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IRS Audits Colorado Marijuana Companies

State legalization of both medicinal and recreational marijuana has created tension between states and the federal government. Marijuana remains an illegal substance under federal law and state-legalized marijuana businesses are encountering problems with federal banking regulations and aggressive IRS audits.

Are IRS Audits of Legalized Marijuana Businesses a Violation of Federalism?

Proponents of marijuana legalization argue that IRS audits are targeting the marijuana industry and are an abuse of power in violation of federalism principles. Federalism is the balance of power between federal and state governments. The Founding Fathers enumerated certain powers for the federal government in the Constitution, but also included the 10th Amendment to reserve unenumerated powers for the states. The theory was that states should govern themselves without interference from the federal government and the federal government should only regulate areas that states could not, such as foreign affairs and interstate commerce.

IRS audits targeting marijuana businesses could be an abuse of federal power because they interfere with an industry Colorado has legalized. Because of federal banking regulations, many banks refuse to work with marijuana businesses making it difficult for growers and retailers to open bank accounts. Marijuana 2Since it is difficult for marijuana businesses to open accounts, most operate as cash businesses. Although the IRS has not admitted it is targeting the industry, cash-operated businesses are vulnerable to audits. Moreover, at least 30 marijuana companies in Colorado are currently being audited for the 2013 and 2014 tax years.

The Constitution grants the federal government broad powers to tax, but it is also a widely accepted principal that the federal government has the power to regulate banks under its enumerated power to regulate interstate commerce. Thus, marijuana businesses would have a hard time challenging these banking regulations and IRS practices.

Tax Compliance for Marijuana Businesses

Until the federal government amends banking regulations, marijuana businesses will continue to run a high risk of IRS audits. Thus, it is imperative that marijuana businesses comply with federal tax laws.

In general, profits from illegal activities are considered taxable income under federal tax law. The federal government taxes state-legalized marijuana, even though it is still an illegal substance under the Controlled Substances Act. It appears that the current IRS audits of Colorado marijuana businesses are related to compliance with section 280E of the Internal Revenue Code and Form 8300. Accordingly, marijuana businesses should have a basic understanding of section 280E and Form 8300.

Since marijuana is an illegal substance under federal law, business deductions are disallowed under section 280E. There is one exception to this rule. Marijuana businesses can deduct the cost of goods sold. For instance, a dispensary can deduct what it paid for marijuana products purchased from a grower. However, most business expenses, such as employee salaries, advertising costs, or rents, are not deductible.

Filing Form 8300 is also required for many marijuana businesses, since most deal with large amounts of cash. Form 8300 is a document that must be filed if the business has cash payments over $10,000.

What Should Marijuana Companies Do in Response to an Audit?

Marijuana businesses, and any business for that matter, can make the audit process less stressful by adhering to the following recommendations:

  1. Organize Business Records: Taxpayers subject to audits should review returns for the years subject to audit to ensure they have documentation for their claimed deductions i.e. credit cards statements and receipts.
  2. Hire a Tax Professional: Businesses are advised to hire a tax professional to ensure responses to IRS inquiries are timely and the appropriate documents are sent to the IRS.
  3. Understand the Law: Is it also important for taxpayers to know their rights during audits. For instance, taxpayers generally have 30 days to file an appeal if the taxpayer disagrees with the audit decision.

Assuming the business complied with federal tax laws, an audit is usually nothing more than a mere inconvenience. But, if the IRS discovers the taxpayer has not complied with tax laws, the taxpayer may be subject to fines for civil audits and prison time in the case of criminal audits. Since it appears that the marijuana industry is a target for audits, it is essential they comply with federal tax laws.

KFC’s Colonel Accused of a Deep-Fried Falsehood

First Starbucks was sued for not putting enough liquid in their cups, and now KFC is being sued over not providing enough fried chicken in its buckets. A New York woman has filed a lawsuit against Kentucky Fried Chicken for false advertisement with regard to just how many pieces were in her bucket.

Anna Wurtzburger decided to file a lawsuit after she was disappointed in the number of pieces of chicken that she was given as part of her “Family Fill Up” meal. Ms. Wurtzburger ordered the meal, expecting to receive what she saw in a commercial, which featured a KFC bucket overflowing with fried chicken. Instead, all she got was 8 pieces of chicken, which did not even fill up the entire bucket.

When Ms. Wurtzburger contacted Kentucky Fried Chicken to complain about her portion size, the company responded that the chicken appeared emerging from the bucket so as to display it in all of its deep-fried glory. The overflowing bucket was never meant to be an accurate depiction of the portion size that would be served with the meal. Well, that did not sit well with Ms. Wurtzburger, who decided to sue Kentucky Fried Chicken for $20 million in response to her lack of chicken.

False advertising is frowned upon throughout the United States, and every state has at least one law that requires advertising to not be intentionally misleading. Section 350 of New York’s General Business Law is what prohibits false advertising in New York. Under New York law, false advertising is defined as advertising of an item that is misleading in a material respect. If an advertisement is found to be false, then the punishment can be an injunction, a fine of up to $5000, actual damages, three times the actual damages up to $10,000 if the advertiser acted willfully or knowingly, and attorney’s fees.

In order to find KFC guilty of committing false advertisement when the company aired the “Family Fill Up” meal commercial featuring the overflowing fried chicken bucket, it must be determined that reasonable people could be misled into believing that they will receive a bucket of chicken that is indeed overflowing if they order the “Family Fill Up” meal. If it is determined that a reasonable person would have expected to receive an overflowing bucket of chicken based upon seeing the commercial, then Kentucky Fried Chicken may have committed false advertising if it can also be proven that the buckets are normally not filled to the point of having pieces of chicken rise above the top of the bucket.

The actual damages that Ms. Wurtzburger would receive would likely just be the difference between how much she paid for the meal and how much it would have cost her to have a bucket overflowing with chicken, which probably would not be a lot of money. However, the intent to display the chicken emerging from the bucket in the commercial indicates that KFC knowingly portrayed the bucket as overflowing in its commercial, which would entitle Ms. Wurtzburger to three times the amount of her actual damages. Furthermore, Kentuckey Fried Chicken may also be on the hook for covering the costs of Ms. Wurtzburger’s legal representation and for a fine paid to New York state.

Kentucky Fried Chicken can counter Ms. Wurtzburger’s argument that she was misled by the image of the overflowing chicken bucket with an argument that no reasonable person would mistakenly think that they would receive an overflowing bucket because a reasonable person would not simply go off of the image portrayed in the commercial to determine just how many pieces they would receive as part of the meal. The company can present evidence showing that the vast majority of people do not believe that their bucket of chicken will consist of more than eight pieces or that the bucket would not be overflowing with chicken. KFC can also show that it has shown similar images in the past as part of their advertisements with no ill effects or accusations of engaging in false advertising.

Whether or not KFC truly intended for those buckets to be perceived as being overabundant in the commercial, the company may now think twice about how it shows off its delectable chicken in advertisements, even if the company ends up not having to pay $20 million to Ms. Wurtzburger over the lack of anticipated chicken. At the very least, Kentucky Fried Chicken may deem it necessary to make it painfully clear just how many pieces are included in each meal in every single commercial it airs.

What Happened to Our Healthcare System?

On October 4, 2016, former President Bill Clinton had some choice words for the Affordable Care Act (ACA), also known as Obamacare. He pointed out that the ACA has failed to help small business owners or individuals who make just over the ACA requirement for discounted insurance.

For example, in 2015, if a single individual made $47,000 a year, then they would not qualify for a subsidy. To qualify for a subsidy, a single individual must make less than $46,680 a year. But if you happen to make $46,680 or more, like $47,000, then does that mean you can afford an individual healthcare plan? No, probably not.

The ACA was supposed to fix the healthcare system and make insurance affordable for everyone, so every person can be covered. Yet, studies show that around 29 million individuals are still uninsured and the price of health insurance is still unaffordable for a large number of the U.S. population.

How did we get here? Where did we go wrong?

The 2008 Recession and How It Got Us Here, Today

In 2000, 83% of employees in the work force worked +35 hours and were considered to be full-time employees and 17% were part-time employees. But after the 2008 recession, full-time employment dropped to 80% and part-time employment went up to 20.1%. While the change in percentage does not seem significant, it was the start of a massive shift in the job market.

But why did this shift occur? After the recession, companies that were still in business had to find ways to cut costs in order to stay open. Under federal law, businesses with a certain number of employees must offer certain benefits, like health insurance. On average, employers cover 83% of the cost of the premium of an individual and 72% of the premium for a family. Employees still need to cover a portion of the health insurance premium, but how can they afford the cost if the price of insurance is rising and personal income remains the same, or drops?

In 2008, the cost of individual insurance rose by 5% and family insurance rose by 4.7%, while personal income dropped by 0.4%. But in 2009, the cost of individual insurance rose by 2.6% and family insurance rose by 5.5%, yet personal income dropped by 5.6%.

Health insurance companies need to make a profit, even though most citizens cannot afford to purchase health insurance. During the recession, the cost of healthcare coverage either remained the same or increased. Whereas earned income during the recession dropped, by 5.6%. A person who earned $47,000 a year in 2007 would have found their income drop to around $44,400 in 2009. But only if they were lucky enough to keep their job, since the unemployment rate in 2007 was 4.6% and in 2009 it rose to 9.3%.

But Where Does This Leave Us?

Recent numbers show that in 2017, insurance premiums under Obamacare will go up 25%. Despite the 2008 Recession, health insurance companies are managing to make record profits.

While the majority of U.S. citizens were losing their jobs, making less money, and/or losing their savings, the U.S. healthcare insurance companies were making record profits. The five largest insurance companies made $12.2 billion in profit in 2009, compared to the $4.4 billion they made in 2008. In 2009, 2.7 million Americans lost their health coverage.

Obamacare was enacted in 2010, with the goal of expanding Medicaid and giving federal subsidies to help middle and lower-class Americans buy private coverage. It began with the belief that, in 2014, around 3.5 million Americans will enroll in Medicaid, but in reality 6.8 million individuals enrolled.

To enroll in Medicaid, an individual has to make less than $16,243 a year, just $4,363 below the federal poverty level of $11,880. So in 2014, 6.8 million Americans hover just above, or below, what is considered to be absolute poverty.

But, in times of wealth or poverty, people will continue to get sick. When healthcare is indispensable, yet unaffordable, then health insurance is just as necessary. When our system is over-burdened and our economy is recovering from a recession, it is not surprising that the Affordable Care Act has yet to meet expectations.

Employment Rights in a Religious Work Place: The Ministerial Exception

Kate Drumgoole, New Jersey native, loved her job. She worked for Paramus Catholic High School as a guidance counselor and women’s basketball coach.  She also loves her wife, a fact the school was unaware of until recently.  Upon learning of Ms. Drumgoole’s marriage, the school fired her.  Ms. Drumgoole has since filed an employment discrimination lawsuit against Paramus.

Employers are forbidden from taking adverse employment action, such as firing an employee, based on a protected class like gender, race, or national origin. Sexual orientation, while not considered a protected class in every state, is a recognized protected class in New Jersey and has been considered a protected class by the Equal Employment Opportunity Commission for several years now. However, Paramus argues that they are protected by their First Amendment freedom of religion in firing Ms. Drumgoole for not living according to the tenets of their faith.  In her lawsuit, Ms. Drumgoole contests this allegation, pointing out that Paramus employs faculty members who are divorced or violate other Catholic tenets.

Ms. Drumgoole is not alone; more than 50 people have been fired or had employment offers rescinded by religious institutions for similar reasons since 2010. An Indiana Catholic School recently fired a teacher of purely secular topics after it came to her attention she used in vitro fertilization to become pregnant—calling her a “grave immoral sinner.”  An Ohio woman was fired by a religious institution earlier this year over being artificially inseminated. In Florida, a woman was fired for becoming pregnant outside of marriage.

Discrimination based on pregnancy is well established as gender discrimination, a federally protected class throughout the U.S. So how can religious institutions make employment decisions based on such clearly discriminatory reasons without fear of lawsuits such as Mrs. Drumgoole’s?  The answer lies in the interplay between employment rights and freedom of religion—the ministerial exception.

The Ministerial Exception and the Hosanna Case

To preserve the separation of church and state, as well as the free exercise of religion, employment law has a carve out for religious institutions, allowing them to favor those who share their beliefs. The Ministerial exception is so named because the employees who typically embody this carve out are church minsters. The exception is an affirmative defense—it must be proved by a religious employer seeking its refuge—which has historically been interpreted to allow discrimination on the basis of religion, but not as a loophole to any neutrally applied valid law. It specifically wasn’t generally considered an exception to non-religious discrimination.  This changed with the 2012 Supreme Court case which first recognized the ministerial exception—Hossana-Tabor Evangelical Lutheran Church v. EEOC.

The case was brought by Cheryl Perich, an ordained teacher at a Hossana who went on disability leave after she was diagnosed with narcolepsy. After six months leave, Hosanna asked Ms. Perich to resign.  Ms. Perich refused and threatened a lawsuit for violation of the American’s With Disabilities Act which requires employers to make reasonable accommodations for employee’s with disabilities and forbids discrimination based on an employee’s disability.  Hosanna fired Perich, explicitly over her disability.  Perich sued.

Unfortunately for her, the Supreme Court unanimously came out in favor of a particularly strong version of the ministerial exception. They ruled that employees who have a role in conveying the Church’s message and carrying out its mission” are barred by the First Amendment from suing over employment discrimination. This broad protection meant that religious institutions are totally insulated from discrimination lawsuits so long as the person suing them counts as a “minister.” This left the question, who qualifies as a minister.

Perich was ordained, but spent only a small portion of her time teaching anything that had to do with religion. However, the Court certainly felt she qualified as a minister. Unfortunately, the Court was also intentionally sparse on exactly why. They wanted to avoid a clearly delineated test for fear of excluding religions with different traditions. They did make it clear that the portion of time spent with religious duties is a factor, but not a deciding one on its own. However, as an ordained minister in both Hosanna and her own eyes, the Court felt there was little doubt Perich was a minister.

The Legal Landscape After Hosanna

After Hosanna, many have questioned the breadth of the ministerial exception.  The exception has seen some abuse. Catholic schools adding “minister” to every employee’s job description from teachers to receptionists to janitors.  Religious institutions often supplement this argument by making all employees sign a contract agreeing to uphold the tenets of their faith.

The flip side to this potential is the sanctity of church and state. Should a religious institution be legally forced to employ somebody who conflicts with their beliefs? As an extreme example, a synagogue shouldn’t have to employ a Holocaust denier.

The happy medium likely extends the exception more narrowly, to people whose positions implicate primarily religious duties. As it stands, the ministerial exception is extremely broad. The current state of the law bars ministers from bringing any employment discrimination or retaliation against a religious employer, regardless of whether the discrimination is related to religious tenets. As mentioned above, this clarification is a tricky prospect to say the least due to the differences between religions.

The truth is, since Hosanna the courts have done more to expand the exception than limit it.  There are some courts, such as this year’s Fratello v. Roman Catholic Archdiocese of New York, which have applied Hosanna as a balancing factor test looking at whether 1) the school held the employee out to the world as a minister, (2) the employee’s title connoted a religious “calling,” (3) the employee held themselves out as a minister and (4) the employee had religious responsibilities.  However, prior to this case the vast majority of courts have given much more deference to the religious organization’s categorization of an employee.

The cases discussed in the beginning of this article all deal with employees with completely or primarily non-secular duties. Cases like Ms. Drumgoole’s, pitting protected groups and employment discrimination against the ministerial exception, will help winnow down the exception and assist courts in understanding when a religious institution is properly due the protections of the First Amendment. Generally, the Constitution provides rights to protect yourself—not assert those rights as a license to discriminate or diminish the rights of others.

What Taxpayers Ought to Know About IRS Scams

A recent upsurge of IRS phone scams in Fort Worth, Texas has brought national attention to the issue. So far this year, over $73,000 has been stolen from Fort Worth residents by callers claiming to be IRS employees. IRS phone scams are a nationwide problem. Last year, over 300,000 incidences were reported from all over the country.

These phone scams usually involve imposter IRS employees telling victims that they owe back taxes, or unpaid taxes, from a previous year. Sometimes, the scammers will threaten to call the police if the victim does not pay. Scammers will also claim that the victim is being audited in order to acquire financial information.

Having a basic understanding of IRS procedures for back-tax collections and audits will help alert you to scams.

IRS Collection Procedures

Individuals owe back taxes if they did not pay their taxes in full or in part. There are several steps the IRS takes to collect back taxes.

The first step in the collection process is to provide the taxpayer with notice, by sending a notice letter. This letter will contain a bill for the amount owed, including interest and penalties, and a demand for the taxpayer to pay in full. If the taxpayer does not respond to the IRS, it will send another letter with an assessed balance that includes interest and penalties. If you did not receive a notice prior to the phone call in question, it is likely a scam. IRS

If the taxpayer cannot pay-in-full there are usually several options available, such as installment agreements or offers-in-compromise. An installment agreement allows the taxpayer to pay incrementally. An offer-in-compromise is where the taxpayer negotiates with the IRS to pay a reduced amount in lieu of the full amount.

Only after the notice letter, and the taxpayer’s failure to pay, will the IRS initiate collection proceedings. Typically, the IRS files a Notice of Federal Tax Lien if the taxpayer fails to pay. A tax lien is a claim to the delinquent taxpayer’s property that is used as security for unpaid tax debt. The IRS will also use wage garnishments and bank levies to collect unpaid taxes.

IRS Audit Procedures

The IRS performs audits to review financial information and assess whether tax return information was reported accurately.  Taxpayers are selected for audits at random and when the information reported on their returns does not match their tax documentation, such as W-2s or Forms 1099s.

Audits begin with a mailed letter or phone call informing the taxpayer that he or she is being audited. If the IRS contacts the taxpayer by phone, a letter will be sent confirming the audit. These notification letters usually list documents and other materials that must be sent to the IRS. After the IRS reviews the information sent, it makes a determination whether the information reported was correct. If the taxpayer disagrees with the determination, then the taxpayer may appeal within 30 days.

If a caller asks for financial information directly over the phone, it is likely a scam since the IRS usually sends a letter confirming an audit and listing documents that must be sent.

IRS Scam Alerts

In addition to failing to follow IRS procedures, there are other common scam indicators. For instance, scammers frequently require unusual payment methods and threaten serious consequences unless their victim makes an immediate payment.

Reports state that the IRS imposters require payments through pre-loaded debit cards or wire transfers. Frequently, scammers will request iTunes gift cards as payments, telling their victims that the IRS has partnered with iTunes. The real IRS normally does not accept over-the-phone payments, even with regular debt or credit cards.

Victims are also frequently told that if they do not pay immediately, they will be arrested, deported, or face suspension of drivers’ licenses. Unless you have committed a serious tax crime, it is more likely that the IRS put a tax lien on your property. Tax liens usually show up on credit reports because the IRS files a Notice of Federal Tax Lien to put other creditors on notice. If no tax lien appears on your credit report, it is unlikely that you need to pay taxes immediately.

If an “IRS employee” does not follow the procedures for tax collection, audits, and refunds laid out above, it is likely a scam.