24 Aug What to do when your Dispensary or Cultivation site is being audited by the IRS
First thing – don’t panic when you get the audit “invitation”. Remember, the IRS has no powers of arrest. That’s the treasury’s job, and you’re no where near that point yet.
Once the initial shock has worn off, get the letter to your CPA or tax lawyer. Ask them point blank – have you handled a cannabis audit, and if not, do you know anyone who has successfully? On the west coast, there are a number of competent practitioners, but on the east coast, due to the relative newness of the licensing practices, there hasn’t been a lot of need.
Here are the steps to follow, and start as soon as the letter hits your desk.
a. Contact your cpa/lawyer, and find out if they are equipped to handle it, have ever done one of these before, and/or can recommend a practitioner who has.
b. Determine what type of audit it is – correspondence or in person. Correspondence usually means you forgot to address something. In person means they want to go over documents with you present. Also, make sure you ask exactly what you’re being audited for. It never makes sense to provide more information than necessary.
c. The audit will detail the years they are looking to audit – they have statutory power to go back three years, or longer if there appears to be “substantial errors”. Don’t agree to let the auditor go past 6 years if they believe there are “substantial errors”.
d. Interview all personnel that may have a part in either putting together your statements together or who will know the details the IRS is looking for. It’s better if you have an understanding of what they’re looking for rather than having to call in an employee who might only get you in deeper because they don’t grasp the facts.
d. Gather all of your documentation for the period they are looking for. If you’re missing statements or invoices, contact the vendors and try to retrieve them. Remember if you’re a dispensary or cultivation facility, most of your income is in cash, so be prepared to have cash reconciliation reports ready.
e. Create spreadsheets showing your numbers tally against the income tax returns. Ask your accountant for his work papers, and ask that he or she provide detail about schedules, statements, and anything flagged on the return.
f. The day of the audit, be prepared mentally, physically and emotionally. Be prepared to work with your tax professional, and make sure you’ve rehearsed any questions you feel they will be throwing at you. *****IMPORTANT NOTE*** – Because you’re primarily a cash basis business, make sure your cash reconciliation reports agree to your revenue reporting. ALSO IF CHALLENGED, BE PREPARED TO SHOW TAPES OF THE CASH COUNTING ROOM. KEEP THESE FOR AT LEAST SIX YEARS! If you don’t have cameras in the cash counting room, buy them today. You need to be able to show that you have sufficient documentation to prove your cash counts. In certain instances, ask the auditor if the statements can be amended if you believe it will help reduce any deficiency and you have substantiating documentation.
g. If you disagree with the outcome of an audit make sure to ask to talk with a manager, who can conduct an internal review. If that doesn’t help, you can request assistance from the Taxpayer Advocate Service, the IRS’s watchdog arm. As a last resort, you can appeal the audit in U.S. Tax Court, a federal court specializing in tax cases. Remember – you don’t have to agree with the auditor’s findings, if you believe they are in error or do not accurately reflect your accountant’s application of the tax code. Be prepared to challenge the findings, but do so professionally, and with supporting documentation.