It’s no secret cannabis businesses are being aggressively audited by the IRS, state, and their local taxing authorities. If you or your business just happen to be a taxpayer who was issued a statutory Proposed Notice of Deficiency in late December 2019 or early 2020, you may be in for another corollary of COVID-19: premature tax assessment.
Once a Statutory Notice of Deficiency is issued, the taxpayer has a certain amount of time to file a petition in Tax Court to challenge a proposed assessment. Many taxpayers should go this route, because proposed assessments at the examination level are often erroneous. Think of it this way – the examiner wants to protect the government’s interest, so if they feel there is even the smallest basis for an adjustment to income, they will make the case for an adjustment at the conclusion of the exam. That’s why many taxpayers exercise their right to appeal, protest or petition in Tax Court proposed assessments. Most of the time, they probably should.
This is especially true in the case of cannabis businesses. In my experience, over the years, many examiners have lacked a consistent application and understanding of IRC Sections 280E and 471, and while many auditors have some modest training in examining cannabis businesses[1] , they don’t always understand how cannabis businesses operate. This often leads to inaccurate assessments in exam that should be addressed by the taxpayer exercising their right to challenge a proposed assessment in an appeal or by petitioning Tax Court. And while a tax assessment can be scary, and a taxpayer’s first instinct may be to pay it to make it go away, that is not always in a taxpayer’s best interest.
Back to COVID-19 and its effect of mucking up procedures and processes of governmental taxing authorities. You see, magic government computers calculate the dates to spit out notices and assessments where a taxpayer fails to timely file a protest, petition, or appeal. These computers don’t care about COVID-19 or the fact that in reaction to the Federal Government’s Emergency Declaration in response to the pandemic, via its Notice 2020-23, in March 2020 the IRS extended the tax deadlines for Tax Court petitions due between April 1, 2020 and before July 15, 2020.
They basically closed up shop at Tax Court and didn’t open the mail, FOR MONTHS.
The backlog in processing mail at the US Tax Court caused a substantial delay in the processing and service of likely hundreds if not thousands of timely filed petitions. Which meant…Voila! taxpayers timely and lawfully protesting proposed assessments were “prematurely assessed” for taxes they or their representatives challenged in Tax Court.
We are now seeing those mean “Notice[s]of Balance Due” hitting mailboxes, surprising taxpayers and their representatives, and undoubtedly causing stress and heartburn no taxpayer (or lawyer or accountant) needs in a time of a global pandemic. Notably, this is just another case of one hand of the government not knowing what the other is doing. In any other circumstance, the computers would be rightly justified in spitting out a protective tax assessment after deadlines for filing protests have passed, but here, it’s just another COVID consequence that has to be undone.
To their credit, the IRS’s Office of Chief Counsel has recognized the problem of premature assessments and from what I have seen, they have been understanding in how such an assessment can impact taxpayers. So far the IRS is responsive in addressing the issue, even creating a special email address, taxcourt.petitioner.premature.assessment@irs.gov, for those petitioners and their representatives who are dealing with a premature tax assessment. If you choose to communicate this way, the email should include:
the petitioner’s full name and address
the date the petition was filed at Tax Court
the names of other parties to the petitioner’s Tax Court case
the Tax Court docket number, if that is known
the names of any IRS attorneys working on the case
A taxpayer or a taxpayer’s representative should not hesitate to reach out to the attorney responding to their petition. The IRS Chief Counsel can abate the assessment and immediately put a hold on the account of a prematurely assessed taxpayer, preventing enforced collections and Federal tax lien filings. Thus, all is not lost.
Know your rights as a taxpayer! If you are a cannabis business taxpayer facing a premature or erroneous assessment, audit or other tax matter, please do not hesitate to contact us.
[1] See my “Response to IRS FOIA” on Cannabis Audit Training Materials series here.
By: Rachel K. Gillette*
*The blog author is no longer with Greenspoon Marder LLP.
