In most circumstances, the IRS and other regulatory tax bodies are authoritative in their perspective and decisions. But the punishing cannabis tax regime is so complex, sometimes even the regulators can be wrong. And if you’ve been faced with a cannabis tax audit before, you can understand why the expertise of dedicated cannabis accountants can actually correct the regulators and save you money.
With the number of cannabis audits increasing, we still see some unclear decision-making from the IRS and other state agencies. It may be worth a second look from a cannabis accountant, especially if you’re facing penalties or have had to make payments due to a prior audit.
In this case study, we provide a recent example where one of our cannabis clients successfully challenged the calculations by a state auditor. We also discuss how our team was able to identify the issue, research the problem, and ultimately dispute the findings with the state tax authorities, resulting in a win for our client.
Case Study: Challenging Audit Findings
A cannabis operator received notification of an audit from their state regarding the underpayment of sales tax. The notice informed the operator they were miscalculating sales taxes and had under collected over $5,000 in sales taxes from the previous year. The owner was charged $5,000 in taxes plus penalties and interest. Because of the miscalculation, they also had to go back and amend all tax filings from the previous year.
Like most operators, the business owner assumed the authorities were correct and never questioned their decision. They amended their tax returns, refiled, and paid the balance plus fees and interest assessed. Fast-forward to the following year…
The Issue Reemerges
The operator in this case study recently became a client of our Outsourced CFO service. They started working with Val, a GreenGrowth CPAs team member who specializes in cannabis accounting. This service provides turn-key accounting solutions to help cannabis operators build out financial and accounting processes. The resulting data and insight helps improve financial performance and maintain tax compliance.
Upon reviewing the new client’s financials and discussing the details around the cannabis tax audit, we quickly informed the client that the audit findings were wrong. “Wait,” we told the client, “we need to clearly understand why they charged you that [$5,000 +penalties/interest] and make sure everything is structured correctly.” Val went digging…she believed the original filings were correct, and the sales calculations were causing the client to now over-pay sales taxes to the state.
Addressing concerns with the IRS
To address the issue, Val connected with the revenue compliance officer assigned to the audit case. She asked the auditor for further clarification on calculating the sales tax. It turns out he was confused…and went back to his team at the IRS for further clarification.
Because sales tax law varies from state to state, we always recommend working with an accountant specializing in cannabis. In this example, the client is established and operating out of Oklahoma. Our team was able to educate the auditor on the accurate calculation.
IRS finds their own mistake
After clarifying the rules for the calculation and providing documentation, the revenue officer responded that he was wrong in his original findings that sparked the audit.
Where the IRS went wrong
The relevant tax rule states that cannabis operators must calculate the sales tax based on gross receipts. The compliance officer thought the gross receipts were the revenue collected before any discounts. However, after further investigation, his internal department aligned with our calculation that the sales tax calculation is based on the dollar amount after the discounts are applied.
Under Section 280E, we calculated what the operator actually received minus the discounts. Therefore, the operator only pays tax on the amount collected from their customers after discounts, trade, etc. By reducing the discounts to gross receipts, they become deductible under 280E.
The final result
Val was able to file a dispute of the previous audit and assist the client with filing another amended tax return. She was then able to facilitate the reimbursement of funds for overpayment plus the months of overreported sales taxes since the calculation change. Ultimately, she saved our client by reimbursing their funds. In addition, she minimized the tax burden for future tax payments for months and even years to come. We caught up with Val to get her feedback on this interaction, and she told us,
“My favorite part of working at GreenGrowth CPAs is being a part of a team that can give that peace of mind to our clients and truly be an advocate on their behalf.”
Why are cannabis tax regulations still so unclear?
Because rules are still so new and legislation is constantly developing, staying ahead can be difficult for many operators in the cannabis industry. They remain at a much higher risk for audits, and authorities are actively penalizing operators for not complying with regulations. While any business might have problems like this, it is more prevalent in the cannabis industry. If there is an audit and tax authorities question certain deductions, we can start the conversation to ensure our clients are not paying for unnecessary taxes and penalties.
If your cannabis business is currently facing an audit, we can help. We have experience assisting clients of all sizes across all verticals in the cannabis space. There are many types of audits and tax calculations for the cannabis operator to be aware of. The state and federal agencies handling your information are still learning the nuances of the cannabis industry. And they can make mistakes concerning sales tax, cannabis taxes, state and federal income tax calculations.
The truth of the matter is that sometimes they might be correct, but they may also be wrong and look at your data incorrectly. We are all using different methods and systems for accounting practices, and that may be confusing to auditors. That’s why we always recommend working with an experienced tax professional in the cannabis space. For more information on why and how to avoid an IRS audit, check out our latest video or reach out to us.
How can we help your cannabis company?
Currently, the IRS is taking a very long time to process any communication. A client may receive several notices about past due balances, or even notices of intent to seize the property before the IRS processes any new communication coming in. Dealing with these situations causes stress to the operator and can create uncertainty about the future of the business.
At GreenGrowth CPAs, our accountants specialize in partnering with businesses in all verticals of the cannabis industry. Our knowledgeable professionals have experience negotiating with revenue officers and can often decrease or eliminate penalties. We have experience filing abatement letters and speaking directly with compliance officers. We advise our clients what is standard and what is not. And we take immediate action when dealing with the IRS and other state agencies.
For more information on minimizing your tax liability reach out to our accounting experts at GreenGrowth CPAs. We are here to help your cannabis venture through any level of the tax filing process. We employ several financial programs that can assist the company with its fiscal responsibilities including, tax planning and compliance, outsourced CFO support, audit preparation, tax controversy support, and much more.
For recommendations and assistance with tax planning and accounting services, schedule a free consultation or contact us at 1-800-674-9050.