The Tax Man cometh, and cometh and cometh. At least that’s how it feels in cannabis Colorado. The Internal Revenue Service is auditing some 30 cannabusiness pioneers for tax years 2014 and 2015 because of the cash nature of the industry.

Uncle Sam has a way of keeping track of drug (expect pharmaceuticals) money with IRS Form 8300. Form 8300 is supposed to be filled out for cash business deposits of more than $10,000. Remember the Feds won’t allow banks to accept drug money, so imagine the reluctance of a grower to divulge the origins of this cash deposit.

Marijuana cultivation and sales are legal in 28 states. Eight states plus the District of Columbia allow for retail (recreational) sales. This IRS persecution should be a heads up for others looking to get in on the Green Rush.

Another IRS snag for cannabusiness? Section 280E of the Internal Revenue Code.

Section 280E forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act. The IRS has applied Section 280E to state-legal cannabis businesses, since cannabis is a Schedule I substance.

Whether charges will be filed against these cannabusiness pioneers and whether those charges will be civil and criminal audits is still up in the air. Both audits result in fines. The criminal audit could result in a prison sentence and steeper fines.

Although the IRS cannot comment on specific taxpayers, its stand on cannabis: marijuana is an illegal substance, according to federal law. Entrepreneurs running state-legal marijuana businesses are drug traffickers.

An April 28, 2016 memo from Kristen Bailey, the director of collection policy at the IRS, and directed at the marijuana industry, regarding Calculation of Reasonable Collection Potential in Certain Offers in Compromise Cases, the Procedures section contains instructions on the investigation of offers involving businesses cultivating and selling marijuana, which may be located in states where the activity is permitted by statute even while that activity remains a violation of federal law.

This policy statement was issued to clarify when rejection of an offer for public policy reasons is appropriate. The policy statement allows for rejection where acceptance of the OIC may in any way be detrimental to the interest of fair tax administration, even though it is shown conclusively that the amount offered is greater than could be collected by other means, provided no Effective Tax Administration issues exist.

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