The overall number of tax audits continued to decrease with about one million individual returns flagged last year, which equates to less than one percent of all those filed. This number was 16 percent lower than the prior fiscal year.
Beauty, it's often said, is in the eye of the beholder. But that isn't really true of tax deductions. No matter how necessary a certain expense may seem to a given taxpayer, that doesn't mean the IRS will agree.
There is an unusual interplay between federal and state laws. While states have the ability to enact their own laws, when there is a conflict, federal laws control. For example, medical marijuana dispensaries are a completely legal business in California. However, federal law still considers marijuana a controlled substance regardless of the purpose for which it is used.
Last week we discussed the fact that sometimes business expenses are characterized as hobby losses by the IRS. The line between business expenses and hobby losses is sometimes thin, especially in the context of new businesses.
This is the year that many Orange County residents will follow their passions and start their own businesses. The current economic climate has shown many Californians that being an employee of someone else is not as risk-free as it once was, which is why increasing amounts of Californians are going into business for themselves while still employed. Normally, businesses can deduct expenses but the deduction of business expenses may not be as straightforward for many upstart businesses.
This week we have covered an IRS ruling against one of California's biggest medical marijuana dispensaries which resulted in a $2 million tax debt from disallowed payroll taxes and other deductions. The CEO of Oakland's Harborside Medical Center said that the IRS' logic in disallowing his business deductions did not make sense in light of an allowed deduction for the actual purchase of pot.
No one wants to open their mailbox and discover an envelope from the Internal Revenue Service. Tax payers know that such an ominous package usually means that they have been selected for an audit. The prospect of undergoing an audit can be incredibly nerve wrecking, even for individuals who are completely confident in their ability to file everything correctly.