IRS Drops Penalty Against Marijuana Company For Not Filing Electronically

by Bruce Givner on March 26, 2015

In a settlement reached with the Internal Revenue Service, a Colorado medical marijuana dispensary will not have to pay a penalty for failing to pay certain taxes electronically.

The dispensary, Allgreens LLC, failed to pay employee withholding taxes electronically as is required under federal law due to the fact that it couldn’t get a bank account. The IRS initially assessed a 10% penalty for failing to deposit Form 940 and Form 941 employment taxes, which amounted to $25,000.

On July 24, 2014, Linda Andrews, the hearing officer in the case, ruled in a substantive contract letter that the fact that Allgreens “cannot secure a bank account due to current banking laws is not considered reasonable cause to abate the penalty.” The IRS later agreed to abate the penalties it had assessed on Allgreens and return the portion of the penalty already paid by the company, in exchange for which Allgreens will withdraw its U.S. Tax Court Challenge of Andrews’s July 24 determination (Allgreens LLC v. Commissioner) (35 DTR K-3 2/23/15).

According to Rachel Gillette, the Denver attorney representing the company, the settlement isn’t anticipated to create a precedent. She added, “But the hope is eventually the IRS will come up with a system to stop automatically assessing penalties on taxpayers who are paying in cash because they can’t get a bank account.”

Gillette said she believes the settlement could push the IRS to look at situations analogous to Allgreens’ and consider abatement of penalties “on a case-by-case basis.” It is possible, she said, that other marijuana sellers have received penalty abatements from the IRS.

In order to use the Electronic Federal Tax Payment System, a taxpayer requires a bank account. However, as marijuana remains a Class 1 controlled substance under federal law, licensed medical marijuana businesses like Allgreens have been unable to secure bank accounts. Instead, Allgreens pays all its taxes in cash at a local IRS office.

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