Business owners in the cannabis industry are no strangers to all the hoops they must jump through to keep their businesses in compliance with the tax laws. The marijuana industry, recreational or medicinal, has unique tax challenges other businesses and individuals are not faced with. Roughly about 1% of individuals have their taxes audited by the IRS annually. The percentage of tax audits increases for higher income taxpayers and with tax returns in areas of specific interest to the IRS (ahem, the cannabis industry). Don’t panic though, we have 5 Tips from Cannabis Tax Experts: Navigating IRS Letter to prepare you for battle, just kidding, kind of.
Let’s start by clearing the air. Not all communication your marijuana business receives from Uncle Sam is bad. Sometimes those IRS letters you are receiving could be a notification of overpayment or even a larger tax return among other reasons. Overpayment is not ideal, but it is better than receiving a large bill of additional taxes you were unaware of. Redbud Advisors are experts at cannabis taxes and ensure our clients are set up correctly for all state, county, and city taxes to help avoid overages and shortages when paying taxes.
Don’t Panic- It is Not Always Bad News
We know the tax system within the marijuana industry has created an intimidating audit environment for many business owners causing a panic. Unfortunately, there isn’t much that can be done about that, except educate business owners and encourage asking for help from a cannabis accountant.
There are many reasons the IRS will send a letter to your cannabis business, according to the IRS. Below is a list of common reasons you might be receiving an IRS letter.
A balance is due
A larger or smaller refund is due
A question about the tax return
Verification of identity
Additional information is needed
The agency changed the tax return
See, it is not all bad. As a business owner, you can prevent panic down the road by enlisting a full service cannabis accounting firm to assist you in the set-up or re-vamping of your taxes, payroll system, POS system, and all other specifications involving the cannabis industry.
We are confident these 5 Tips from Cannabis Tax Experts: Navigating IRS Letter will help prepare cannabis business owners for a letter from the IRS.
Don’t Ignore IRS Letters
Don’t Panic- It is not always bad news
Always Respond in a Timely Manner
The Best Defense is a Good Offense
Always Pay the Amount Due
Don’t Ignore IRS Letters
If you receive correspondence from the IRS you need to open it immediately. Thoroughly read the letters sent to you about your cannabis business and fulfill the requests that are being made by the date listed, especially if it is an IRS audit letter.
Seriously though, open the letters. If you choose to ignore the IRS this will not make the issue, if there is one, go away. The IRS can’t stop, won’t stop. In fact, it is likely the situation will escalate if your response is not received in a timely manner.
Ignoring IRS communication can lead to costly penalties, more interest, and an overall bad experience with the auditing process. Your marijuana business tax return can potentially continue to be flagged for future audits, especially if the IRS suspects willful fraud or negligence on your part.
Always, keep a copy of any letters received by the IRS, you never know when you will need these in the future. We advise you to keep all supporting documents with the IRS letter. Doing this will make it easier to locate any information needed in regard to that specific IRS letter.
Don’t Panic- It is Not Always Bad News
When you receive a letter from the IRS, it can be easy to panic. The information contained in those letters can be complex and confusing, especially if you are panicking. It is important to understand the information in the letter and know what your options are. Responding appropriately is paramount as this could escalate or de-escalate your case.
It is good to remember, the IRS is starting to catch up, many of these notices are only due to the processing backlog.
A tax return is usually flagged by an IRS computer for an audit. The vast majority of these audits are routine. If you are audited it will more than likely focus on a few areas of your cannabis tax return, not the whole return. Again, an audit does not automatically mean something is wrong. It is possible to receive a "no change" or even an additional refund as a result of an audit.
If you are not sure how to handle any situation with the IRS Redbud Advisors encourages you to seek assistance from a cannabis accountant. Having a professional help you deal with the IRS in any capacity will improve the outcome.
Always Respond in a Timely Manner
After carefully reading through the letter sent to your marijuana business it is important to respond by the given deadline, if applicable.
A timely response will help to avoid any delays in tax return processing, it will help minimize any additional interest or penalties, and a timely response will preserve your appeal rights for any discrepancies you find.
As a business owner in the cannabis industry, there is a chance you may find discrepancies with the information the IRS is sending you. Preserving the right to appeal by responding in a timely manner allows the opportunity to submit information to back up your position during the audit process. Your response time will give you an opportunity to seek professional advice and guidance to give you the confidence you are on the right track.
keeping good records and being prepared to support all of your tax return details.
The Best Defense is a Good Offense
Have you ever played sports? If so there is a good chance you have heard the saying “the best defense is a good offense”. This is true even when dealing with the IRS. Cannabis businesses are notorious for being targeted by the IRS and there is no indication this trend will end anytime soon.
Be ready for the IRS before they notice you by keeping good records and being prepared to support all of your tax return details. At Redbud Advisors, we always preach to our clients to always be “audit ready”. This “offensive” tactic will start you off on the right foot during the audit process.
Answer all questions asked by the IRS but do not volunteer information.
IRC section 280E exposes the cannabis industry to tax audits because marijuana is a Schedule I controlled substance that is not federally legal. IRC section 280E does not allow the deduction of ordinary and necessary business expenses related to an illegal drug business creating many gray areas leading to mistakes on tax returns. Being knowledgeable about how the 280E affects your cannabis business is the best offense to avoiding audits.
A good rule of thumb is to answer all questions asked by the IRS but do not volunteer information. Answer only the questions under review. It helps both you and the often overworked auditor. Following this rule can, hopefully, keep your foot out of your mouth.
Remember you are not a tax professional, the IRS auditor is
Ask. For. Help. Remember you are not a tax professional, the IRS auditor is. Cannabis taxes are not cut and dry making it difficult to stay on top of the changes. It is in your best interest to avoid attending meetings with an auditor on your own and let cannabis tax professionals deal with the IRS as much as possible.
Contact Redbud Advisors as soon as possible after receiving a letter from the IRS, we have experience in all areas of cannabis business tax audits.
Always Pay the Amount Due
Some letters from the IRS will ask you to remit payment and list the reason why. While you always want to comply with the IRS it is still imperative to do due diligence for your cannabis business and confirm the amount owed is correct. This is the exact reason it is important to keep good records, you never know when you will need them for supporting information during an audit.
If you have a marijuana tax accountant they should be able to help you confirm this information. If not, we urge you to call us at 866-830-5144 so we can take a look at all the information and speak to the IRS auditor on your behalf. Doing this can potentially save you money and give you peace of mind as a cannabis tax accountant moves through the stages of the audit with you.
Once all the information is finalized and confirmed by both parties and it is clear there is an amount owed to the IRS on behalf of your marijuana business, to be in compliance, you must remit payment. The IRS accepts payments in various forms, online notably being the easiest. If it is needed you can apply online for a payment agreement if the full amount cannot be paid at the time it is due. This can include installment agreements or an Offer in Compromise.
Conclusion
It’s not always easy being a cannabis entrepreneur. The marijuana tax laws can make it even more challenging, especially when the IRS is sending out letters. Remember receiving an IRS letter (don’t panic) doesn’t mean anything bad has happened to your cannabis business; it just means that there are some issues that need addressing before you can continue operating in peace with Uncle Sam.
We have given you 5 tips from cannabis tax experts about how to navigate IRS Letters in hopes this will help alleviate some fear and help you jump into it head-on with knowledge. Following these steps will help you get started in the right direction and Redbud Advisors is just a phone call away if you need assistance.
If at any time, you feel you are being treated unfairly by the IRS, there are numerous means within the system to help you. Asking to talk to an auditor's supervisor can help or even correct an issue. If talking with a supervisor doesn’t alleviate your concern, reaching out to the IRS taxpayer advocate service is another option.
