise. The IRS has updated its policy covering offer in compromise (OIC) applications received on or after March 27, 2017.
  • Interest rates. Interest rates have slowly been rising throughout 2017 and are expected to continue to rise into 2018, which points to various tax planning opportunities or the closing of certain tax advantages.

Timing rules. Timing, and the skilled use of timing rules to accelerate and defer certain income or deductions, is the linchpin of year-end tax planning. For example, timing year-end bonuses or year-end tax payments, or timing sales of investment properties to maximize capital gains benefits should be considered. So, too, sometimes fairly sophisticated “like-kind exchange,” “installment sale” or “placed in service” rules for business or investment properties come into play. In other situations, however, implementation of more basic concepts are just as useful. For example, taxpayers can write a check or can charge an item by credit card and treat these actions as payments. It often does not matter for tax purposes when the recipient receives a check mailed by the payor, when a bank honors the check, or when the taxpayer pays the credit card bill, as long as done or delivered  “in due course.” 

Please feel free to call our offices if you have any questions about how year-end tax planning might help you save taxes. Our tax laws operate largely within the confines of “the tax year.” Once 2017 is over, tax savings that are specific to this year may be gone forever.

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