The Internal Revenue Service is ramping up its cannabis compliance efforts.
This week, the University of California Los Angeles Extension held a virtual event called “Tax Controversy Institute,” which covered the most current tax issues and “sensitive tax practice problems” that workers in the tax field encounter. In 2020, this, of course, includes cannabis, which has fallen into seemingly unending policy and legal patchworks. While eleven states and Washington, D.C. have legalized cannabis for adult use, owners of cannabis companies can’t deduct the same business expenses as, say, a grape vineyard or a yoga studio.
Specifically, a panel on cannabis tax issues included: Ani Gaylan, founder of Galyan Law; Vladislav Rozenzhak, a chief counsel with the Internal Revenue Service; Warren Klomp, California Department of Tax and Fee Administration (CDTFA); and Daniel Lauer, director of Small Business/Self-Employed (SB/SE) field examination for the IRS.
Lauer, with the IRS, talked about the midwestern states his job covers, including Michigan and Illinois, which have legalized cannabis for adult use, and Missouri, which has legal medical cannabis. And in his nearly 40 years with the IRS, Lauer said, he’s focused on excise tax policy, employment tax policy, and policy surrounding the Bank Secrecy Act, “all of which have some interconnection to the cannabis industry and compliance.”
In March, the Treasury Inspector General for Tax Administration issued a report that provided an overview of the “growth of the marijuana industry,” and also examined the cash-based industry, with an “emphasis in legal marijuana operations.” Tucked among a handful of recommendations was the note that the IRS is not using publicly available cannabis tax return information, and therefore not identifying “nonfilers and underreported income.” In addition, another recommendation section noted that the IRS “lacks guidance” regarding the IRS tax code 280E.
This report was a long time coming, Lauer said, and also added that the IRS is working on building “specialized” audit teams focused on cannabis, and working more closely with states that tax and regulate cannabis.
“The IRS has concentrated on developing marijuana-based relationships with states where marijuana has been legalized, both from a medical perspective and then also from a recreational perspective,” with an emphasis on the adult use states, Lauer said. When it comes to cannabis, the IRS is working to build relationships and partnerships with state law enforcement, state regulatory enforcement, and the revenue arm of the state to work on joint compliance efforts, he said.
“As we move toward the future, we will have agents that are specifically trained in the cannabis industry and its workings, knowledgeable about the issues in the cannabis industry. And what we’re striving for there is consistency of application of the tax law within the spokes of the cannabis industry,” Lauer added.
Lauer added that the IRS also has other national and local employees, from technical support to policy, “supporting the industry.”
Rozenzhak, the chief counsel with the IRS, talked about the attorneys who specialize in investigations, including “upholding” the IRS’ positions on various issues, like 280E. He reminded those listening to the presentation that if an attorney does investigate a particular cannabis case, “it’s not because we think somebody is particularly egregious about the case or there’s any reason for you to be concerned. It’s something we’re doing typically now.” In other words, cannabis is starting to become run-of-the-mill for the IRS.
Rozenzhak said he and others “help with these unusual issues,” of which there are many with cases that involve cannabis.
“Obviously, we have this great gap between federal law and state law,” Rozenzhak said. “So we’re trying to do our best to navigate through these differences of opinion and differences of law.”
Klomp, with CDTFA, said that the agency is beginning to “look more and more” at distributor audits, that cultivation tax audits will start soon, and that retailer tax audits have been “ongoing,” adding that “of course, our emphasis on the illegal market is our main focus.”