Cannabis operators live under a brighter spotlight than most businesses. The combination of Section 280E, cash-intensive operations, and state track-and-trace obligations means your books attract attention — and auditors know precisely where to look. While federal policy continues to evolve, the IRS has reiterated that 280E still applies until a final rule changes federal law, so ordinary deductions remain limited and the quality of your COGS and documentation matters more than ever.
Here we consider why cannabis companies attract more IRS attention than other industries, what exam teams typically focus on, and how you can prepare for an audit with the right systems and professional guidance.
Why IRS scrutiny stays high
Cannabis operators face more IRS scrutiny than most industries. In fact, one assessment found they are nearly five times more likely to be audited than businesses of similar size in other sectors. There are three main reasons cannabis operators are under such intense scrutiny.
- 280E narrows what counts. Because marijuana remains federally controlled for now, 280E disallows most ordinary deductions and leaves properly calculated COGS as the key offset to taxable income. The IRS continues to remind taxpayers that nothing has changed on this front; refund claims premised on 280E not applying are not valid while marijuana remains Schedule I.
- Cash triggers reporting obligations. Where cash is involved, exam teams look for Form 8300 filings (for cash receipts over $10,000), aggregation rules, and timeliness. As of January 1, 2024, many businesses are required to e-file Form 8300 instead of submitting paper returns—a detail that can be easily overlooked but can still result in penalties if ignored.
- Policy uncertainty keeps cannabis in the crosshairs. The Department of Justice proposed rescheduling marijuana to Schedule III in 2024. But until the rule is final, the IRS is motivated to enforce current law aggressively — knowing that businesses might otherwise take uncertain positions. In practice, that means audits continue under today’s rules, with no leeway for anticipated changes.
What auditors tend to look for
Examiners generally start by understanding how your business operates — then they test whether your records support that story. Expect close attention to:
- COGS and inventory methods. Auditors review how you determine COGS under Section 471, how consistently you apply your method (e.g., weighted average or FIFO), and whether overhead you capitalize aligns with what your advisors support.
- Cash controls and Form 8300 workflow. They’ll look for confirmations that reportable cash receipts were aggregated correctly and filed within 15 days, and that statements were issued to customers when required.
- Reconciliation to state tracking. Discrepancies between internal records and systems, such as Metrc, raise questions, so routine comparisons and explanations for variances are crucial. Industry guidance for operators consistently emphasizes the importance of frequent reconciliation as a core compliance discipline.
The pitfalls that prolong audits
Most exam headaches come from the same patterns:
- Method drift. Changing inventory methods midstream — or applying them inconsistently across sites — without a documented policy or clear rationale.
- COGS overreach. Treating non-allowable selling or administrative costs as inventory in the hope of lowering tax; this tends to draw adjustments. (Your CPA should set the boundaries; your system should enforce them.)
- Late or missing Form 8300 filings. Especially in multi-site or fast-growing operations without a clear owner for the process.
- Gaps between systems. A package exists in Metrc but not in your inventory subledger (or vice versa), with no documented resolution. Expect questions until the trail is clear.
How to get audit-ready
You can’t eliminate audit risk, [link to blog titled” 5 Tips to Strengthen Cannabis Compliance] but you can reduce surprises and shorten the exam cycle. These practices help:
- Write down the rules you follow — and follow them. Maintain a concise inventory accounting memo that outlines your Section 471 method, describes how you account for production costs, [link to new blog titled Cannabis Inventory Costing Methods: What Successful Operators Need to Know] and identifies the person responsible for approving changes.
- Tighten the cash workflow end-to-end. Calendar the 15-day Form 8300 deadline, define aggregation logic, and assign responsibility for e-filing. Build a simple checklist for supporting documents (deposit records, customer statements).
- Reconcile to state data on a schedule. Monthly (or tighter) reconciliations between your inventory records and Metrc reduce issues during an exam and create a defensible trail of variance explanations.
- Centralize evidence. Keep invoices, lot histories, testing certificates, cycle counts, and adjustment approvals in one place. When exam teams request “everything related to this SKU,” you should know precisely where it lives.
Use an ERP system to do the heavy lifting. Software that connects production, inventory, costing, cash controls, and compliance reduces duplicate entry and preserves the audit trail your CPA needs to defend positions. ERP systems don’t replace professional advice, but they maintain the kind of audit trail examiners like to see.
The near-term outlook
Policy headlines will continue, but audits will track current law until/if the rescheduling process is finalized and implemented. If rescheduling to Schedule III is finalized, the impact of 280E may change going forward. However, operators shouldn’t expect retroactive relief or a pause in sound documentation at this time. And don’t count on a smaller IRS workforce to protect you. Audits of cannabis companies are typically more lucrative for the IRS than those of other industries; therefore, the agency may consider it worthwhile to focus agents’ efforts in this area.
The prudent move is to assume the status quo for tax years under audit and build agility for whatever comes next. If rules shift, you’ll adjust faster when your data is clean, your processes are disciplined, and your evidence is organized.
Where Velosio helps
Audit readiness is a journey. When you’re ready to tighten the back office, SilverLeaf ERP — powered by Microsoft 365 Business Central — helps connect compliance, inventory, and accounting. Schedule a walkthrough with our cannabis experts to see what an audit-ready back office looks like in practice.