Did you know the IRS is four times more likely to audit a cannabis business than the mainstream? According to Marijuana Business Daily, the IRS uncovered an average tax deficiency of $282,596 over three audited returns for a cannabis business versus $120,301 per 103 audited returns in the mainstream.
At a whopping 81% more collectable shortages with 189% less work by simply targeting cannabis companies and the announcement that the agency would be hiring 87,000 new agents, there is a higher likelihood of your cannabis business being at risk for audit. Follow these four tips and be prepared before they come knocking.
Understand the law. Particularly 280e of the Internal Revenue Code. Confirm correct characterization that may qualify expenses as the cost of goods sold under IRS Code Section 471(a). Follow tax court cases to understand past and new rulings.
Document everything and maintain organized records. Including all tax returns, receipts, correspondence, contracts, insurance, and other pertinent documentation, for an extended time frame. Don’t forget to get everything in writing and keep all IRS correspondence.
Be prepared. Agents have been trained in the details of auditing cannabis companies and employ several methods, including the interview and on-site tour. Other methods are also used, like counting grow lights, calculating the owners’ net worth, and employing external databases for information on cash transports, ATMs on-site, and investor prospectuses.
Cooperate and have expert guidance. Work with your accountant and attorney to protect yourself and your rights. Advanced preparation coordinated with a solid, professional team before you’re hit with an audit is best.
There are no guarantees regarding audit risk management, but best practices are available to safeguard you and your business should you be their target and reduce your potential tax liability. Consult with a professional experienced in cannabis-specific risk controls before you face IRS auditors. It may not be a matter of if but rather when. Remember, you don’t know what you don’t know.
This article first appeared in Volume 4 Issue 3 of Cannabis & Tech Today.