IRS LB&I Cannabis Industry Audit Initiative: Coordinated Examination Program Targets MSOs

## Overview The IRS Large Business & International (LB&I) division has formally launched a Cannabis Industry Coordinated Examination Program targeting multi-state cannabis operators (MSOs) with revenues above $10M annually. The initiative coordinates IRS agents across multiple examination teams to audit cannabis operators' §280E compliance, COGS allocation methodologies, entity structure tax treatment, and executive compensation arrangements. ## What the Initiative Covers Examination teams are focusing on: (1) §280E COGS allocation methodologies against the standard established in recent Tax Court cases and Rev. Rul. 2024-12, (2) §471(c) election validity and books-and-records consistency, (3) related-party transactions between plant-touching and ancillary entities used to shift income, (4) executive compensation structures in pass-through entities, and (5) state tax conformity positions. ## Who Is Targeted Initially targeting MSOs and vertically-integrated operators with revenues exceeding $10M. The initiative's scope is expected to expand to include single-state operators with revenues above $3M in subsequent phases.