The best thing you can do to help the audit run smoothly is organize and produce all your cannabis business-related records. An organized business owner is more likely to be a fiscally responsible business owner. Gather the following records in preparation for your audit:
- All Point of Sale (“POS”) records that include transactional data.
- Accounting records that include, but are not limited to, income statements, balance sheets, and your general ledger.
- Documents that support bookkeeping records, such as sales invoices, purchase invoices, purchase orders, bank statements, or cancelled checks.
- Copies of contracts or documents that support your other commercial cannabis business activities that you may have, under the same license or under multiple cannabis licenses, or with other cannabis licensees.
- Inventory records of all cannabis or cannabis products purchased and distributed.
- Records that support any volume of destroyed cannabis or cannabis products.
- Resale certificates, and
- Worksheets used to calculate the average market price of the cannabis.
- Previously filed returns and the worksheets and supporting schedules used to prepare them; and
- Your commercial cannabis license and the initial application.
Be sure to make copies of all your documents ahead of time in case the auditor requests them.
It is imperative that you maintain the originals. As a general practice, you should keep required records for at least four years, regardless of whether they are electronic or paper.
If you are being audited, you should retain all records that cover the audit period until the audit is complete, even if that means you keep them longer than four years.
If you have a point-of-sale system that overwrites data after a period less than four years, you should transfer, maintain, and have available, all data that would have been overwritten or otherwise removed from the system for the required time periods indicated above.
In addition, you should be well-versed in your accounting methods prior to the audit taking place.
The auditor will most likely want to ask you questions about account management, reporting, and your inventory. It is wise to keep a copy of your Standard Operating Procedures (“SOPs”) nearby.
The CDTFA may obtain information about taxpayers from various sources including other state agencies, businesses, wholesalers, and data houses. DO NOT be alarmed if this happens. The CDTFA is only trying to gather information about your cannabis business.
Interpreting the Outcomes
When the audit is complete, the auditor will arrange to hold an exit conference with you, at which point the auditor will explain any proposed refunds, additional taxes or fees, or indicate that your return has been accepted as filed.
The auditor is required to provide you with copies of all the audit working papers, which normally include the auditor’s notes describing your records, explaining the purposes of the tests conducted, and interpreting the findings of the tests.
If it is determined that you do not owe taxes or fees, or you are not entitled to a refund, you will receive a letter in the mail stating that your return has been accepted as filed.
It is imperative that you tell the auditor whether you agree or disagree with the findings at the exit conference. Unlike most IRS audits, the CDTFA maintains an interest in amicably resolving tax disputes in a mutually beneficial manner.
If the auditor determines that you owe taxes or fees, or are entitled to a refund, the auditor will prepare a Report of Field Audit or a Report of Investigation that summarizes those findings.
If you have indicated you agree with the audit findings, the report will be reviewed for accuracy, and you will later receive either a Notice of Determination (if taxes are owed) or a Notice of Refund.
If you indicate you disagree with the audit results, the auditor will generally defer preparing the final audit report and allow you a reasonable amount of time to provide additional information to support your argument.
Once the auditor has considered your reasons and documentation, they can adjust the audit results, request more information, and arrange for another discussion, or recommend the next step in resolving the dispute, which is usually a discussion with the audit supervisor.
Following the meeting, the supervising auditor will prepare the Report of Field Audit or Report of Investigation that summarizes the final audit findings.
If the report notes you do not agree with the audit results, you will be given the opportunity to meet with a CDTFA representative to discuss your disagreement.
Since this discussion is your final means of resolution before you receive a billing or refund notice, you should present any information that you feel can resolve the disagreement.
Like meeting with the audit supervisor, CDTFA’s representative may recommend a change to your tax refund or tax amount due if the information you provide at that time is found acceptable. Any proposed adjustments will be discussed with you.
Next, a representative will review the issues involved to determine whether the audit is correct.
Depending on the findings, the representative will then recommend that a Notice of Determination or Notice of Refund be issued as applicable.
If you receive a Notice of Determination, you must pay the billed amount or file an appeal within 30 days. If neither of the two actions are taken, the taxpayer will be assessed a fine of 10 percent of the unpaid taxes.