IRS Audits and Litigation
Due to conflicting laws and regulations at the federal, state and local levels, marijuana-related businesses face enormous challenges, and in the cannabis industry one thing is certain – no matter how cautious you are with your business management and operations, you still run a substantially higher risk of being audited by the IRS than other kinds of businesses.
The IRS has not admitted that it is targeting the cannabis industry, but we are seeing an increasing number of audits of marijuana-related businesses in two areas – Section 280E compliance and the filing of Form 8300.
Section 280E Audits
IRS agents have been very aggressive in enforcing 26 U.S. Code § 280E, a section of the Internal Revenue Code that disallows businesses from taking deductions for normal business expenses if they are “trafficking in a controlled substance.” Section 280E was enacted in 1982 in response to a Tax Court ruling that a drug dealer could deduct his “ordinary and necessary” business expenses –including the costs of weighing and packaging amphetamines and cocaine. It is clear that the statute was intended to prevent drug dealers from saving their tax dollars, and not to hamper the efforts of legitimate businesses that generate state revenue and jobs.
Marijuana businesses are not permitted to deduct business expenses such as rent, salaries, advertising, handling and storing costs. However, they can deduct their cost of goods sold (COGS) from their gross profits. Our highly experienced tax attorneys and accountants have assisted many cannabusinesses with maximizing and substantiating their COGS and in otherwise legally circumventing Section 280E. We are tax law experts that know the limitations of Section 280E and are ready to tackle legitimate challenges to its unjust application.
Form 8300 Audits
The IRS knows that many marijuana businesses have not been filing Form 8300 for all their cash transactions, and agents have begun to initiate Form 8300 audits with increasing frequency.
The filing of Form 8300 is required under the Bank Secrecy Act / Anti-Money Laundering Law (BSA/AML) to report cash transactions totaling $10,000 received in a single transaction or in two or more related transactions. The Form is intended to provide the government with an audit trail that will help in future investigations of tax evasion and money laundering. Form 8300 must be filed within 15 days of the receipt of the cash and should be kept for at least five years after filing.
By filing these forms in a proper and timely manner, you increase the likelihood that if you are the subject of a Form 8300 audit, it will be a relatively quick and painless process.
We can help you whether or not you are in compliance, at any stage of the audit process.
Inaccurate assessments of business income
Many IRS agents don’t fully understand how marijuana businesses operate and the financial effect of changes in their business operations. For example, in the absence of a bank reconciliation as a secondary audit methodology, other means such as observation tests may be employed that could vastly overstate your tax liability.
It is imperative to have a tax professional at your side during your audit who is familiar with the audit techniques being utilized and makes sure that procedures are being followed that will result in a reasonable assessment.
If you are looking at going to court on a tax matter, you need the most experienced tax litigators on your side. We have an active civil and criminal tax litigation division that has yielded outstanding results in hundreds of court and settlement negotiations cases throughout the United States. We aggressively pursue and defend tax litigation matters, and our efforts have even changed the way the IRS looks at and imposes penalties in certain cases.
Marijuana tax audit and litigation attorneys
For more than 30 years, the tax attorneys at Moskowitz, LLP have successfully handled thousands of tax audits, civil and criminal tax trials, tax appeals, tax opinions, and more. An added benefit – we also know marijuana law and urge you to take advantage of our commitment to the cannabis industry. Call our Cannabis Practice Group today at (415) 394-7200.
Disclaimer: Growing, cultivating and distributing marijuana are violations of federal law under the Controlled Substances Act, Title 21, Section 841(a)(1). The tax firm of Moskowitz, LLP can assist you in adhering to state and local law and regulations, and advise you how to conduct your operations in a way that will minimize your risk of federal prosecution. However, we do not intend for our advice to assist you in the violation of any law and in light of the evolving nature of the marijuana industry in the U.S., clients must understand that our legal and tax services can guarantee neither success nor immunity from civil and/or criminal prosecution. In all areas where the legal landscape is constantly changing, we recommend that our clients act with caution, stay abreast of developments in the industry, and consult with us often.