This a great summary of offers in compromise including an overview of eligibility, criteria, and fees.
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer’s tax liabilities for less than the full amount owed. That’s the good news. The bad news is that not everyone can use this option to settle tax debt; the IRS rejected nearly 60 percent of […]Settling Tax Debt With an IRS Offer in Compromise — Lahrmer & Company
California marijuana dispensaries face a challenging tax landscape. Not only are business deductions effectively barred by IRC 280E, but Cost of Goods Sold calculations are less favorable than they otherwise could be in light of this IRS memo. Furthermore, the CDTFA can be said to target cannabis businesses for sales tax audits in light of the frequency of return filings, applicable cannabis tax penalties for late payment, and general distrust of cash-intensive businesses. In light of the tax hurdles faced by Marijuana dispensaries, tax lawyer Jin Kim has identified some of the common tax mistakes made by California cannabis businesses.
#1: Deducting Some Business Expenses Due To A “Separate Business”
Some cannabis businesses take an aggressive approach to their taxes and attempt to deduct some business expenses attributable to a ‘separate’ business that does not traffick in marijuana. Following the holding in CHAMP v. Commissioner, these marijuana dispensaries are more likely to end up like the taxpayer in Martin Olive v. Comm. or Harborside. In essence, tax courts are skeptical of a marijuana dispensary being engaged in two separate trades or businesses, one of which does not traffick in marijuana and thus whose expenses are not barred from deduction via IRC 280E. Rather, tax courts often find marijuana dispensaries as being engaged in a single business of selling marijuana, especially when nearly all of the income generated by the two alleged businesses is derived from the sale of marijuana and marijuana paraphernalia. (See Alterman).
#2: Payroll Tax Violations
It’s surprising that marijuana dispensaries, part of an industry that’s so heavily regulated and scrutinized by tax authorities, still commit payroll tax violations such as failing to file timely returns or remit the correct amount of employment taxes owed. With the applicable trust fund recovery penalty, responsible persons for these trust fund taxes can face daunting tax liability.
#3: Sales Tax Violations
In California, the CDTFA is charged with collecting sales taxes. Now, while the CDTFA has created a cannabis tax website to help marijuana businesses comply with onerous California tax obligations, the frequency of return filings and significant penalties for untimely payments can quickly snowball for lax marijuana dispensaries. In addition, the CDTFA is distrustful of cash-intensive businesses which by necessity include marijuana dispensaries. Accordingly, the applicable penalties, onerous return filing deadlines, and significant sales volume make marijuana dispensaries attractive targets for CDTFA sales tax audits. Unfortunately for some dispensaries with poor recordkeeping, these sales tax audits can result in significant tax liability.
There are many different types of tax penalties, but two of the most common involve the failure to timely file a tax return and the failure to timely pay the amount owed. This article will give a brief overview of these delinquency penalties – the civil penalty for failing to timely file a tax return and penalty for failing to timely pay the amount owed.
When is The Delinquency Penalty Imposed?
Taxes are the lifeblood of the government. It sustains the activities of the government and allows it to provide services and infrastructure to the people. For the government to do its job timely and without delay, it needs the revenue from the taxes paid by the people. For this reason, people must file tax returns timely and pay taxes by the applicable deadline; otherwise, the government may impose delinquency penalties.
3 Instances When A Delinquency Penalty is Imposed
The delinquency penalty arises in three instances: (1) when there is failure to file a timely return; (2) when there is failure to pay tax reported on a return; and (3) when there is failure to pay an assessed tax required to be, but not shown, on a return.
1) Failure to timely file a tax return
For failure to file a timely return, the Code imposes under Section 6651(a) a penalty amounting to 5% per month up to 25% as a maximum constituting five months. The imposition of the penalty is on the net amount due to which the taxpayer is entitled. It will accrue when the taxpayer failed to file one or all of the returns on the date prescribed with extensions granted. Unless the taxpayer can prove that such failure is due to reasonable cause and not to willful neglect, the delinquency penalty will be imposed.
2) Failure to pay tax reported on tax return
The delinquency penalty is imposed when there is a failure to pay the “self-assessed” amount shown on a filed return and the assessed tax within ten days after the date of the notice. The penalty is 0.5 percent for each month of the delinquency up to a maximum of 25 percent or 50 months. A penalty will not be imposed upon a taxpayer if he pays within 21 calendar days from the date of the notice and the demand or within ten business days if the corresponding amount is $ 100,000 or more. The penalty will not likewise accrue when shown that the failure to pay the tax or deficiency was not due to willful neglect but due to a reasonable cause.
3) Fraudulent failure to file tax return
When there is a fraudulent failure to file a tax return, the imposition of the delinquency penalty is on an increasing monthly penalty rate of 5% to 15% up to 75% of the net amount due. The IRS has the burden of proving through clear and convincing evidence the element of fraud on the increasing portion of the penalty. Failure to show fraud committed by the taxpayer will only make the taxpayer liable for the delinquency penalty. The taxpayer then can raise the defense of reasonable cause and absence of willful neglect.
Grounds for Avoiding The Delinquency Penalty
The common ground of avoiding these three instances of accruing delinquency penalties is for the taxpayer to show the absence of willful intent in neglecting and failing to pay taxes due to a reasonable cause. At best, taxpayers must always be mindful in filing the correct and complete return and paying the taxes on their respective schedules to avoid any penalty assessments from the IRS. Nonpayment of the penalties will lead the IRS to issue a Notice of Levy of the liable taxpayer’s properties to satisfy the unpaid taxes.
The IRS imposes the accuracy-related penalty due to a taxpayer’s underpayment of federal taxes through substantial understatement of income tax, negligence, or other errors in the tax return. The penalty is 20% of the underpayment. The main reason for implementing an accuracy-related penalty is to help the IRS enforce accurate payment and filing of annual tax returns.
Underpayment of Taxes
Before the IRS can impose an accuracy-related penalty against the taxpayer there must be an underpayment in taxes. The underpayment is related to one of the following instances:
- Disregard of rules or regulations or negligence;
- Any substantial understatement of income taxes;
- Any substantial valuation misstatement;
- Any substantial overstatement of pension liabilities;
- Any substantial estate tax or gift tax valuation understatement;
- Any disallowance of claimed tax benefits because of a transaction lacking economic substance;
- Any undisclosed foreign financial asset understatement; or
- Any inconsistent estate basis.
Defense Against Tax Underpayment Allegations
The accuracy-related penalty is not applicable if the taxpayer can show that the underpayment is due to a reasonable cause and that the taxpayer acted in good faith. Reasonable cause is considered on a case-to-case basis with a determinant factor as to what extent the taxpayer exerted effort to determine the proper tax liability. Other factors include the following:
- Experience, knowledge, and education of the taxpayer;
- The complexity of the law;
- The novelty of issue or the first impression to the courts;
- Whether there was no receipt of the third party’s information return/reliance;
- Adequate records;
- The credibility of the taxpayer; and
- Reliance on tax adviser advice.
Substantial-Authority Defense and Procedural Defense
Aside from the reasonable cause defense, the taxpayer can alternatively raise the substantial-authority defense and procedural defenses.
The substantial authority argument is difficult to prove. It requires corroborating code sections, regulations, revenue rulings and procedures, court cases, and other sources, which are treated as having authority to establish the taxpayer’s position.
As for the procedural argument, the IRS must show that the accuracy-related penalty is approved in writing by its examiner’s immediate supervisor. The IRS must do this no later than the issuance date of the notice of deficiency asserting the penalty. Failure of the IRS in proving the procedural burden will make the taxpayer avoid accuracy-related penalties.
For the imposition of the accuracy-related penalty, the Internal Revenue Code imposes the burden of proof on the IRS that the penalty is warranted. Suppose the taxpayers IRS defense lawyer can show credible evidence, correctly substantiate items, maintain records, and cooperate with reasonable IRS requests, then the IRS will have the burden of proof concerning the factual issues.