A California-based cannabis microbusiness, licensed for cultivation, manufacturing, distribution, and retail, found itself under significant financial stress when the IRS audited its 2019-2021 books. The IRS reclassified the company as solely retail, disallowing manufacturing-related COGS (Cost of Goods Sold) and demanding over $4 million in back taxes and penalties.
The company’s initial classification included both manufacturing and retail, but the IRS's reclassification to retail-only resulted in substantial penalties for negligence and major tax liability. The owners, recognizing that the audit process was spiraling out of control, sought expert guidance.
For cannabis businesses facing similar tax challenges, understanding IRS tax compliance for the cannabis industry is crucial.
At the recommendation of a Chamber of Commerce colleague, the company contacted Verdant Strategies and CEO Rachel Wright for a Wellness Check—a low-cost, neutral assessment of the audit’s progress.
Rachel and her team quickly identified that much of the required documentation had not been submitted, which had led to communication breakdowns with the IRS.
What is a Wellness Check?
A Wellness Check is a structured evaluation that helps cannabis businesses assess financial health, identify compliance risks, and develop a clear audit response strategy.
For cannabis operators, proactive financial oversight is essential. Learn more about Verdant Strategies’ CPA & Advisory Services.
Verdant Strategies took full control of the audit, meticulously organizing and submitting receipts, ledgers, and supporting financial records. Their approach:
By leveraging Verdant’s “high impact—low confrontation” method, the IRS shifted from an adversarial stance to a more collaborative approach.
Cannabis operators facing an IRS audit should consider early intervention. Read more on why accurate cannabis tax reporting is critical.
Once Verdant Strategies took the reins:
✅ Full documentation submission improved the IRS’s stance on the audit
✅ A 30-day extension was secured after the company’s controller resigned
✅ Ongoing discussions suggest a 70-85% tax reduction
✅ Negligence penalties may be waived, saving the company millions
This approach protected the microbusiness from a devastating financial outcome and positioned it for future compliance success.
When an audit becomes adversarial, having the right CPA firm can make all the difference. VERDANT Strategies’s expertise in cannabis tax law and IRS procedures allowed them to:
For cannabis operators, engaging with a specialized CPA firm like VERDANT Strategies ensures compliance with tax codes and reduces financial risks.
When should you request a Wellness Check?
Rachel Wright emphasizes the importance of trusting your instincts as a business owner. A Wellness Check offers clarity before financial problems escalate.
For cannabis businesses preparing for tax season or facing IRS inquiries, a proactive CPA strategy is key.
If your business is facing an IRS audit or you’re unsure about your financial standing, a Wellness Check can provide immediate clarity.
Contact VERDANT Strategies today to schedule a consultation and ensure your cannabis business stays compliant and financially secure.