Cannabis Entrepreneurs Accused Of Tax Crimes

Just because a State like Oregon has legalized cannabis you cannot assume that the Feds will not pursue any charges and look to shut down your business. Regardless of what type of business you operate, any business that is involved in such crimes as wire fraud and tax evasion could be subject to criminal prosecution by the Feds.

Commencement Of Federal Prosecution Against Two Oregon Cannabis Operators

In a press release issued by the U.S. Attorney’s Office in Oregon on April 12, 2018, separate criminal informations were filed in federal court against two Portland-based marijuana business owners. Nathan Wheeler, 42, of Portland, was charged with one count each of wire fraud and tax evasion. Matthew Price, 32, also of Portland, faces four counts of willfully failing to file income tax returns.

According to court documents, Mr. Wheeler, a certified public accountant, is alleged to have engaged in a scheme to defraud clients and investors of more than $4.4 million while also evading income taxes. Mr. Wheeler and others operated Bridge City Advisors, LLC, offering accounting, investment, and legal services to clients throughout Portland. Mr. Wheeler also held an Oregon medical marijuana license to grow and distribute marijuana. He is accused of using investor funds, without their knowledge or consent, in part, to build and expand his marijuana enterprise. In carrying out his fraud, he sometimes prepared false account statements to keep clients from discovering the unauthorized use of funds.

Beginning in August 2013, Mr. Price was part owner and operator of a Portland-based medical marijuana dispensary. In 2014, Mr. Price and his business partner opened two additional retail locations, a second in Portland and one in Eugene, Oregon. Between 2011 and 2014, Price allegedly received substantial income from the business and a marijuana farmers’ market he previously owned and operated. During this four-year period, Mr. Price is accused of failing to file individual income tax returns, resulting in a tax loss of nearly $263,000.

18 U.S.C. §1956 – Laundering Of Monetary Instruments

18 U.S.C. § 1956(a) defines three types of criminal conduct: domestic money laundering transactions (§ 1956(a)(1)); international money laundering transactions (§ 1956(a)(2)); and undercover “sting” money laundering transactions (§ 1956(a)(3)). Marijuana-related businesses need to be aware of domestic money laundering transactions (§ 1956(a)(1)).

To be criminally culpable under 18 U.S.C. § 1956(a)(1), a defendant must conduct or attempt to conduct a financial transaction, knowing that the property involved in the financial transaction represents the proceeds of some unlawful activity, and the property must in fact be derived from a specified unlawful activity.

Violations of § 1956 have a maximum potential 20-year prison sentence and a $500,000 fine or twice the amount involved in the transaction, whichever is greater. There is also a civil penalty provision in § 1956(b) which may be pursued as a civil cause of action. Under this provision, persons who engage in violations of any of the subsections of 1956(a) are liable to the United States for a civil penalty of not more than the greater of $10,000 or the value of the funds involved in the transaction.

Penalties For Filing A False Income Tax Return Or Under-reporting Income

Failure to report all the money you make is a main reason folks end up facing an IRS auditor. Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

Criminal Fraud – The law defines that any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

And even if the IRS is not looking to put you in jail, they will be looking to hit you with a big tax bill with hefty penalties.

Civil Fraud – Normally the IRS will impose a negligence penalty of 20% of the underpayment of tax (Code Sec. 6662(b)(1) and 6662(b)(2)) but violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty. In lieu of the 20% negligence penalty, the civil fraud penalty is 75% of the underpayment of tax (Code Sec. 6663). The imposition of the Civil Fraud Penalty essentially doubles your liability to the IRS!

What Should You Do?

Although a criminal charge is only an accusation of a crime and a defendant is presumed innocent unless and until proven guilty, given the illegal status of cannabis under Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you. It’s coming down that the biggest risk is TAXES. So it is best to be proactive and engage an experienced board certified tax attorney-CPA in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, the San Francisco Bay Area (including San Jose and Walnut Creek) and other California locations protect you and maximize your net profits.