The IRS is shaking up the US cannabis industry with its audit.In fact, the Internal Revenue Service (IRS) is the US federal government agency that collects income tax and various other taxes—including employment, corporate, and estate taxes—and enforces tax laws related to the US federal budget. That said, companies specializing in cannabis and its derivatives have been in turmoil since the IRS announced it would be auditing them. Let’s take a closer look at this news by examining the key points of the audit below.
Table of Contents
- An audit that has been in the works for years
- Huge risks for companies that don’t comply
- The processes used to audit cannabis companies
An audit that has been in the works for years
Indeed, upon the announcement of the IRS’s audit of cannabis companies, many might believe that this decision was made after only a few weeks. However, this is not the case. In fact, this audit was meticulously prepared. This organization has been training agents specifically to audit these businesses for almost eight years. To that end, the agents are trained to master every detail of theaudit of marijuana businesses. This training is conducted using PowerPoint presentations, which describe everything, including legal precedents and questions that should be asked during interviews with business owners.From this perspective, the related training already provides an overview of the actions and processes that will be emphasized in the field. That said, a few details may be noteworthy, such as the fact that many training materials focus on the fundamental principles of the industry. This is the case with the explanation of Section 280E of theInternal Revenue Code.or the discussion of legal precedents. Some of which are decades old. The goal behind all this is to ensure that
cannabis companies in the UScomply with the tax principles in force in their state. Along these lines, a slide reads: “As with any new industry, the IRS continues to spend resources to ensure tax compliance.”
Huge risks for companies that don’t comply
Indeed, this audit isn’t being conducted to appease business owners. In fact, the ultimate goal is to severely penalize companies that don’t comply with their state’s tax laws. In this regard, the IRS will have the power to seize and sell the substances. This is precisely what’s causing a lot of anxiety for many owners in the US. They could see their businesses collapse overnight. Speaking of seizures, Henry Wykowski, a lawyer based in San Francisco, shares an experience.
“Years ago, I represented… a guy who had a fleet of private jets, and (the IRS) obtained a deficiency order against him, and they went and inventoried his fleet, and two weeks later, they auctioned off three of his planes.”
Reading such testimony from this lawyer, it’s clear that some cannabis business owners are already breaking out in a cold sweat. Furthermore, it’s possible that the IRS doesn’t intend to limit itself to seizing only the substances. In fact, the equipment used by the businesses could also be seized. This includes “cash registers, safes, and equipment,” as suggested in the agents’ training materials.
The processes used to audit cannabis businesses Indeed, an IRS guide
- This document details the processes the agency will use to audit cannabis businesses. This allows business owners to know what to expect when the time comes. These processes can be summarized as follows:
- Entry and Visit: Like other industries, the IRS recommends that agents gather as much information as possible during the initial interview. Agents are encouraged to conduct or enforce a visit to the business. Indirect Methods: Indirect methods, such as calculating revenue to determine production or calculating the owner’s net worth over time, are used to help uncover unreported income.
- External Databases: The IRS increasingly relies on external databases and records that can provide information about the cannabis trade. Specifically: regular state data, point-of-sale data from technology providers, utility company electricity and water bills, armored truck data, ATM data from dispensaries, and investor prospectuses.
References:
- https://mjbizdaily.com/confidential-irs-marijuana-guide-details-audit-procedures-for-agents-to-follow/
- https://mjbizdaily.com/irs-agents-trained-on-marijuana-audits-section-280e/
- https://www.irs.gov/businesses/small-businesses-self-employed/marijuana-industry-frequently-asked-questions
