The Most Common Tax Problems for Cash Businesses

The Most Common Tax Problems for Cash Businesses

In 2016, the IRS audited just over 1 million individual income tax returns. The IRS is always interested in businesses who receive most of their income in cash. Running a business that deals a lot with cash makes life easier (who likes waiting for credit card companies?), but there are some drawbacks.

Drawback number one is that the IRS is gunning for you. If you are looking for an IRS tax audit defense lawyer, we can help.

Failure to Log Appointments

If you provide a service, you plan ahead a little bit. You can’t jam two people in the same time slot. Having a record of who is coming in at what time might help provide a defense from the authorities when they come knocking at your door. This can give the IRS some indication of how much you are earning, and where the income is coming from.


lying to the IRS about an all cash business

Let’s say you run a restaurant. Business is booming, and you are beating your “assumed tip income”. It can be tempting to pencil in the average (or something closer to the average) and just keep the cash.  This is a spectacularly poor decision.

Those “assumed tip income” tables are not made up. The IRS comes up with those averages based on a lot of hard data. It is a good idea to be aware of them, if nothing else. Going under that amount raises eyebrows.


Helping Out Friends and Family Too Much

When a friend or family member falls on hard times, it can be tempting to help them out. Sometimes, that comes in the form of low (or zero) rent payments, or providing them inventory to give them some aid.

The IRS looks for these hidden transactions. They are not particularly happy about them. While we would never say that you shouldn’t help out someone in need, it may be a good idea to make sure you are doing it in a clear and above board way.

Living Beyond Your Means

living beyond your means is trouble if you have an all cash business

Your business is crushing it. You are seeing steady growth month after month and year after year, and you want to enjoy it a little bit. So you get a house in the nice part of town. Why not take it a step up, even? We are talking Wyandotte and Grosse Pointe, those sort of areas.

If you run a cash business, big purchases are going to raise some questions. If you are showing $5,000 profit every month, and you drive a $100,000 car, the IRS is going to have some serious inquiries for you. Dipping into the company cash drawer to help yourself out is a big no-no. While everyone takes a ‘business lunch’ here and there, buying a house or a car is too much.

Showing No Profit

We get it. Sometimes your business goes through hard times, and that is why you have that rainy day fund. But businesses that don’t show any profit over several years are of particular interest to the IRS. Cash businesses also get a lot of attention from the authorities. Combine those two facts, and you’ve got yourself a serious problem.

There is no IRS rule that says “You have to show a profit.” There are a whole bunch of rules about taking steps to correct your losses, however. Part of this involves making sure your personal accounts are straight. If your business is in the red for a while, and your bank account has a consistent positive balance, well, the IRS might have a problem with that.

There is nothing that you can do to ensure that the IRS will not audit you. That is especially true if you are a cash business. Playing by the rules is a good way to increase your odds, though.

If you have any questions, you should reach out to an IRS tax audit defense lawyer today.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.

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