August 5, 2014
A marijuana business in Colorado has filed a lawsuit against the IRS because the IRS is assessing a penalty for paying the taxes in U.S. currency – in other words, cash, according to the Denver Post.
The IRS requires employers to pay federal withholding taxes using the Electronic Federal Payment System (EFPS). It charges a 10 percent penalty if the taxes are paid by mail – or, as in this case, in cash.
The company involved in the lawsuit is a medical marijuana dispensary. Because pot is illegal under federal drug law, many marijuana businesses have no bank accounts.
Banks are not permitted to provide accounts to known drug dealers. Most banks have yet to respond to federal guidance earlier this year on how they may legally accept pot money. Without a bank account, a business cannot access the electronic payment system.
“It was not that the taxpayer did not want to make use of the EFP System,” the company’s attorney wrote in the Tax Court petition. “Rather, the taxpayer is unable to secure a bank account due to the nature of its business. With no bank account and no access to banking services, the taxpayer is simply incapable of making” the payments electronically.
The company has been hand-delivering cash payments twice monthly to the downtown Denver IRS office – the only one in the state that accepts cash. Each quarterly tax cycle, the IRS has assessed a 10 percent penalty.
The company asked the IRS for a waiver of the penalty, saying it had complied with the law and had not intentionally avoided making the electronic payments. The IRS responded with a letter describing two alternatives to pay electronically. Both methods would require the company to funnel the cash to a third party, who could then make the tax payment on its behalf.
The company’s attorney told the Denver Post that both options are “the very definition of money laundering.” Complying with the IRS recommendation could subject the company to criminal charges.
A third alternative the IRS suggested in its letter – paying the tax in a single lump-sum payment at the end of each quarter – would incur not only the 10 percent penalty but also an additional penalty for paying late.
“Now his life is full of wonder, but his heart still knows some fear, of a simple thing he cannot comprehend.” – John Denver, “Rocky Mountain High”
This article was originally posted on August 5, 2014 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at email@example.com.