Things to Know About Tax Audits—Including Cautions for Cannabis Businesses

This year, the IRS will audit hundreds of thousands of tax returns. One in 100 businesses will be audited.

The easiest way to survive a tax audit is to be prepared in advance.

Tax Audit Timeline

The purpose of a tax audit is to verify items reported on a tax return. The government normally will conduct an audit within three years of a return being filed, and often the audit will begin more than a year after you file your tax return.

Tax Audit Preparation

At Smith Patrick CPAs, we recommend that you maintain ongoing documentation for all items to be reported on your tax returns, including:

• Invoices
• Bills
• Cancelled checks
• Receipts

Make sure to keep all your records in one place.

Tax Audit Cautions for Missouri Cannabis Facilities

As we’ve worked with Missouri cannabis facilities, it’s important to note that the audit rate for cannabis companies is higher than that of traditional companies.

What causes higher tax audit rates?

• Cannabis businesses are cash intensive, which is considered high risk by the IRS.
• In states where marijuana is legal, the cannabis operators are easily identifiable.

When high risk businesses are combined with being easily identifiable, it equals higher risk of being audited.

At Smith Patrick CPAs, we always advise good recordkeeping, but with high risk businesses like cannabis operators, it’s especially important.

CPA Representation for Tax Audits

Even if you prepared your own tax return, it is often advisable to have a tax professional represent you at an audit.

The scope of an audit depends on the complexity of the return being examined. A return reflecting business or real estate income and expenses is likely to take longer to audit than a return reflecting only salary income.

Your CPA representative knows what issues the IRS agent is likely to focus on and can prepare accordingly. The typical IRS agent is experienced and knows the job. But IRS is focused on their agenda. A CPA firm representing you is your advocate and is focused on the best outcome for you.

For example, a tax professional knows that in many instances IRS agents will take a position (for example, to disallow the deduction of a certain type of expense) even though courts and other authorities have expressed a contrary opinion on the issue. Because your CPA representative knows the issues and the prevailing opinions, they can point to the proper authority, and the IRS agent may be forced to concede on that point.

In Summary

Be prepared with strong record-keeping. If you’re facing an audit, seek accounting representation. Be aware of your risks for being audited, and plan ahead with tax advice and processes that support documentation.