Can You Avoid the 10% IRS Cash Tax Payment Penalty?

Joseph Bailey, CPA

If you are reading this, you likely have been hit with the infamous 10% "cash penalty" from the IRS. The below information should be very helpful to you, but please note it is for illustration only as the IRS abates penalties on a case-by-case basis. I am not saying your specific penalty/interest will be abated. (Sorry, making sure I don't get cranky emails from people later!)

With the lack of access to banking, many cannabis companies are forced to operate solely in cash, and this includes making tax payments.

Hopefully, you already read my post on how to pay your taxes in cash. If not, take a look. In that post I mentioned that if you are declined by banks, that you should keep those letters. Well, here is why.

When assessed with the IRS 10% cash penalty applied to companies who do not use the required Electronic Federal Tax Payment System (EFTPS) you may be able to have the penalty abated by showing that you are "unbankable". This was the case for Allgreens v. US in which case the cannabis company was able to have the penalties dropped. The IRS then made some changes to their Internal Revenue Manual wherein they provided some guidelines on having the penalty removed.

Okay Joe, great background, now let's get to the meat and potatoes! How do I attempt avoid the 10% IRS cash payment penalty already?! Please note that there was no precedent set in the Allgreens case, these cases are handled on a case-by-case basis, and you may or may not be able to get your penalty removed. But what is the harm? If it doesn't work, you already owed the penalty. If it does work, it can save you thousands of dollars of unnecessary penalty payments.

1. Apply for bank accounts every year. The Feds will allow up to 2 years, but it is in your best interest in a few ways to try and obtain bank accounts regularly. One, you may just get a good bank account and avoid all of this. Two, an annual (or even better semi-annual) attempt at obtaining banking shows a consistent attempt on your part. The IRS doesn't remove this penalty for people who just decide to not try and get an account, so keep that in mind.

2. Have a qualified CPA draft you a letter response to the IRS.

3. SIGN the declaration letter.

4. Send in the signed letter along with any and all documentation showing your attempts to obtain legal banking.

5. Cross your fingers!

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For assistance, email info@B-Cconsulting.com and visit BC Consulting website

How Do I Pay My Tax Without A Bank Account?

So you have already done the impossible... you started a cannabis company, it is operating, AND it is making a tax profit. First off, congrats!

Now, how exactly do you pay that stinking tax bill? You don't have a bank account, and you can't just show up with a bag of cash and pay your tax right? Wrong! You not only can do it that way, you will have to do it that way without a bank account unless you are planning on going to 30 post offices to get 100 separate $1,000 money orders to pay that $100,000 tax bill. Doesn't sound like something you will do? That's because you won't, so let's get to reality here.

Remember that "taxes" aren't just one government body, we are dealing with multiple states with varying issues, tax rates (some have no income tax at all). Even though below we will talk about the Federal side of things (since it applies to you all), do not forget that you need to do this same thing for your State and Local taxes, as applicable in your jurisdiction.

1. Go online (https://apps.irs.gov/app/officeLocator/index.jsp) and find your nearest IRS Taxpayer Assistance Center (TAC). Not all TAC's are created equal, as some will not accept cash payments. When I search 97267 I get the below result

Find the right IRS Taxpayer Assistance Center (TAC)

2. Once I click to make an appointment, I am taken to a list of close centers, where I am then able to see which services they provide. This is where you can make sure they take cash payments.

Finding Services Provided by the local IRS TAC

WAIT! Look at this below, this TAC doesn't accept cash payments, good thing we checked!

Good thing we didn't just drive over there!

Good thing the Portland, OR IRS TAC accepts cash payments!

Perfect, they take cash so we will make our appointment here

Once complete, you will have an appropriate appointment setup at the correct center where you can pay your IRS tax balance.

Tips for your meeting:

1. Show up on time

2. Do NOT try to get cute and pay in pennies or they will turn you away (yes they can say no to your money).

3. You are going to be in a Federal building, leave your firearms, cannabis, or anything else at home or you may be in a Federal building for a lot longer.

4. ALWAYS walk out with a receipt showing the payment as being applied to your correct account and the correct tax year!

How do I open a cannabis bank account?

Okay, so there is no central bank doing business with cannabis, but that doesn't mean it is 

the end of our search.

Your best course of action is to have you are looking into, though I will be honest and just let you know your best luck is at a credit union. When setting appointments or speaking with someone live, always be honest about what your company does, really does.

The banking question eventually (usually) turns into ... "Can I just open a bank account and not tell them I am in cannabis?" While you may be able to obtain a bank account through omission or outright lying, we advise you do not do this. Eventually, your clandestine account will be shutdown, and it usually happens at the absolute worst possible time. Note that the shutting down of your bank account may also include a temporary freezing of the funds in the account which can devastate already cash strapped businesses.

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Steps to get a cannabis bank account

Route 1

Ask around to others in the industry in your State. In Oregon, for instance MAPS Credit Union and Salal Credit Union both do direct, transparent banking business with the cannabis industry. This varies greatly state by state, so getting recommendations from others in your position is always the best starting point.

If you can find "friendly banks/credit unions", call first and set an appointment and ask them what documents need to be provided, which applications should be completed, etc.

When you show up and apply, you must show up looking and acting the part of a business owner, with all documents and applications completed fully and correctly. Sound like a stupid point to make? Of course you will do that right?! From my experience, wrong! People quite often go the lazy approach and put the onus on the bank to let them know how to do something.

Let me tell you, you are not the only person looking to get that cannabis account. You are not a beautiful snowflake to them, your business being social conscious doesn't matter, and quite frankly they likely have a large backlog of applicants to go through and approve/deny. If there are 10 other companies who did everything perfect and then there is you with half the documents completed, you are absolutely guaranteed to be pushed to the bottom of the list. With waiting times, that could extend your wait time by months.

Ensure you understand the fees being charged, and what information you will be required to provide to the bank on a regular basis, before signing any documents to setup the account(s). Note that there will likely be a waiting period while you and your business are vetted by the bank/credit union.

Once the account is received, don't start celebrating too early! A LOT of cannabis companies lose their bank accounts at cannabis friendly institutions. Why? Because they do not properly maintain their data, documents, etc. and are eventually given the boot.

Route 2 (most common)

If you are approaching banks on a branch-by-branch basis, gather your organizational documents, tax returns (if any), your books, your seed-to-sale reports (where applicable), and make an appointment to speak with the manager of the specific bank or credit union. When making the appointment, be crystal clear why you are making the appointment. There is no point in being coy, only to find out you have wasted your time, travel, etc. when they tell you right away they will not work with cannabis companies.

Show up to your appointment in a suit, have your documentation in order, and be ready to answer any and all questions posed.

If a question is asked and you do not know the answer, tell them "good question, I am not positive on the answer, I will make sure I gather this info and get it to you ASAP". The worst thing you can do is make things up, at some point they are going to know, don't waste anyone's time.

Please do not get discouraged if and when a bank says "no" to you, it will happen at least a few times. But once you do secure the relationship, you will know you have secured open, transparent banking, with an institution that is willing to work through issues with you.

If the bank is going to decline to offer you banking, ask them to provide the declination via letter. 

This is a real **Pro tip**, saving those letters can save you the 10% cash penalty the IRS charges corporations who pay in cash. I wrote more about that in another blog post. 

- Joseph Bailey, CPA

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For assistance, email info@B-Cconsulting.com and visit BC Consulting website