On behalf of Silver Tax Group posted in IRS Tax Audits on Monday, May 23, 2016.
For some people, the thought of running an all-cash business hearkens back to a simpler time, a time before Apple and Android phones had pay capabilities, credit cards came with chips to protect data, and receipts were hand-written instead of emailed automatically. For others, though, an all-cash (or mostly cash) business without the hassles and charges of, for example, dealing with paying fees to credit card companies on every purchase or having to track down people who write checks on insufficient accounts, just makes sense.
While there are clear benefits to choosing to run your business as an all-cash or at least mostly cash company, there are some definite drawbacks come tax time.
Prepare yourself for the possibility of an audit
Simply put, cash leaves no paper trail. This can make it difficult to keep adequate records to protect yourself from an audit unless you take great pains to keep meticulous documentation. For this reason, cash businesses are much more likely to be audited than those with more easily traced revenue streams are.
Among other things, you’ll need to prove to the IRS:
- Your business’ true income, including both profits and losses
- That your personal assets aren’t commingled with business assets (this can be hard if you’re the only employee of the business, but you must make an effort in order to avoid both legal conflicts and tax implications)
- Business expenses (and that they are kept separate from personal expenses) including overhead, transportation, supplies, wages, etc.
- That business-related purchases like supplies, equipment and marketing materials were used for strictly business purposes
It is definitely possible to successfully operate an all-cash business yet comply with all IRS record-keeping requirements and tax obligations, but it does require effort on your part. For example, keeping a calendar of all business appointments can help you prove that income you received during a particular period was truly related to a business purpose. Likewise, having a detailed journal of business expenses can prove that you entertained a potential client with dinner and a show on a particular date; this can help you avoid the implication that you took your significant other out on the town and tried to “pass it off” as a business expense.
If you have questions about how best to document your business’ expenses, profits and losses, seek the advice of a financial professional. Should you receive notification that you are being audited, however, strongly consider hiring an experienced tax attorney to represent you throughout the audit process. Tax attorneys understand the convoluted regulations of the tax code, know how to prove business expenses to tax authorities and will give you a statistically better chance of a positive outcome than going it alone.