Assume Examination
Cannabis returns are examined disproportionately, and the disallowance at stake makes each case worth an examiner's time. Operating on the assumption that the return will be reviewed changes how records are kept — for the better and at low cost.
The Standing Audit File
Maintain, by year: inventory rollforwards reconciled to physical counts and track-and-trace; signed count sheets; allocation studies with the underlying measurements; job-coded time records; purchase invoices matched to manifests; depreciation schedules by function; intercompany agreements; and written methodology memoranda.
Assemble it as the year closes, not when a notice arrives.
- Inventory rollforward and reconciliation workpapers, signed and dated
- Square footage measurements and floor plans by function
- Labor allocation support from time-tracking data
- Methodology memoranda documenting each significant position
Income Substantiation in a Cash Business
Examiners test gross receipts first and will use indirect methods where records are thin. Daily cash logs, deposit records tied to sales journals, and POS-to-track-and-trace 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, execute a power of attorney, and route all contact through your representative. Never alter or recreate records.
Answer each information document request in writing, completely and on time, providing what was asked and nothing extra.
Penalty Exposure and Mitigation
Accuracy-related penalties can often be mitigated where the taxpayer relied on a documented methodology and professional advice. That defense depends on evidence created before the return was filed.
It is one more reason the methodology memorandum is the highest-value hour of work in the entire compliance cycle.
