Some Common IRS Audit Questions for Cash Businesses

Questions to Expect if Your Marijana Business Gets Audited

IRS Audits Marijuana BusinessWhen an IRS agent audits your marijuana dispensary (or other cash business) and says s/he has a few questions, it’s almost never about the proper strain for anxiety or muscle pain. In fact, since the IRS has already completed most or all of the groundwork, this interview is the audit’s first phase. The questions asked during an IRS audit largely determine whether subsequent activities will be brief and relatively painless or long and quite excruciating.

Auditors assume that cash-only businesses have few or no reliable records. So many times, the IRS gives little advance notice. Furthermore, the auditor probably asked for no records before the interview, so the target has little or no idea about what questions to expect.

Hopefully, this post will give owners a little more insight into this part of the process.

Cash Accounting Method

Many of the questions asked during an IRS audit are mechanical ones. The auditor wants to know every step of the cash process, including:

  • Mostly-cash inventory items,
  • The employee who handles these transactions,
  • Recording method used,
  • Where the cash goes initially (e.g. a safe or a lock box),
  • How often cash goes to the bank,
  • The bank employee who handles the cash transactions, and
  • Bank account information.

Typically, the agent already knows a lot of these answers, thanks to the Currency and Banking Retrieval System. So, the auditor really wants to know how honest and upfront the owner is at this stage. If there are any inconsistencies or evasiveness, the rest of the questions asked during an IRS audit will be even more pointed than they would be otherwise.

The agent will go through this same process for vending machines, snack bars, and other mostly-cash business areas.

Cash on Hand

Just as importantly, the agent will also want to know how much cash the owner has at any given time. That includes not only money from the sale of goods or services, but also any other available funds. That includes cash under the mattress at home, regardless of where it came from.

Don’t be evasive or offer rough estimates. Such responses just increase the likelihood of a dreaded and feared indirect income reconstruction method. After these questions asked during an IRS audit, the agent will probably ask the owner to sign a statement.

Other Business Properties

Many people who run new businesses, and that includes most Michigan marijuana dispensaries, also have other commercial interests. The agent will want to know all the details about such enterprises and will also want their written records. If such interests aren’t profitable, and the owner cannot explain why, that’s a major red flag.

Personal Financial Information

It’s very common for owners to mix business and personal funds. Even if the business is a corporation, that’s not necessarily illegal. However, if the auditor already believes that the owner is hiding money, these questions asked during an IRS audit could be the final nails in the coffin. Specifically, the auditor will want to know about cash loans, gifts, inheritances, and other sources of income not likely to appear in the business records. Real property, stock options, and other non-cash items are also on this list.

All taxpayers have a right to representation at this stage. This is a right that all owners should exercise, both for themselves and for their families.  It is never a good idea to go through an IRS Audit without representation, especially if you are in the marijuana business.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.