Question 1

What does the IRS look for first in a cannabis audit?

Accepted Answer

Most IRS agents begin with inventory valuation and COGS, because these determine the only significant deductions allowed under 280E. They also compare POS data with tax returns to identify mismatches.

Question 2

How can my California dispensary prepare for a 2026 IRS audit?

Accepted Answer

Start by tightening documentation, especially inventory controls, intercompany agreements, and cash handling procedures. Many dispensaries benefit from quarterly internal audits to keep financial statements aligned with tax filings.

Question 3

Can the IRS audit my non-cannabis entities too?

Accepted Answer

Yes. If entities share ownership or employees, the IRS can examine related entities under IRC §482 to test whether transactions are legitimate and at arms’ length. Proper service agreements are essential.

Question 4

What makes a business “audit-ready”?

Accepted Answer

Audit-ready businesses maintain clean financials, consistent accounting methods, defensible tax positions, and thorough documentation for every major transaction. The goal is not so much about achieving perfection but more about ensuring clarity and consistency.

Question 5

How do I protect shareholder loans from reclassification?

Accepted Answer

Use formal loan documents, repayment schedules, and realistic interest rates. Track every movement of funds and approve each loan through board or ownership minutes.

Question 6

Is executive compensation a major IRS focus?

Accepted Answer

Absolutely. Cannabis operators with unusually high or poorly documented compensation packages face elevated audit scrutiny. Benchmarking and written policies are key defenses.

Question 7

How do I make my financials “audit-proof”?

Accepted Answer

Unfortunately, there is no such thing as “audit-proof,” but you can be audit-ready by fortifying documentation, controls, and accounting policies. A specialized cannabis accounting firm can help maintain this standard year-round.

Tag: Cannabis Compliance

The Audit-Ready Cannabis CFO

Cash Flow Management for Cannabis: Best Practices for Cash Handling

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