According to MJBizDaily.com, the IRS put much of its routine work on the back burner, including audits, enforcement and collections during the coronavirus pandemic.
However, the federal tax agency appears to have returned to business as usual. Now, the warning is sounding about a new wave of audits targeting marijuana companies and their 2019 returns.
Prior to COVID-19, many marijuana businesses were targeted for audits due to the high volume of cash in their businesses. And with IRS audits often comes additional tax bills for businesses.
What cannabis businesses should be aware of with tax audits:
- Increased audits to marijuana related businesses across the US
- More audits tied to Form 8300, an IRS requirement for any time $10,000 in cash is part of a business transaction
Why the IRS is Targeting Marijuana Businesses
Targeting legal marijuana businesses is nothing new for the IRS. The IRS has focused audits on legal marijuana businesses for many years; much of this relates to Section 280E of the Internal Revenue Code, which bars companies that traffic in controlled substances from claiming standard tax deductions.
As a result, Section 280E creates a much higher federal tax rate for state-legal marijuana companies than traditional businesses.
- Since 2010, the IRS has pursued at least five special “compliance initiative projects” with targeted audits involving cannabis businesses
- These audits discovered tens of millions in unpaid taxes
- Industry experts believe that the IRS will continue targeting the industry until Congress acts to change 280E
- There’s been an uptick in auditing things like the cash filings for Form 8300 vs. auditing full returns with expenses
- IRS has expanded agent training involving marijuana audit practices
- Marijuana businesses can experience inconsistent audit experiences and different outcomes, depending on which auditor they get.
What Cannabis Businesses Should Do to Protect Against Tax Audits
The best defense against audits is preparation. With audit outcomes inconsistent, you can find yourself off the hook or owing the IRS tens of millions of dollars.
- Cannabis companies should get their financial statements in order right away: the IRS has become adept at finding tax dollars owed by marijuana businesses
- Be aware that audits can take different approaches, including what can be deducted as “cost of goods sold” – one of the only deductions that marijuana companies are allowed to take
- Pay special attention to cash filings for Form 8300 as this is a focus of IRS audits
Do the state of your accounting records keep you up at night?
Our firm was voted 2022 Best Accounting Service by the readers of Greenway Magazine, Missouri’s cannabis industry publication.
Let the experts at Smith Patrick give you a diagnosis and put you on a path to better sleep.
If you have questions, reach out to us at 314-961-1600 or contact us to discuss your situation.
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David Smith helps businesses and individuals develop smart business practices for tax and accounting advantages as the president of Smith Patrick CPAs. He is involved in the cannabis industry in Missouri through MoCannTrade and other organizations, helping cannabis operators with their tax and accounting needs.
About Smith Patrick CPAs
Smith Patrick CPAs is a boutique, St. Louis-based, CPA firm dedicated to providing personal guidance on taxes, investment advice and financial service to forward-thinking businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to business owners and high-net worth families across the country. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.