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The Tax Practice of IIT Chicago-Kent College of Law
The Tax Practice of IIT Chicago-Kent College of Law

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There's Nothing Wrong with Cash !

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Many business owners in America believe there is something intrinsically suspicious or wrong with dealing in cash (i.e., paying their employees’ wages, purchasing supplies, receiving large currency bills for services rendered, etc...). However, and though it may raise suspicions of tax evasive conduct on the part of the Internal Revenue Service (the government agency responsible for collecting federal taxes), the truth is there is nothing illegal about using cash, and there are many legitimate reasons for accepting and making payments in cash. And some businesses - restaurants, for example - are by their very nature cash-intensive operations.

With this in mind, we offer the following guidelines to make sure you can defend yourself against inquiring federal tax collectors:

  1. Keep written records. For both cash received, and cash paid out, you should maintain contemporaneous written records of each specific payment received or made, including the date of the payment, the source or recipient of the payment, and the reason/purpose for the payment. These records should be organized into income and expense categories, at least on a monthly basis (preferably weekly), and will form the basis for your business accounting and tax compliance system.
  2. Deposit cash into a bank account. Besides the obvious safety risk of carrying around or maintaining large amounts of cash on hand, bank accounts provide an additional written record of cash payments and receipts, and serve to deflect suspicious Internal Revenue Service agents from making inappropriate inquiries into your business activities. Transparency is the key! Also, its always best to have a separate, dedicated bank account for your business, and to not commingle (mix in) your personal expenses with your business receipts.
  3. Fulfill your payroll obligations. If you have employees, and you pay them in cash, make sure you carefully comply with your federal (and state of Illinois) payroll tax reporting and payment obligations. If you have a large number of employees, you may want to hire a payroll company - for a fee - to perform this service for you, but if you have a relatively small number of employees (under 10), your accountant or tax lawyer can advise you and you can do this yourself. The important point is to ensure that your employees provide you with a valid social security number so that you can protect yourself from government penalties!
  4. If the government contacts you... Do not panic. Deal with the Internal Revenue Service or the Illinois Department of Revenue calmly, respectfully, and cooperatively. But do not answer specific questions or turn over any records without first getting yourself organized and consulting with a professional so that you fully understand what the government is requesting, why it is being requested from you, and what the possible consequences of the request might be. Remember - not every government contact results in you owing the government additional taxes. In fact, if skillfully handled, many government inquiries result in no changes to your tax returns at all!

Please be aware that the recommendations, suggestions and guidance provided on this website is informational only, and is not intended as, nor does it constitute, legal advice to be relied upon for your particular situation. Nothing written on this site should be a substitute for the specific advice of a competent professional.

Please also note that all original content on this website is solely the property of The Short Chicago Tax Lawyer, Ltd., and copyright protection is hereby claimed for all such content, including the domain names theshortchicagotaxlawyer.com and thecktaxclinic.com.

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