Marijuana Dispensary Settles Case after IRS Suggests It Engage in Money Laundering

April 20, 2015

Imagine running a small business and being assessed a penalty by the IRS. Then imagine being told by the IRS that the only way to avoid the penalty is to commit a serious felony, laundering money. This Kafkaesque nightmare actually became reality for a Colorado marijuana dispensary called Allgreens when it tried to pay its federal payroll taxes.

Generally speaking, in the United States, cash is legal tender for all debts, public charges, taxes, and dues. This general rule gets a little fuzzy when it comes to payment of payroll taxes. In compliance with a law designed to reduce administrative costs and save taxpayers money, the IRS requires taxpayers to deposit their payroll taxes using the Electronic Federal Tax Payment System (EFTPS).

Usually this isn’t a bad system: using EFTPS instead of a paper filing system saves taxpayers on compliance and administration. For taxpayers who do not pay with EFTPS, no penalty is assessed if the taxpayer can show that the failure to use EFTPS was due to “reasonable cause and not willful neglect”.

For most marijuana related businesses, using EFTPS simply isn’t possible. EFTPS requires a bank account. Most banks refuse to offer services or accounts to marijuana businesses, citing their illegality under federal law. The inability to use EFTPS certainly appears to be a reasonable cause for not using EFTPS, but the IRS has disagreed.

When Allgreens asserted that they had reasonable cause for not using EFTPS, the IRS denied that their failure was reasonable and offered an alternative to paying the penalty: funnel cash to a third party with a bank account. There was only one small problem with this alternative: it required the taxpayers to perform financial transactions that conceal the federally illegal source of their funds. This is virtually the definition of money laundering, punishable by twenty years in federal prison.

Allgreens and their attorney Rachel Gillette took the IRS to court, and last month the agency agreed to back down and rescind the 10 percent penalties it had assessed the taxpayer. But according to Gillette, “This settlement only affects this client…marijuana businesses unable to use bank accounts are still operating in an uncertain environment”.

Taxation should be neutral and transparent, not punitive and uncertain. The IRS shouldn’t penalize taxpayers who do everything they can to comply with tax law, and it definitely shouldn’t suggest taxpayers launder money to pay taxes.

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