New IRS Audits in Colorado Worry Cannabis Companies

By John Schroyer

The Internal Revenue Service has begun probing the large cash transactions of dozens of Colorado marijuana companies, sparking uncertainty and unease among cannabis entrepreneurs.

The audits – focusing on Form 8300 – have raised the specter of money laundering charges. But legal experts are divided over whether such fears are overblown.

“It’s not necessarily something that a marijuana business has to freak out about. All cash-intensive industries are subject to Form 8300 filing requirements,” Colorado attorney Rachel Gillette, who has already settled multiple Form 8300 audits, said.

Others aren’t so sanguine, including one business owner who is used to dealing with the IRS over issues such as 280E. The IRS is examining his company’s failure to file Form 8300, which involves reporting cash payments received of more than $10,000.

That type of scrutiny is something new, said the business owner, who asked to remain anonymous so as not to draw the attention of the IRS.

“So I’m looking at this with my tax attorney, and it’s pretty serious,” he said. “They’re not ruling out criminal charges. And, as a matter of fact, I know a couple of the audits have come from the fraud division of the IRS.”

The audits are expected to spread beyond Colorado. Legal experts agreed that marijuana business owners facing one should retain an attorney.

Any company or person in a trade or business that receives more than $10,000 in cash in a single transaction or in related transactions must file a Form 8300.

Think auto dealers, attorneys and, of course, cannabis companies – especially wholesalers. And, as the IRS notes: “Drug dealers and smugglers often use large cash payments to ‘launder’ money from illegal activities.”

Until now, Form 8300 hadn’t been a concern among marijuana industry businesses.

The IRS is changing that. At least 30 Colorado businesses have been hit with Form 8300 audits in recent weeks, said Colorado attorney Jim Thorburn, who represents multiple marijuana companies facing such audits. The main problem, he said, is there’s considerable uncertainty surrounding around the audits and what they could presage.

Questions Without Answers

Thorburn’s concerns mainly stem from an IRS questionnaire agents have used in the audits. The questionnaire was obtained by a cannabis industry attorney and shared.

It contains queries unrelated to a standard 8300 audit, such as: “How many plants do you grow per year?” and “How many times did you harvest them during the examination period?”

“What the IRS agents are telling us is that this is strictly civil, and that it’s educational,” Thorburn said. “If you take them on their word, on the surface, then it would be civil. The question is, are they being completely candid with us? And we just don’t know. And when we see a lot of these questions that are being asked, it raises more questions. Is this going criminal? I don’t know.”

He also raised the possibility of the IRS working together with the U.S. Treasury Department and the Department of Justice to develop money laundering charges against cannabis companies. He noted that in April 2015 the IRS signed a memorandum of understanding with the Financial Crimes Enforcement Network (FinCEN) to share information.

Thorburn worries the Form 8300 audits could lead to federal money laundering charges, which carry stiff penalties – up to 20 years in prison and a half million dollar fine per violation.

But others said that while the situation isn’t as serious as that, it deserves attention.

Gillette, the Colorado attorney, said she first got hold of the questionnaire during an audit. She advises any marijuana company to retain a lawyer and not answer anything that’s unrelated.

“If they’re not relevant to the audit, then you don’t have to answer them,” Gillette said. “They’ll ask for the moon, the sun, the stars and the sky. But you give them what’s relevant to the audit.”

The worst that’ll likely happen, she added, is a fine of $100 per missed Form 8300 for the 2015 tax year, and then $250 per missed form for the 2016 tax year. If the federal government really wanted to build a criminal case against Colorado cannabis companies, she said, they could simply walk in the front door.

“You have a sign on your building that says, ‘Come in and buy some marijuana,’” Gillette said. “It couldn’t be more obvious, if they wanted to build a case against you from a criminal standpoint. They don’t need to go about it this way.”

Can They Be Trusted?

But it may not be so simple. Just because the situation isn’t necessarily explosive doesn’t mean it can’t backfire.

That’s California attorney Henry Wykowski’s read on the Form 8300 audits that have begun in Colorado. He expects them to spread to other states. Wykowski was contacted by Thorburn, and after going over all the relevant documentation – including the IRS questionnaire – he dubbed it “concerning.”

“I see this as a very dangerous development,” said Wykowski, who has a lengthy history of fighting the IRS in court on behalf of the marijuana industry.

“‘How did you get started in the business?’ What the hell does that have to do with how much money a business is making? These are just talking points,” Wykowski said. “If you gave them this information under the guise of a civil audit, you would be making admissions that – if they decided to charge you criminally – could be used against you in a trial.”

Wykowski’s guess, however, is that the IRS is compiling basic information on the marijuana industry.

And he’s exactly right, said Jacque Riordon, a 29-year IRS veteran involved in criminal investigations who also spent several years as a cannabis consultant.

“The IRS is a bit behind the eight ball, because there were no audit standards. They’re trying to learn as much about the industry as they can so they can move forward,” Riordon said. “So if people are willing to answer those questions, they’re happy to take those answers and put them in their toolbox for when they put their standard procedures together.”

As far as criminal charges and penalties go, Riordon added, that’s a stretch unless there’s an obvious pattern of deliberate noncompliance.

She also said there was “nothing extraordinary” about the memorandum signed between the IRS and FinCEN. All a business must do once it’s audited is pay the penalties, file the forms, and remain in compliance.

But, she added, marijuana businesses outside of Colorado shouldn’t be surprised to undergo Form 8300 audits in another year, especially given the industry’s widespread ignorance about the requirement.

“I was kind of expecting this was going to be an area of concern, because it not only impacts growers and dispensaries, it impacts all the ancillary businesses as well,” Riordon said.

Riordon also agreed with Gillette and Wykowski that the IRS is delving too deeply with its questionnaire, and that cannabis businesses that get audited should retain attorneys and not answer unrelated questions.

“The scope of an 8300 audit should be: ‘How many of your customers paid you in excess of $10,000 in cash? How often? Who were they? How were the events triggered? Did you file an 8300? If not, why not?'” Riordon said.

Asked if he thinks the IRS is planning prosecutions around the audits, or if he – like Gillette – thinks Thorburn is making a mountain out of a molehill, Wykowski was circumspect.

“The scary thing about our criminal justice system is that our prosecutors have wide discretion as to what cases to prosecute and what cases not to,” Wykowski said. “I wouldn’t rule out a prosecution for an 8300 offense. I would hope not. But I wouldn’t rule it out.”

John Schroyer can be reached at [email protected]

15 comments on “New IRS Audits in Colorado Worry Cannabis Companies
  1. Matt on

    Well it’s pretty simple in terms of the plants/harvest. They figure there’s going to be a few big outliers…clear instances of illegal sales…where people don’t bother to lie. If they do lie, somewhere there’s someone who knows roughly how many plants they actually have…then they still get them. Technically, because illegal sales ARE TAXABLE and can be assumed to have been paid in cash…then if it appears you have enough that there are more $10,000 sales it is related to the audit. Whether or not they can prove it doesn’t really matter…in the end if you’re doing illegal stuff here (beyond the normal “legal” illegal sales) you’re going to get caught.

    Reply
  2. Michael Davis on

    Exactly with an audit or any examination with authority figures don’t tell much and definitely don’t volunteer anything. Also, unless you know the law you will need your attorney there.

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  3. Kenneth R Boiarsky on

    Recognizing that the IRS audit beef-up is, as usual, several years behind, I agree that caution and tax counsel (even if you believe you “know the law”) are well-advised, at least until we know more about where the IRS, FinCen, and DOJ are going with this, and I suggest we all watch carefully to see what modifications are made to the questionnaire in the months ahead.

    Reply
  4. Brandon on

    I think this is the first Federal government steps to stop recreational cannabis altogether. The next President, Hillary Clinton, is adamantly anti cannabis with the last bill she proposed on the topic as a senator having federal, mandatory 6 mos diversion and 2 year driver’s license suspension for testing positive for THC.

    Reply
      • Matt on

        Yes, it does, but only because its popular. Hillary Clinton will swing to any popular social justice movement that she opposed years ago (gay marriage for example). I can’t speak to the accuracy of the statement above by Brandon, but I can say it would not surprise me in the slightest.

        Reply
    • Jay on

      oh heaven forbid we leave the banking, mortgage investors and Wall Street gangsters out of that equation. Now those are true gangsters! Funny thing is I know a lot of caregivers in the MMJ industry who are anything but gangsters who have sacrificed their lives to help the sick and infirmed.

      Reply
  5. Weed App Financial on

    Well the banking sector is starting to open their vaults to the cannabis industry slowly, but surely. Weed App Financial currently has over 35 FDIC Insured Banks accepting dispensary accounts nationwide. There is a vetting process to compliancy, however it creates a solid financial foundation moving forward.

    Reply
  6. joe on

    heck I got audited several times had to go to tax office. one trick I can tell works real well. BRING A TAPE RECORDER, USE IT. THEY WILL TELL YOU IT IS NOT ALLOWED NOT TRUE JUST ASK THEIR BOSS TO SHOW YOU WHERE IT IS WRITTEN I CAN’T USE IT. WORKS EVERYTIME OF COURSE TODAY THAT MAY BE DIFFERENT. I DID BATTLE WITH IRS MANY TIMES in fact I am in a fight now with fed irs and maine irs both at once. my trial is to start 7/26/2016 I am 76 years old and sick and tired of the way irs treats us. I called irs in maine and complained about taxes, next thing you know I was arrested, put in prison for 2 weeks JUST BECAUSE I COMPLAINED ABOUT THE IRS. MATTER OF FACT, I JUST GOT OUT TODAY .

    Reply
    • Matt on

      Just because it’s not written anywhere that it’s not allowed doesn’t mean that it is allowed… They probably just didn’t want to deal with you if they let you go, but regardless, they have the authority to tell you what you can and can’t bring to an audit. I’m sure it says nowhere that you can’t bring a boombox playing on loud, or even a vibrator taped to your chest (I don’t know…weird thing that’s legal)…but I can probably guarantee that you’d have to get rid of either.

      Reply
  7. Jerry Chin on

    Thanks for informing the industry on these Form 8300 audits. For those of us working IRS filings and exams on a daily basis for our MMJ clients, the more information we share with our colleagues, the better. From my perspective with working IRS audits in CA, the IRS ask many questions “outside” the scope to gather information for a future IRM on Audit Technique Guide for our industry. Mark my words, by 2020, there will be a ATG for the MMJ industry, which will closely resemble the IRS ATG for cash intensive businesses, with some specifics regarding 280E and 263 thrown in. I know 2020 sounds like a far ways away, but on the IRS timeline, that is very fast. I remember working a case related to Enron, in 2012. Enron went bankrupt in 2002. Give the IRS ten years, and they likely will catch up with industry.

    Reply

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