The Details

Cannabis IRS Audit Defense

An audit is an opportunity to assess the quality and reliability of the information you use to make important decisions. We provide cannabis audit defense services to help your cannabis business grow, including reviews and compilations of financial statements, preparation of financial statements, forecast-projections, contract or regulation compliance, Internal/operational audits, forensic accounting, and transaction assistance. Anything cash and cannabis we can help out with.

We’ve prepared over 1,200 annual tax returns for cannabis business operators in all verticals, from dispensaries, distribution, cultivation, manufacturing, to delivery and testing. We can speak intelligently about all different parts of the supply chain for cannabis in the financials around that.

GreenGrowth CPAs has 500+ cannabis business clients. We see everything from big, large public companies all the way down to the small, individual operators just doing their small little shop across that wide spectrum.

We’re in 12 different States including California, Oregon, Washington, Colorado, Hawaii, Montana, Florida, and Oklahoma. Outside of just tax returns, we’ve done 17 audit related valuation projects in 2018 and 2019.

IRS Tax Audit Preparation for Cannabis Businesses Subject to 280e

Cash Based Business

What draws attention from authorities?

As the cannabis industry continues to grow, IRS auditors will be taking an aim at cannabis business operators due to their lack of understanding around cannabis business taxes and cannabis compliance regulations, like 280-E for example. Also, the fact that cannabis businesses operate primarily in cash is another reason they draw attention to the authorities because cash can easily become untraceable.

We highly suggest that you work with a seasoned, experienced lawyer and CPA to protect your company, especially in cannabis, since it’s a very regulated industry. This is not just like opening up a corner store. This is like starting an airline, starting a liquor company, starting a pharmacy, starting a pharmaceutical brand. This is really, really big. It’s not a small business. It’s not very easy. It takes a lot of money to start these businesses. And cannabis is a team sport. So make sure that you’re assembling the best superstar team to help your business be successful as you grow on this path.

The process

How do IRS audits typically proceed with Cannabis Companies?

First off, you are going to need specific tax return data. Most likely, you are going to need to submit the previous year’s tax return information in addition to the current year. Yes, the IRS has them, but they want you to bring them in as well because the IRS will be looking for a point of comparison. You may also be asked to bring in returns for other businesses that you are an operator of. This requires a lot of tax return information, so be sure to save your tax data. Don’t just throw it away; archive it, save it digitally, save it in hard copies, whatever you need to do.

Then, the auditor is going to ask about the reliability of taxpayer’s information. So if you have unexplained gaps in your records, the IRS will want to understand why your records are incomplete. They usually assume the worst, right? So to be prepared, be able to justify what’s missing and why, and how to back up your receipts. If there are gaps in the documentation, have a reason to explain why that is. After this, there’s this thing called the minimum income probe. This tool is usually used to identify deposits that may be taxable income or sources of taxable income, not otherwise disclosed by the taxpayer. So they start seeing the positives come into your accounts and you’re not claiming this as income. What is going on? They’re going to look at that. They’re going to ask what is this and ask you to explain it. They’re also going to ask for your cash accounting methodology, which may include things for inventory items and the way that the employees handle these transactions.

For records of transactions and accounts, identify cash deposit locations and procedures for cash deposits and any other cash handling procedures. What’s happening in your store? Who is depositing the money into the safe and who’s actually going through the safe log? Is there a division of duties to prevent theft and diversion? They’re going to ask you for all of your bank account information and other personal financial information as well. Auditors are able to open the scope up and state that cannabis regulators are permitted to ask for a range of records to inspect. They can inspect anything in your physical location. The cannabis regulatory authorities can pretty much ask you to turn over anything and everything. Even the IRS agents, as federal agents, will pull all the strings they need to to get the information that they desire.

So don’t hide anything, right? Focus on gathering the documents by the deadline that they’ve set for you and be a good partner in your IRS audit. Always be operating in good faith.