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.”
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 firstname.lastname@example.org