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Marijuana Business Tax Audits

Special Considerations for IRS Audits of Marijuana-Related Businesses

tray of marijuana in white dishMarijuana dispensary businesses are six times more likely to be audited by the IRS than U.S. businesses in general. These small businesses get hauled before tax examiners at the same rate as corporations that have assets in excess of $100 million. Worse, the outcomes of IRS audits of cannabis businesses have resulted in tax bills in the millions.

Why? Let’s look at two reasons.

Cannabis Businesses Pay Heavy Taxes

According to federal law, pot dispensaries and growers are trafficking an illegal substance. It doesn’t matter if your state has legalized medical or recreational marijuana – it’s still against the law at the federal level. As a federal agency, the IRS views marijuana as an illegal controlled substance, and has a special part of the tax code, Section 280E, that governs how taxes are assessed. 280E makes it impossible for businesses selling marijuana to deduct the normal business expenses, lick rent, payroll, and marketing costs. Left with only one allowed deduction, the cost of the marijuana itself, pot dispensaries have a tax burden averaging 70% of profits, and the IRS wants every penny.

Cash-Based Marijuana Dispensaries and Growers are Audit Targets

Banks are loathe to open business accounts for marijuana dispensaries due to a fear of being accused of money laundering. So cannabis businesses operate on a cash basis, which makes the IRS suspicious of skimming and under-reporting. This suspicion, coupled with the ability to collect a lot of tax, put these businesses squarely in the IRS audit crosshairs.

Hire a Michigan Marijuana Tax Attorney to Represent You at a Tax Audit

A notification of a tax audit could come by telephone or mail, or an IRS agent could appear at your business. Your only response should be to contact your tax attorney. Ideally, you established a relationship with a Michigan marijuana business tax attorney even before you opened your doors. If not, immediately hire a tax attorney with experience representing marijuana dispensary and grower businesses at IRS audits. Do not appear at your audit or speak to an IRS tax examiner without legal representation. Even answering simple questions can lead to mistakes that result in a big tax bill or jail time. Your tax lawyer can defend you and your business under 280E.

It’s not enough to have an accountant. You need the privacy privileges that come with an attorney-client relationship. Your accountant can’t provide that protection and can be subpoenaed and compelled to testify against you in court.

During a tax audit, let your cannabis tax lawyer do the talking. Think of the audit request and IRS representatives like a fragile explosive and your marijuana tax lawyer like the bomb squad. Forward all correspondence and refer all telephone or in-person inquiries to your attorney.

Medical Marijuana Dispensaries and Growers Can Survive Tax Audits

Believe it or not, there is good news coming out of these audits. Recent surveys reveal that medical cannabis dispensary and grower businesses are far less likely to have their tax returns changed as a result of IRS audits than other types of businesess. Fewer than half of marijuana businesses reported having to change their tax return after an audit. Other businesses don’t fare as well; more than 80% of non-cannabis businesses have to make changes to their returns when the tax examiners are done. This shows that marijuana businesses take their tax obligations seriously and are doing everything they can to comply with the complex tax laws.

Prepare for An IRS Audit Before You’re Audited

Don’t wait for the IRS to call or knock on your door to hire a marijuana tax lawyer. To ensure that your business has a good outcome when audited, contact a tax attorney with knowledge of the marijuana industry and experience representing medical marijuana dispensaries and growers in front of the Internal Revenue Service and United States Tax Court before you get a visit from the IRS.

Please also see related post Marijuana and Taxes.

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.