On April thirteenth, I moderated a webinar about hashish taxes referred to as “IRS Enforcement of Cannabis Operators is Here – What Do We Do Now?“. Hashish taxes ought to scare anybody within the trade, however federal incomes taxes below I.R.C. 280E most likely take the cake in terms of normal nervousness. Our webinar featured Ani Gaylan and Jonathan Kalinski who’re each tax attorneys from Los Angeles, representing shoppers within the hashish trade going through 280E audits and controversy circumstances. Jonathan even handles the legal facet when the IRS comes calling. If you happen to didn’t attend the webinar, under are the important thing takeaways about hashish taxes and the IRS.
It’s not a matter of “if” however “when” for audits on hashish taxes
Ani and Jonathan each agree that the IRS is ramping up its pursuit of audits towards hashish companies. In case you forgot, I.R.C. 280E dictates that, in case you visitors in a schedule I or II managed substance (and hashish is in schedule I), you can’t take regular enterprise deductions or credit. You solely get Prices of Items Bought (“COGS”). The efficient company revenue tax charge then for hashish companies is sky excessive, except these companies can seize extra COGS.
The IRS has a helpful, user-friendly online resource to assist hashish corporations with reporting their hashish taxes, however it’s clear that brokers are extra aggressively pursuing hashish companies within the type of audits. Each Ani and Jonathan have seen a major uptick in IRS hashish tax audits, and that’s unlikely to alter anytime quickly since (1) the IRS realized awhile again that it was probably leaving cash on the desk below I.R.C. 280E on condition that a lot of hashish commerce remains to be all money; and (2) we now have extra knowledge than ever on who’s operating a hashish enterprise and the place they’re at within the nation (together with filed tax returns and suspicious exercise studies with monetary establishments). So far as again as 2021 (and doubtless earlier), the IRS has been coaching its brokers with particular regard to hashish tax audits (as proven by MJbiz Day by day’s 2021 FOIA request).
A hashish tax audit shouldn’t be your run-of-the-mill audit
Info doc requests (“IDRs”) from the IRS are very completely different for a hashish companies than some other enterprise. For instance, in a hashish audit, the IRS will ask for any checking account or bank card used within the operation of the enterprise. This doesn’t occur in a normal audit. The opposite main distinction is that the IRS will wish to get in entrance of a hashish companies instantly, together with assembly in particular person and touring the hashish facility. Each Ani and Jonathan echoed the truth that you’ll need authorized counsel ASAP for any IRS interview (a few of which might last as long as 3-4 hours). Your doc retention and group additionally must be top-flight (with a bookkeeper and/or accountant in tow) to efficiently deal with an IRS interview as a part of an audit.
The IRS has summons energy
Typically, hashish companies suppose that, simply because they’re violating the Managed Substances Act, they’ve a license to violate different federal legal guidelines. Not so. If hashish companies suppose they’ll clam up and/or not produce the requested data or paperwork pursuant to an IDR, they’ve one other factor coming. It’s because the IRS has summons energy: the IRS can and can demand your presence and your documentation manufacturing, which you will need to comply accordingly otherwise you’re going to be in huge hassle with the Division of Justice.
If you happen to don’t adjust to these broad IRS powers, you possibly can totally anticipate penalties and perhaps even legal investigation and prosecution relying on the info surrounding the audit. The summons energy additionally applies to 3rd events implicated within the hashish trafficking (together with ancillary companies). So, well timed and totally cooperate together with your IDRs accordingly.
Don’t make up paperwork in terms of hashish taxes
It goes with out saying that it is best to by no means deceive the IRS. Nonetheless, you additionally shouldn’t make up paperwork to fulfill an IDR request. Per Ani and Jonathan, you gained’t get in hassle in case you don’t have a doc on the record. You’ll endure, although, in case you begin making up or backdating paperwork (like money logs) to get by way of an IDR.
The DOJ can prosecute for greater than tax evasion
Tax evasion at all times involves thoughts when individuals consider IRS legal investigation and prosecution. Nonetheless, through the webinar, Jonathan identified that that’s actually simply the tip of the iceberg. Relying on what you’re doing in terms of hiding your cash from the IRS, you possibly can additionally face a conspiracy cost or fees for structuring, or fraud, amongst different non-tax associated legal fees.
Confidentiality
The webinar revealed that these audits are literally not public data. In truth, there are extreme penalties if the federal government breaches confidentiality. Administrative appeals from the outcomes of an audit additionally aren’t public data. Nonetheless, if after the attraction, you petition the U.S. tax court docket, issues develop into public as a result of these filings. Any recorded authorities liens ensuing from tax liabilities can even be made public (the liens, not the liabilities).
Ultimately, hashish corporations ought to well timed pay all taxes owed to the IRS below I.R.C. 280E. The IRS shouldn’t be an company with which you wish to get cute or experiment. Whereas the hashish trade is oftentimes a “express regret” trade, in terms of federal revenue taxes, this isn’t a type of instances.