December 16, 2015

Taxable income? But I was paid in cash!

More than once I’ve had small business clients come to me for tax preparation and planning services
 who, in the past, had improperly accounted for cash payments in income.  The small businesses were involved in construction or landscaping maintenance trades; each offered a discount for payments in cash.

The “discount for cash payment” was not the problem.  The problem was how each business handled the cash payments on income tax returns. 

And it was a big problem.

For each business, upon reviewing prior income tax returns, I noticed a significant discrepancy of claimed income versus what showed up on their billing records.  The response from each?  Essentially “Oh, I never add the cash to my income for tax purposes.  It’s cash after all, not a check or credit card payment.”

Ugh.  Income is income and must be counted for tax purposes.  Doesn’t matter if the income is obtained via cash, check, money order, credit card, barter, virtual currency, or another method.  Payment for your services is income.

My advice was the same for each client:  We would need to amend prior year tax returns for which the statute of limitations applied, claiming the correct amount of income.  Each business would need to pay back taxes, penalties and interest.  Going forward, all income would be counted on current and future tax returns. 

Each client refused.  Consequently, I had no choice but to sever my tax preparation and planning services agreement with each client.  As an Enrolled Agent licensed by the United States Department of the Treasury, I cannot prepare tax returns I know to be false.

Do it right the first time.

Cash heavy businesses are always a target for audit by the IRS and state taxing authorities.  I know of no one who likes to pay taxes – myself included.  But getting taxes right the first time will save you headache and grief down the road if the Tax Man comes along with an audit notice.

Please contact me if you have questions about tax preparation or tax planning matters.  For information about my nationwide Consulting, Expert Witness, and Tax Services visit Fouts Financial Group.

Mary Rae Fouts

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