medical_marijuana

In a government version of Catch-22, a Denver medical marijuana dispensary was told “tough luck” and is being penalized by the Internal Revenue Service for not paying certain taxes electronically, as required by federal tax law.

An IRS appeals officer told Allgreens LLC not being able to get a bank account is no excuse for not paying employee withholding taxes electronically. The dispensary has tried to get a bank account for at least two years.

Allgreens had a bank account — and paid its withholding taxes electronically — until mid-2012, when the bank closed the account. Allgreens has been unable to locate a new bank that will take its business. As a result, the company has been assessed a 10 percent penalty every quarter of the tax cycle.

That Allgreens “cannot secure a bank account due to current banking laws is not considered reasonable cause to abate the penalty,” an IRS hearing officer ruled in denying the dispensary’s request to waive the 10 percent penalty.

Allgreens is one of many businesses to face the fine. The company pays its taxes twice each month, on time and in cash, at the downtown Denver IRS office. But the IRS requires all businesses to pay the quarterly tax by bank wire, which is impossible for hundreds of recreational and medical marijuana shops nationwide that cannot obtain banking services.

Allgreens’ attorney Rachel Gillette has said since it will not waive the penalty for cash-only businesses, the IRS has advised the companies to avoid the assessment by using techniques that amount to money laundering.

The IRS sent the company a letter with a copy of its internal policies, which indicate there are two alternatives to pay electronically. Both methods would require Allgreens to funnel the cash to a third party, who would then make the tax payment on its behalf.

“It’s the very definition of money laundering,” Gillette told the Denver Post in a telephone interview. “It’s absurd. An alternative should not force a taxpayer to engage in a potentially unlawful activity under a federal statute.”

The dispensary has challenged the IRS policy in U.S. Tax Court, stating the penalty is unfair since many marijuana businesses cannot obtain banking services because the drug remains illegal under federal law.

In newly filed court papers, the dispensary said a hearing officer’s determination that the business’ inability to get a bank account was little more than hard luck running afoul of the agency’s own rules. The IRS imposes the penalty “unless it can be shown that such failure (to pay electronically) is due to reasonable cause and not due to willful neglect.”

Gillette wrote in a new court brief that Allgreens “meets the requirements of reasonable cause because the petitioner exercised ordinary business care and prudence in paying its federal employment tax obligations.”

“The application of a penalty to an entire industry that, though willing, is unable to comply, is discriminatory, unjust and unfair,” Gillette wrote the IRS.

IRS settlement officer Linda Andrews denied Allgreens’ request and said the IRS was clear its position remains that “all (withholding taxes) are to be made via Electric Funds Transfer Deposit System, and as of now IRS has not made any policy change or exception for businesses that cannot use banks to make their federal tax deposits.”

Gillette said the decision shows how the IRS “has forsaken its role as a fair and impartial enforcer of the tax code as it has allowed the federal government’s position on marijuana to influence its decision.”

Enforcing the penalties is “a wasteful and inefficient use of taxpayer dollars,” Gillette wrote in her Tax Court challenge.

Allgreens’ case remains pending.

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