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IRS Official Gives Marijuana Businesses Advice On Tax Compliance

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The Internal Revenue Service (IRS) can’t do anything on its own to resolve the unique financial challenges that marijuana businesses face as a result of federal prohibition—but the agency wants to make clear that it’s here to support cannabis firms with tax compliance nonetheless.

De Lon Harris, commissioner of examination at the IRS Small Business/Self Employed (SB/SE) Division, spoke about tax-related issues in state-legal marijuana markets in a webinar published on Wednesday by PBC Conference. He said that while cannabis remains federally illegal, businesses that deal in the controlled substance must still file federal taxes, and IRS is here to help.

“It’s really our mission at the IRS—not just with marijuana and cannabis industries, but with all taxpayers—to promote voluntary compliance,” Harris said. “When most people think of the IRS, they think of examinations or audits and they think that’s the only way that we interact or try to promote voluntary compliance with taxpayers, but we do our fair share of outreach and education as well.”

To be sure, Harris also provided tips for marijuana businesses on tax compliance in a blog post published in September. And IRS separately hosted a forum in August dedicated to tax policy for marijuana businesses and cryptocurrency.

“Regarding the cannabis marijuana industry, we developed a strategy that we hope will increase voluntary compliance and identify and address non-compliance when it’s there,” Harris said at the PBC event. “Our focus is to positively impact filing and paying and reporting compliance on the part of all cannabis businesses to keep audits to a minimum.”

Part of the IRS strategy involves training revenue officers and examiners “so that they can come to conduct an examination that is a quality one” and also “providing our examiners with the job aids to facilitate quality examinations.”

“We also collaborate with external stakeholders like we’re doing today,” he said. “We hope that the more we are partners with those in the private industry, the better chance there is for compliance for the businesses that they represent.”

A marijuana business might not be federally legal, but “nevertheless, it’s a business in every sense of the word” as far as IRS is concerned.

Harris also explained that while cannabis companies can’t make conventional tax deductions or receive credits because of the tax statute known as 280E, that “doesn’t prohibit the participant in the marijuana industry to reduce their gross receipts by properly calculating the cost of goods sold.”

This kind of information is also available on the IRS website, the official said, though he noted for now people need to search “marijuana,” rather than “cannabis,” to find what they need. That’s changing, Harris said, “because I really feel like a lot of the folks that are in the industry prefer to use the word ‘cannabis’ instead of ‘marijuana.'”

“So we’re making that change, but for now you would type in ‘marijuana industry’ and it would pull up the page that we give you information about—not only general information that would help you understand and meet tax responsibilities required by the cannabis industry but the page which includes links to pages of more specific information.”

Another top IRS official who’s since left the agency also participated in a PBC Conference webinar last year. He offered similar recommendations to cannabis businesses, while also recognizing that the legalization movement will potentially succeed in ending prohibition in “all states.”

There’s growing recognition within the financial sector and among regulators that the federal-state marijuana policy conflict is untenable.

The secretary of the U.S. Treasury Department said last week that freeing up banks to work with state-legal marijuana businesses would “of course” make the IRS job of collecting taxes easier.

Steven Mnuchin, the Treasury secretary under the Trump administration, repeatedly addressed the issue, saying the current policy conflict creates “significant problems” for IRS and financial regulators. It “creates significant risk in the communities for collecting this amount of cash. It’s problematic,” he said last year.

At a separate PBC Conference event in September, former National Credit Union Administration Chairman Rodney Hood criticized Congress for failing to advance marijuana reform and talked about the need for federal financial regulators to take a “principles-based approach to cannabis banking” and “deliver a preliminary regulatory framework that we can share with other regulators and members of Congress who share our concern about addressing these problems.”

Meanwhile, lawmakers, advocates and stakeholders have also been pushing for legislation to protect banks that work with state-legal cannabis businesses in an attempt to give the industry access to traditional financial institutions. Supporters say it’s a public safety matter, as marijuana companies continue to operate on a largely cash-only basis that makes them targets of crime.

The House has passed the Secure and Fair Enforcement (SAFE) Banking Act in some form five times now, though advocates were disappointed on Tuesday when a must-pass defense bill was introduced that excluded the cannabis banking protections following bicameral negotiations.

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