DENVER — A regional IRS executive told a gathering of cannabis lawyers on Friday that the agency is not out to target them, despite their work with clients whose marijuana businesses remain illegal under federal law.
Matthew Houtsma, associate area counsel for the IRS Office of Chief Counsel, said the tax agency’s Office of Professional Responsibility has held that “to the extent [a lawyer] is representing someone in the industry, that is not sanctionable.”
Those lawyers’ clients, even though they’re abiding with state laws regulating medical and recreational marijuana, may not enjoy such protections from federal tax collectors. The IRS, Houtsma told the Cannabis Law Institutegathering in Denver, has won a string of recent court victories clarifying the agency’s authority to inspect records from and question tax deductions taken by dispensaries operating legally under certain states’ laws.
At issue is Internal Revenue Code Section 280E, which forbids businesses from deducting certain business costs associated with the “trafficking” of Schedule 1 substances, including marijuana, which the federal government has deemed have no medical use. Missing out on those tax deductions can wipe out a large part, or even all, of a marijuana businesses’ profits, according to tax attorneys. Taking the deductions can trigger an audit by the IRS.
Houtsma said he sympathized with businesses trying to operate legally under state law. But “unlike the Department of Justice, which can potentially create their own priorities of what they’re going to go after and what they’re going to do and not do, the IRS doesn’t really have authority to simply ignore 280E,” he said. “If someone gets picked up in an audit and they are in the industry, it’s going to be an issue that the IRS is going to ask about.”
Colorado, which legalized adult recreational sales of marijuana in 2014, has been at the center of the tension between state and federal drug laws. The IRS has taken the position that while marijuana is illegal, businesses that operate in the industry must pay federal taxes.
Tax and appellate courts have largely upheld the IRS’ right to enforce Section 280E. The tax agency has now begun scouring Colorado’s marijuana tracking database, known as track-and-trace, for proof that taxpayers are conducting activity that’s illegal under federal law. Dispensaries are challenging that practice, too.
The IRS’ position on marijuana businesses has also presented practical problems for lawyers guiding clients who, frequently rejected by banks, usually deal in a lot of cash. Houtsma said the IRS will accept large cash payments but lawyers and tax advisers must ensure their clients have completed related paperwork.
Houtsma also urged lawyers to consider setting up so-called C corporations for their marijuana clients to avoid personal tax liability, and to retain as many records as possible. IRS agents, he said, are usually open to installment payments and compromise offers.
“The IRS is not going to seize any product,” he said.