Are Your Accounting Operations Prepared for the SCRUTINY of an IRS Audit?
Does the thought of a potential IRS audit keep you up at night? Are you worried if your current accounting and reporting processes are sufficient to withstand an inquiry into your application of IRC § 280E?
As cannabis business owners, you have probably heard about the high-profile cases like Harborside and the costs incurred for not following IRC § 280E. There are many other cases that have challenged the application of IRC § 280E that have led to businesses, the owner's lives and even the lives of the investors (depending on entity structure) being affected by increased tax bill due to penalties and interest.
The Treasury Inspector General for Tax Administration (TIGTA) issued a report, The Growth of the Marijuana Industry Warrants Increased Compliance Efforts & Additional Guidance, that audited tax returns of plant-touching businesses in three states. The cannabis industry is considered a cash-based industry and is among the types of businesses that the IRS will audit or flag because these types of businesses tend to underreport income and when you add in IRC § 280E compliance you're looking at a double whammy. According to the report, of the 237 returns audited, they found that 59% of the returns required IRC § 280E adjustments which led to over $48 million in unassessed taxes for the tax year 2016. This report was released just as the country went into lockdown for COVID.Let The IRC 280E Compliance Audits Begin...
Now that the COVID shutdown is over and the IRS is fully operational the agency is hiring over 1000 revenue agents. Cannabis businesses are high on the list of industries that will be audited. IRC 280E audits of plant touching businesses have already begun in several states. According to sources, the IRS has obtained a list of cannabis license holders and they are going down the list. It's not about if you're going to be audited but more like when will you be audited. No one knows but as a cannabis business owner, it is time to prepare. But don't put it off! Don't be caught off guard!
"It's better to be prepared than to get ready." -Will Smith
It's time to put a plan of action in place so you will be prepared for an audit by making sure you are compliant with IRC 280E by having your accounting and reporting systems and processes audit-ready. This is the first step among many to becoming and maintaining compliance.
Getting Started with IRC 280E Compliance
It’s better to be prepared than unprepared and risk losing everything you have worked hard for. Sleep better at night, run your business more efficiently, and also be prepared for state/local compliance requirements and current or potential investor audits as well.
NO ONE wants to invest in a business that is unorganized and ill-prepared especially if your lack of preparedness will affect a potential investor. If you appear unorganized, then your potential investor will assume you run your business the same way and will not invest in business.
To help cannabis business owners prepare for a potential audit, we have created a proprietary system that canna-business owners can implement within their cannabis accounting operations to help them to become IRC 280E compliant and IRS audit-ready.
Our proprietary system, 280E Compliance Analysis Report™, is based on over twenty-five years of experience working in the audit and accounting industry. This system focuses on the key areas that the IRS will audit. We will review the current state of your cannabis accounting operations and design an accounting and reporting system for your cannabis business based on these key audit areas.
The key areas that the IRS will test during an audit are:
- Gross Receipts - sources of revenue generated for banked and unbanked businesses
- Inventory Cost Accounting - accuracy of inventory accounting
- Cost of Goods Sold (COGs) - accuracy of cost allocation
- Substantiation of Expenses - maintaining the documentation of transactions
The Blunt Accountant™ 280E Compliance Analysis Report™
After your assessment, you will receive a report, The Blunt Accountant™ 280E Compliance Analysis Report™, which is a review your accounting cannabis operations. We will identify deficiencies and areas of improvement along with strategies to implement the recommended cannabis accounting systems, processes, and procedures to produce accurate financial records as well as prepare your business for the scrutiny of an IRS audit.
The 280E Compliance Analysis Report™ will provide the following information:
- Scorecard - an assessment of your entire cannabis accounting operations
- Analysis of how revenue is captured for a banked or unbanked business
- Analysis of your inventory cost accounting procedures
- Review of your cost allocation methodology and potential tax savings
- Document retention recommendations to substantiate transactions
We provide the business owner with a copy of their 280E Compliance Analysis Report™.
Ultimately, this report will be the foundation of your accounting and reporting operations by which your business will operate. The report can be used as a guide for implementing the accounting deficiencies we uncover in our analysis of your business.
This implementable framework will help you worry less, sleep better at night, and improve your overall business operations. This system will also decrease your chances of being assessed a 20% accuracy penalty by the IRS for underpayment of taxes because of your negligence or total disregard to IRC 280E compliance.
Implementation of the 280E Compliance Analysis Report™
We offer three options for implementing the strategies and recommendations outlined in the 280E Compliance Analysis Report™.
- Owner implementation - The owner can take the 280E Compliance Analysis Report™ and implement our recommendations.
- Turn Key - Our team of experts can perform a historical clean up of your accounting and reporting system and the owner can fully (or partially) maintain the accounting and reporting system internally.
- Outsource - Our team can perform a historical clean up of your accounting and reporting system and provide ongoing, worry-free, monthly maintenance of your entire accounting function.
If you want to find out if our 280E Compliance Analysis Framework would help your organization prepare for a 280E Compliance audit, click the button below and schedule a meeting with one our IRC 280E Audit Readiness Experts™.
