A tracking tag that will be attached to a cannabis plant is shown at Colorado marijuana business Northern Lights. Marijuana is required to be tracked from seed to harvest and into sale through the state Marijuana Enforcement Tracking Reporting Compliance system, or METRC. (Seth McConnell, Denver Post file)

DOJ secretly using IRS to investigate Colorado marijuana businesses, lawsuit says

The U.S. Department of Justice is secretly using the Internal Revenue Service to conduct criminal investigations into otherwise legitimate marijuana businesses in Colorado under the guise of tax audits, lawyers for the companies say in an ongoing federal lawsuit.

The IRS called the allegations baseless and illogical, saying inquiries it is making for information from Colorado’s Marijuana Enforcement Division are simply part of its efforts at verifying financial records in determining if businesses owe more tax.

The case in U.S. District Court filed by the owners of Rifle Remedies, a medical marijuana business in Silt, is one of several that challenge IRS subpoenas to MED seeking information about how much pot they’ve grown, to whom they’ve sold it, and when. The IRS said it has resorted to the tactic because businesses have refused to offer the information voluntarily.

Though properly licensed in Colorado to sell the drug, in the view of the IRS the companies are traffickers that violate the federal Controlled Substances Act that lists marijuana as an illegal narcotic. As such, the businesses cannot deduct expenses as other companies can, but before the agency can make that assessment, it must first determine the companies are actually selling pot.

Filings in the Rifle Remedies case allege a deeper conspiracy involving at least three federal agencies.

Lawyers for the companies did not immediately return messages, but have said in recent court filings they suspect the IRS is overstepping its auditing authority by conducting investigations for the DOJ. They claim the Drug Enforcement Administration has trained tax agents on how to investigate drug operations.

“The IRS is working jointly with the Department of Justice to investigate purported criminal activity of the taxpayers,” the lawyers — Greenwood Village attorneys James Thorburn and Richard Walker — wrote in a recent filing. “To this end, the IRS has converged on Colorado and is conducting mass audits of those it has determined to be unlawfully trafficking in controlled substances … dishing out summonses like candy …”

They say their clients would happily give the IRS what it wants, but only with a grant of immunity from prosecution.

They say the DEA and IRS held training sessions in March 2016, “where (IRS) agents were trained in criminal drug law investigator (sic) techniques,” but efforts to learn what actually transpired have been rebuffed.

“The depths of the IRS and DOJ joint effort is shrouded in secrecy,” they wrote, noting responses to their requests under the federal Freedom of Information Act have been repeatedly stalled.

The lawyers assert the conduct is the result of a 2016 law in which Congress prohibited the use of DOJ funds to prevent implementation of state medical marijuana laws. So because the DEA can’t conduct such an investigation, it is working through the IRS in the U.S. Treasury Department.

The IRS, DEA and MED do not comment on pending litigation and will not confirm the existence of any investigation.

The IRS called the assertion “baseless,” saying Rifle Remedies “appears to sell marijuana for recreational use,” and that the DEA doesn’t need the help.

“That the DEA is using the IRS to investigate … defies common sense,” the government said in a court filing. “If prosecution were truly the goal, it would be far simpler — and likely more effective — for the DEA to send a plainclothes agent to purchase marijuana from (Rifle Remedies) than to co-opt the IRS into issuing summons to MED for information about past years’ marijuana sales. (Rifle’s) underlying theory of this case lacks not only evidence, but logic.”

The IRS is trying to get its hands on Colorado’s Marijuana Enforcement Tracking Reporting Compliance system, or METRC, which follows every marijuana plant from seed to sale. The agency wants annual gross sales reports for 2014 and 2015, but apparently also information about who is buying from Rifle Remedies.

Until now, the IRS relied on pot businesses — growers, distributors and manufacturers — to concede they are selling the drug, which the lawyers say is tantamount to admitting to a federal crime. Once done, the IRS uses section 280E of the Revenue Code in denying any business tax deductions, a move that raises the business’s tax bill by multiples.

Businesses are able to deduct their cost of producing goods from the revenues generated, just like other businesses can, but cannot do more than that, a massive liability that leaves them with huge tax bills.

No hearings have been set on the case.

This story was first published on DenverPost.com