Assume the Return Will Be Examined
Cannabis returns face examination at a disproportionately high rate, and the size of a potential 280E disallowance makes each case worth an examiner's time. Operating under the assumption that a given year's return will eventually be reviewed changes how records get kept from the start — and does so at very little added cost.
What the Standing Audit File Should Contain
Maintain, by fiscal year: inventory rollforwards reconciled to physical counts and BioTrack data; signed count sheets; allocation studies with the underlying measurements behind them; job-coded time records; purchase invoices matched to manifests; depreciation schedules organized by function; intercompany agreements; and written methodology memoranda explaining each significant position.
Assemble this file as each year closes, not after a notice shows up demanding it.
- Inventory rollforward and reconciliation workpapers, signed and dated
- Square footage measurements and facility floor plans organized by function
- Labor allocation support drawn directly from time-tracking data
- Written methodology memoranda documenting each significant tax position
Substantiating Income in a Cash-Heavy Business
Examiners test gross receipts first and will resort to indirect reconstruction methods where records are thin. Daily cash logs, deposit records tied directly to the sales journal, and agreement between POS totals and BioTrack sales data form the strongest available defense.
Unexplained deposits and unrecorded cash sales are exactly what turns a routine examination into a serious one.
Responding When a Notice Actually Arrives
When a notice comes in: note the response deadline, avoid responding substantively on your own, execute a power of attorney, and route all further contact through your representative. Never alter or attempt to recreate records after the fact.
Answer each information document request in writing, completely and on time, providing exactly what was requested and nothing beyond it.
Managing Penalty Exposure
Accuracy-related penalties can often be mitigated where the taxpayer relied on a documented methodology and professional advice prepared in advance. That defense only works if the supporting evidence existed before the return was filed, not afterward.
That is precisely why the methodology memorandum is the single highest-value hour of work in the entire annual compliance cycle.
