By Kevan McLaughlin
Cash-intensive businesses are audited by the IRS in higher numbers than other organizations, if only because these types of transactions do not lend themselves well to third-party reporting.
The federal government attempts to combat this problem with IRS Form 8300, which documents transactions greater than $10,000. That still leaves other, smaller exchanges less reportable, but by no means invisible.
Most businesses will not want to keep physical cash, at least large quantities of it, for a prolonged period. Invariably, the deposit of those funds into a financial institution will likely create a paper trail.
While not necessarily complete, deposit information will serve well when combined with the variety of other tools that the IRS, or any taxing agency for that matter, possesses — analyzing things for cash impacts, not just for federal income tax questions, but also employment taxes and, at that state level, sales taxes.
Even at times when a business fails to report their correct amount of cash sales, indirect methods of proof exist for the IRS and other tax regulators to review. For example, we’ve seen invoices that note “discount for cash payments” while miraculously the books and records show no receipt of cash.
Similarly, when a retail business reports sales and use taxes and indicates 100 percent of gross receipts are either from checks or credit cards, then the obvious auditor’s response is, “You must have received something in cash.” And that begins the speculation and the opportunity to look into other areas.
One big issue, often out of a company’s hands, occurs when the payer does not — or even will not — provide a taxpayer identification number. We see this a lot in the legal cannabis industry, and it gives many in the market pause.
Conducting business with such individuals and organizations must happen, but it places companies within the auditor’s focus at tax authorities. Filing out a partial IRS Form 8300 does not help. In the view of the federal government, doing so would not differ from failing to file at all. Nevertheless, companies may take specific steps to avoid any penalties.
The first step may be to make an initial solicitation for the tax information to the payer verbally, by email or regular mail, and then document the attempt. This should be done at the time the relationship or the account begins.
If not received, follow up with an annual solicitation to request the information needed to complete Form 8300. This should typically occur by Dec. 31 of the year in which the relationship began, unless the relationship started in December of that year, in which case that annual solicitation goes out on Jan. 31.
If you still hear nothing, a second annual solicitation is generally needed later. Making a sincere attempt to get this information can definitely help you with the IRS.
As the founder of McLaughlin Legal, San Diego tax attorney Kevan McLaughlin focuses his practice on all aspects of Federal and California tax law, with a particular emphasis on representing taxpayers in civil and criminal tax litigation and controversy cases.
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