Will Your Cannabis Business Survive the Income Tax Audit?
Marijuana dispensaries are FIVE times more likely to face an IRS cash business audit and operate in a legal grey area that is often considered a strike to the IRS. The IRS targets cash businesses for audit because of this grey area along with evidence that the cash business may have inaccurate records, considered strike two. Perennial losses or low-profit margins that are not consistent with a successful similar business can be considered preliminary evidence for inaccurate records. Along with low-profit margins, they look for the owner to have correct bank balances that are increasing and debt balances decreasing (as profit remains flat). Other types of evidence include having a lifestyle that the reported business profits cannot sustain or persistent low sales.
There are a few different methods the IRS find very accurate and more likely to use when it comes to a cash business audit. Typically, an auditor will confront the business owner and give the wonder the opportunity to present a defense. They commonly as for cash register tapes, receipts, invoices, bank deposits and reconciliation worksheets. If the auditor doesn’t like the answer they will use more invasive means such as:
- Tax Return Data: The IRS compares previous years to the current year, the supporting schedules to the primary return form, and the returns of a similar business.
- Reliability of Taxpayer’s Information: The IRS has a high standard for record retention and unexplained gaps often indicate that the records may be incomplete.
- The Minimum Income Probe: This tool is most common with indirect cash businesses audit and income reconstruction platforms because as far as the IRS is concerned, these probes are almost absolutely conclusive.
- LUQ Expenses or Deduction: This method is used to categorize amounts that are Large, Unusual or Questionable.
The IRS uses their records to examine tax returns for verification and ensuring that the government gets from its citizens what is due and that the citizens are not overtaxed. But in some cases, there might be an error in your tax examination findings. In such case, you can and should dispute by appealing the results.
The IRS basically collects and keeps records of your taxes. Within this fundamental function, it is their responsibility to provide you as the taxpayer help in understanding and performing your tax obligations. But there are some taxpayers that fail to comply whether it’s willingly or unknowingly.
As a taxpayer you have rights and it’s important to be aware of these rights in the event of a tax audit. These rights include;
- Right to professional and courteous treatment by the IRS staff
- Right to representation by oneself or an authorized representative
- Right to privacy and confidentiality about tax matters
- Right to the knowledge as the way the IRS is asking for information, how the IRS will use the information and the consequences if the said information is not provided
- Right to appeal to disagreements, both to the IRS and before courts
When going to appeal the IRS examination findings, you can either appeal directly to the IRS (cost-free) or you could go directly to tax court which is way more costly but definitely a more efficient option. The IRS provides 30 days from the date of the audit findings to appeal. Depending on the size of your tax liability dispute you can request for an appeal in two different forms of letters. A $25,000 or less tax liability would need a simple case informal request letter. In the case, your liability is over $25,000 you are to write a formal letter written in protest to the IRS and their findings on your tax audit. In either case, you will want to contact an Attorney as they know the ins and outs of tax laws.