As if we in the cannabis business did not have enough agencies looking over our work and finances, the IRS has started a cannabis industry-focused compliance effort. The issue here is: Will insurers deny coverage to a non-compliant tax code business?

Trafficking in controlled substances is a crime under Federal guidelines. However, if businesses do choose to earn income from Schedule 1 or 2 controlled substances that income is taxable whether it is cannabis, cocaine or the now commonly available and often dangerous psychedelics. Most certainly, there are full and part-time employees working in the business, so Federal employment taxes are also due. The problem for the industry is IRS Code Section 280E which prohibits deductions for normal business expenses and has been a sword in the heart of the canna operators for 2 decades: even though these companies are state-legal. There will be a wait until cannabis is removed from 280 but in the meantime the IRS, in support of its ostensible duty has launched a “Cannabis/Marijuana Initiative” to implement VOLUNTARY compliance with the tax law.

This effort was launched by Commissioner DeLon Harris who heads the Small Business/Self Employed Examination Unit on businesses with less than 10 million of assets. The effort calls for: 1) Providing training and jobs to IRS examiners working on cases and audits all over the United States: 2) Ensuring a coordinated effort by the IRS: 3) Finding methods to locate noncompliant taxpayers: 4) Going after EXTERNAL shareholders and financiers and making them aware of their liabilities: 5) Maybe giving taxpayers information about this effort: but we know how the IRS works once it has decided to chase a business and uses secret sneaks to provide confidential details about how a canna biz might be hiding cash.

Harris published these efforts on September 27, 2021, in a public memo. He reveals that 36 states plus the District of Columbia and cites California, Washington and California as his first targets. He points out the cash basis in these states, because of a lack of banking and accepts the IRS’ challenge for tax compliance. Harris writes that the goal of his initiative is to implement a strategy for increasing voluntary “compliance” while also locating “non-compliant actors.” Here are his strategic activities:

1) Ensuring his auditors have been trained: 2) Making sure that the agency’s approach is consistent and coordinated: 3) Finding ways to locate non-compliant taxpayers and we know the IRS pays informants for these leads: 4) Talking to the external stakeholders.

Giving taxpayers instructions about complying Harris goes on to say that ALL business owners must, under Revenue Code 61 file ALL income as taxable, including employment taxes. He concludes by writing that all cannabis business owners must familiarize themselves with the available (on the IRS website) “cash business audit techniques guide.”

Here comes Big Brother with more auditors and problems for both the cannabis businesses and their insurers. Be sure that your insureds are compliant to keep coverages intact.

See you next time …

Michael B