Assume You Will Be Examined
Cannabis returns are examined at a disproportionate rate, and the size of a potential 280E adjustment makes each case worth an examiner's time. Operating on the assumption that the return will be reviewed changes how records get kept — for the better, and at fairly low cost.
The Standing Audit File
Maintain, by year: inventory rollforwards reconciled to physical counts and seed-to-sale data; signed count sheets; allocation studies with underlying measurements; job-coded time records; purchase invoices matched to manifests; depreciation schedules by function; intercompany agreements; and written methodology memoranda.
Assemble the file as each year closes, not after a notice arrives.
- Inventory rollforward and reconciliation workpapers, signed and dated
- Square footage measurements and floor plans by function
- Labor allocation support from activity-level time-tracking data
- Methodology memoranda documenting each significant tax position
Substantiating Income in a Cash Business
Examiners test gross receipts first and will use indirect methods where direct records look thin. Daily cash logs, deposit records tied to sales journals, and POS-to-seed-to-sale agreement are the strongest available defense.
Unexplained deposits and unrecorded cash sales are what turn an ordinary examination into a serious one.
Response Protocol When a Notice Arrives
Note the deadline, do not respond substantively on your own, execute a power of attorney, and route all contact through your representative. Never alter or recreate records once a notice is in hand.
Answer each information document request in writing, completely and on time, providing exactly what was requested and nothing extra.
Managing Penalty Exposure
Accuracy-related penalties can often be mitigated where the taxpayer relied on a documented methodology and professional advice created before the return was filed. That defense depends on evidence produced ahead of time, not after the fact.
It is one more reason the methodology memorandum is the single highest-value hour of work in the entire compliance cycle.
