Third in a series on what 1,446 pages of FOIA-ed IRS cannabis training materials reveal.

The first post in this series covered the IRS's internal statement that hemp's federal legal status was "set to change later in 2026." The second explored why METRC, the state-mandated seed-to-sale tracking system, is not the accounting software the IRS apparently wishes it were. This post is about something closer to home for a lot of cannabis operators: your corporate structure, and how much of it the IRS expects to see during an audit.

If you run a cannabis business, there is a decent chance it is not just one entity. Real estate holding companies, management companies, equipment-holding entities, IP-licensing entities, and tiered partnership structures are common in the cannabis industry for a variety of legitimate operational, regulatory, and banking reasons. The FOIA materials I obtained reveal that the IRS is not just aware of these structures. Examiners are specifically trained to map them out before they ever pick up the phone.

The IRS's internal Audit Technique Guide (an examiner playbook, not public taxpayer guidance) uses the phrase "lattices of partnerships or LLCs" to describe how even small cannabis businesses often organize multiple entities under common ownership. The Guide instructs examiners to research the Secretary of State's website for corporate and partnership filings and to check publicly available state marijuana licensing databases to, in the IRS's words, "reveal the full extent of a trafficking organization." That is the IRS's language, not mine, and it gives you a sense of the lens through which examiners are approaching these structures and the exam.

The Guide tells examiners that "consistent ownership percentages with a single organizational purpose are a strong indicator that the entire lattice is a trafficking organization." It instructs agents to open owners' personal income tax returns to determine whether all income from related entities is being properly reported. And it flags S-Corporation structures specifically, noting that officer compensation, "may be non-deductible as a general and administrative expense at the S-Corporation level but is still taxable at the individual level," meaning examiners will seek to determine how each officer splits his or her time between production-related activities and other work. 

A separate IRS best-practice guide notes that "it is very rare that all the related Marijuana income tax returns do not need to be opened and examined." That quote speaks for itself. The IRS is telling its agents to assume that the audit should not be limited to just the licensed cannabis business.

The IRS also notes that one of the main reasons cannabis businesses use multi-entity structures is to obtain bank accounts, for efficiency or because some financial institutions are often reluctant to bank the plant-touching entity directly. That is a practical reality the industry knows well. But the FOIA materials show that the IRS views that same banking workaround as a reason to look more closely at the entire structure. 

The takeaway is not that multi-entity structures are inherently problematic. Businesses in every industry use them for legitimate reasons. The IRS has a detailed, cannabis-specific playbook for examining corporate structures, and the FOIA materials make clear that examiners are being trained to treat a cannabis audit as a full-structure examination from the start. If your business involves more than one entity, the IRS training materials reveal that your examiner will already know that before the first meeting. It's important to be aware, so you can understand the playbook from the IRS's side of the desk.