What Examiners Actually Focus On
Examiners start with income. In a cash-heavy business, they'll tie out deposits, POS data and track-and-trace sales, and turn to indirect methods — bank deposit analysis, markup analysis, cash-flow analysis — the moment direct records look thin.
From there they move to COGS: anything that resembles a selling or admin cost, labor allocations without time records, square-footage splits without measurements, and any inventory number that doesn't tie to physical counts or BioTrack.
- Gross receipts and cash reconciliation testing
- Reseller-versus-producer classification of the taxpayer
- The composition of inventoriable cost and how it's allocated
- Related-party arrangements and separate-trade-or-business claims
- Worker classification, including contractor-versus-employee issues
How We Run the Engagement
First, we take over all communication. Nobody at the business should be answering an examiner's questions off the cuff, by phone or on-site. Every information document request gets a written answer, on time, that gives exactly what was asked for.
Second, we rebuild the position: the inventory rollforward, the allocation studies, the tie between the return and the ledger. We find the weak spots before the examiner does, so the strategy already accounts for them.
What the Substantiation File Needs to Include
These cases turn on documentation. The strongest files hold contemporaneous records: time logs showing what cultivation staff actually did, floor plans with measured square footage by function, invoices matched to manifests, signed and dated count sheets, and methodology memos written before the exam ever started.
Where the records are thin, reconstruction is possible but weaker. We're direct about which positions will hold and which are likely to get conceded, so you can decide where the fight is worth having.
Appeals, Penalties and Getting to Resolution
Not every proposed adjustment should be accepted at the exam level. IRS Appeals weighs litigation risk and often lands somewhere very different from a revenue agent's position, particularly on allocation questions where reasonable methods can differ.
We also fight penalties directly. Accuracy-related penalties frequently get abated when the taxpayer followed a documented methodology and professional advice — one more reason the memo needs to exist before an audit, not after.
Handling State-Level Exams
IDOR exams focus on the Cannabis Purchaser Excise Tax, the Cultivation Privilege Tax and sales tax — whether tax was calculated on the right potency tier, whether medical and adult-use sales were properly kept separate, and whether reported sales match BioTrack. Municipalities and counties run their own MCROT audits on similar logic.
These often run alongside a federal case and pull from the same records, so we manage them together instead of as separate fires.
How a Cannabis Examination Usually Unfolds
A cannabis exam typically opens with an information document request focused on inventory: how ending inventory was valued, which costs were capitalized, how labor was allocated, and how the numbers tie to track-and-trace. The second wave asks about entity separation, related-party transactions and owner pay. The third, in cash-heavy cases, addresses bank deposits and cash controls.
Preparation decides the outcome. Operators with a written costing methodology, allocation studies backed by time records, measured square footage, BioTrack reconciliations and consistent year-over-year treatment resolve exams narrowly. Operators without any of that face reconstruction under time pressure, with the burden of proof on their side.
We manage the engagement start to finish: control the flow of information, respond in writing, prep the client for any interview, and keep the exam inside its stated scope rather than letting it expand into an open-ended review.
- Scope control and a single written channel for every response
- Reconstruction and organization of inventory and allocation workpapers
- Position memos supporting each significant treatment
- Appeals, penalty abatement and collection alternatives where needed
Illinois State and Local Examinations
Federal exposure isn't the only exposure. IDOR runs sales, use and cannabis excise tax audits that often focus on potency-tier classification at the point of sale, med/adult-use segregation at dual-use dispensaries, Cultivation Privilege Tax reconciliation, and whether reported gross receipts match BioTrack data. Municipalities and counties administering a Municipal Cannabis Retailers' Occupation Tax run their own audits, often with less procedural formality and tighter response windows.
These exams draw on the same evidence base as a federal case — POS records, BioTrack exports, bank deposits and the general ledger — so one well-maintained reconciliation file serves all of them. We represent operators across all three levels and keep the positions consistent, because a mismatch between a state filing and a federal one is exactly what an examiner is trained to look for.
Where liabilities are established, the work shifts to resolution: installment agreements, reasonable-cause penalty abatement, and structuring payment against seasonal cash flow so resolving one year doesn't trigger failure in the next.
