The IRS is sending shockwaves through the US cannabis industry with its audit. TheInternal 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 its upcoming audit. Let's take a closer look at this news by examining the key points of the audit below.
The summary
- An audit that has been in preparation for years
- Huge risks for companies that do not comply
- The processes used to audit cannabis companies
An audit that has been in preparation for years
Indeed, upon the announcement of theIRS audit of cannabis businesses, 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. For nearly eight years, the IRS has been training agents specifically to audit these businesses. Accordingly, the agents are trained to master every detail of auditingmarijuana companies. This training is conducted using PowerPoint presentations, which describe everything, including legal precedents and the 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 practice. That said, a few details may be noteworthy. Specifically, 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 objective behind all this is to ensure that cannabis companies in the USA comply with the tax principles in force in their state. Along these lines, one slide reads:
"As with any new industry, the IRS continues to spend resources to ensure tax compliance.".
Huge risks for companies that do not comply
Indeed, this audit isn't intended 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 assets. This is precisely what's causing concern for many business owners in the US. They could see their businesses collapse overnight. Speaking of seizures, Henry Wykowski, a San Francisco-based lawyer, shares an experience.
"Years ago, I represented... a guy who had a fleet of private jets, and (the IRS) obtained a deficiency judgment against him, and they went and inventoried them, and two weeks later, they auctioned off three of his planes.".
Reading this testimony from this lawyer, it's clear that some cannabis business owners are already breaking out in a cold sweat. Furthermore, it's possible the IRS won't just seize the substances themselves. In fact, the equipment used by these businesses could also be seized, including "cash registers, safes, and other equipment," as suggested in the agents' training materials.
The processes used to audit cannabis companies
Indeed, an IRS guide details the processes that will be used by the agency to audit cannabis businesses. This allows owners to know what to expect when the time comes. From this perspective, they can be summarized in the following points.
- Entry and the tour : As with other industries, the IRS recommends that agents obtain as much information as possible during the initial interview. Agents are encouraged to conduct or request a tour of the company.
- Indirect methods : Indirect methods, such as calculating turnover 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 on cannabis trade. These include: 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
Editor-in-Chief specializing in CBD
Julien, born on July 17, 1978, in the Paris region, is a prominent writer and expert in the field of CBD products. Following his studies, Julien developed a passion for natural remedies, including CBD. In 2022, he joined the CBD.fr team as an expert and regular contributor. Thanks to his scientific expertise and clear writing style, Julien helps demystify the complexities of CBD, while highlighting its benefits and potential applications through his articles and conference presentations.
