Cannabis Businesses: WHEN DOING THE RIGHT THING RESULTS IN PENALTIES
Cannabis vendors have found themselves thrust between the proverbial rock and a hard place when it comes to making tax payments to IRS.
Few banks will allow a cannabis businesses to have a bank account for fear of running into conflict with Federal regulators. As marijuana is still a banned substance under Federal law as having no medicinal value, banks are hesitant to allow such businesses to open accounts as this may leave that bank subject to prosecution for breaking Federal law. Banks could find themselves subject to steep fines and even forfeiture of assets. Naturally, they are reluctant to place themselves at that level of risk.
While current Federal law has evolved somewhat in regard to cannabis offenses, banking remains largely prohibited out of concerns for money laundering and other laws that prohibit dealings with federally illegal activities. While some smaller banks may consider an account, at this time none of the major banks service cannabis clients.
This Catch-22 situation puts cannabis businesses in a precarious position with another Federal agency: the Internal Revenue Service. IRS Code requires that payroll tax payments be made via the EFTPS electronic system. Failure to make timely payroll deposits via that system result in a 10% penalty of the tax payment made. Electronic payments cannot be made without a bank account for the system to draw from.
As payments must be made in cash to the IRS this requires the business to bring funds often in the tens of thousands of dollars to the local office. IRS will only accept the funds if an appointment is made and money bundled in a manner acceptable to the IRS. This places the business at extreme risk of loss of those funds if they cannot be safely delivered to the local IRS office.
To add insult to injury, despite making timely payments to IRS of the payroll taxes due, the cannabis business will be notified of a 10% penalty due to paying in cash. IRS Internal Revenue Manual. § 18.104.22.168.1.1 calls taxpayers like the cannabis business, an “Unbanked Taxpayer” and states the following:
“Unbanked Taxpayers are entitled to (penalty) relief on a case by case basis. Taxpayers that fail to make deposits by EFT because they were unable to obtain banking services or had their banking services discontinued may be able to establish reasonable cause for failing to make a deposit in the proper format during the time they were unable to obtain banking services”.
This firm has copies of letters from IRS stating “Unfortunately, our system will continue to assess deposit penalties for deposits made directly to us and not with an electronic payment system.” This requires additional time and often the cost of a tax professional to assist the business in abatement of those penalties for each quarterly tax payment.
Tax Law Center has successfully obtained abatement of these penalties for our clients through the knowledge and experience of our tax professionals and have assisted these businesses in procedures to help ease the stress of dealing with IRS.