The Question — To file or not to file
We all know that the federal government has continued to refuse to make the canna-business easy. No one is skipping down the path of stress free commerce- not the growers, the product manufacturers, the dispensary owners, or even the consumers, but what does this mean for taxes? The current trend toward not filing tax returns for those in the canna industry, is both an interesting one, and a troubling one. As a tax attorney whose emphasis includes the cannabis industry, I am often told, not asked, that my client is choosing not to file tax returns – “let them find me,” is the common +phrase. My response – “they probably will.” So, what happens next? Let’s find out.
You have to file — it’s the law
I’m sure we all know people, well before entering into the world of canna-business, who never paid taxes. Who claimed that there were exempt from filing or paying taxes, and that income tax was just illegal. Suffice it to say, this is not correct – these people are tax protestors. I had a sitting Tax Court Judge tell me that every tax protestor will get their day in court, and every tax protestor will lose. I can quote passages from the Internal Revenue Code and related Court decisions, but instead, please believe me when I tell you that the law says that you have to report your income, regardless of the source (legal, illegal, everything in between), and pay the requisite tax. If you really want the details, call me.
What if you don’t file — what next – civil enforcement path
The IRS has a number of resources at their fingertips, with the most commonly used tool being the “Substitute For Return,” or SFR. This is where the IRS “guesstimates” your income, allows only a single standard deduction, and taxes you at the highest rate available to them. All eyes then turn to you, the taxpayer, to prove them wrong. In the meantime, the penalties, and the interest assessments, continue to accrue, and perhaps IRS eyes start looking at more and more years to “file for you,” you know, as a courtesy – you’re welcome. Meantime, you’re digging through your closets, shoe boxes, and recycle bins looking for receipts, pay stubs, income statements, proof of expenses, to try and limit the damage, but the cat is long out of the bag and you’re left sweeping grains of litter into a pile hoping for relief. This isn’t a good feeling.
So, now that the IRS is your new tax preparer, it seems likely that they’ll want to review older returns you’ve already filed, as a courtesy to assure you that you were correct when filing; they can audit already filed returns within their statutory window. If they find fraud, there is no time limit and the IRS is now examining your tax returns with a microscope looking for things to question. They usually find something and the entire process can take months or even years to resolve. More likely than not, once done, you’re left with a Notice of Deficiency, or a bill for unpaid taxes, plus the penalties & interest already discussed. Rest assured that they may keep an eye open on future returns as well, again, as a courtesy. Keep in mind, this is only the less invasive path of civil review.
I can live with the civil review process, I’m STILL not filing. Up next, criminal prosecution
The IRS toolbox doesn’t stop at SFRs or civil enforcement, sometimes this can just be the beginning. They have an entire unit specifically charged with investigating taxpayers and referring them for criminal prosecution; they are called the Criminal Investigation Division or CID. Let me toss a few names your way: Lauren Hill, Wesley Snipes, Martha Stewart, Richard Pryor, Ja Rule, Chuck Berry, Darryl Strawberry, Pete Ross, and of course, Al Capone. These are people you have probably heard of and you may even know that they all have served time for tax evasion. I would like to tell you that only famous people are prosecuted, but simply put – nope
. CID is a very busy unit within the IRS. I have received calls from “special agents” (those employed by the CID), investigating ex-clients, everyday Joe’s and Jane’s like yourselves. They don’t discriminate and they don’t back down. They also won’t limit their investigation to you and your finances, but can and generally will subpoena friends, family member, neighbors, anyone they think can help shed light on their investigation and further their case. It is a process to be avoided at all costs if possible. How do you do that?
Maybe it’s time to consider filing after all
A brief recap of our path may be helpful here: If you choose not to file your returns, you take your chances, and you’ll probably lose. You may not be tagged today, or even tomorrow, but most likely in the months and years ahead, when records are no longer available and the additional assessments (penalties and interest assessments – remember those?), are skyrocketing, they’ll come calling. The IRS has filed SFRs for you and presented you with a bill that might mean selling your car, or even your home just to try break even. CID has reached out to everyone you know, and the US Attorney General is reviewing your case. Since you’re a canna-professional that likely won’t go well. Here is the game you’re playing, the risk you’ve decided to take with your financial future and your very freedoms.
On the other hand; you can file your returns, take charge of the process, and have a hand in steering your own fate. There are tax professionals in the cannabis industry who are ready to help you and make sure that your returns and your tax life are set up in your best interest, and to help protect your position with the IRS (ah-hem!).
The decision to file is yours, so make an informed choice!
Elizabeth Sheldon, Esq.