Does It Make Sense To Try To Hide Cash From The IRS?
I have a couple of buddies who run their own medical clinics. Their high-end clientele likes to pay for things in cash. This is probably the same cash that the wealthy individual was paid from another wealthy person who only deals in cash. They like hiding this cash from the IRS.
This cash is taken off the top by both of my friends. It goes unreported on taxes and is used to make other cash purchases down the line – win, win for all?
This is a brief post to address the logistics of trying to hide cash from the IRS. I’ll discuss whether it’s worth it, what you could do with the cash if you didn’t report it, and what might be better ways to handle the cash.
Billions Hidden From The IRS
Every year, billions of dollars of cash transactions are hidden from the IRS. They manage to recover a very small percentage through their tedious audits.
The money is discovered when banking statements are audited, unreported 1099’s are found, receipts are reviewed, inventory is taken and vendor accounts are compared to your business transactions.
Comparing Your Income Report
Also, if you have a mainstream business such as a used car lot or a family medicine practice, your income/expense ratios are compared to other comparable business and your expenses scrutinized.
How Income Is Reported
If you have a business then you know exactly how this works. Your payroll sends out W9’s and W4’s. You either pay a W2 paycheck to your employees or send out 1099’s to consultants. Either way, a paper-trail is created for any monies exchanged.
You must create an invoice and hand out receipts and pay state sales taxes on all transactions.
Even if you get a cash transaction, it “must” be reported and accounted for in your bookkeeping. You may not report the incoming cash, but the person who paid it to you through their business may have reported it.
In comes the paper trail.
Different 1099 forms exist depending on the kind of transaction. A copy is sent by the bookkeeper/CPA to both the IRS and the business/individual to whom the money was paid.
It can get ugly when a $100k plastic surgery job is paid for in cash by Mr. X and received by Dr. Y. If Mr. X is audited and the unaccounted for cash is discovered to have been paid to Dr. Y’s office, then the IRS can audit Dr. Y’s taxes to see if that $100k was accounted for.
These days most smaller transactions go through PayPal, Amazon Pay, through credit cards and through other online transaction platforms. But they add up to a lot of money.
For a few years now, companies like PayPal have had to report to the IRS any accounts which have had more than $20k worth of money exchange and 200+ transactions. The person would be then informed by PayPal that they have a 1099-K coming their way.
If someone is paying your business money which you aren’t reporting but they are reporting it to the IRS, then your business could get audited for this unaccounted for income.
Now, audits aren’t the biggest deal – certainly not as scary as everyone makes it out to see. However, they are a major pain in the ass. Everything gets sifted through and the auditors can go back several years.
The IRS has a lot of power. They can request access to damn near anything you have access to, they can shatter any feeling of perceived privacy that you thought you had.
If your savings account, investment account or real estate holdings are going up by $200k a year and yet you are showing $50k of inflow, you best believe you’re going to have to answer some questions.
This is a sad one but don’t underestimate your competition, an ex-partner, an angry business partner, or your jealous neighbor.
If you own a major plastic surgery office and your competition finds out that you just bought a $250,000 laser in cash then they might decide to report you. Will the IRS look into it? They might.
Or a random IRS audit takes place or your business’s income stands out as anemic compared to what it should be making based on location, years in business and perhaps your previous filings.
Let’s Hide Some Cash From The IRS
Is it even worth it to hide cash from the IRS? ]
I would probably have to say no after all the research that I’ve done. Even if you don’t get caught, the amount of work involved in successfully hiding it is not worth the hassle – at least not for a doctor.
I get cash payments from several online financial institutions with all of my online work. When I say cash, it’s any payment which isn’t reported on a specific gov’t form – PayPal or money transfers etc.
My Online Income
I make money on JustAnswer, on BlogMutt and now HealthTap. Neither of them reports this income to the IRS because it doesn’t meet the $20k threshold reporting requirement. It’s essentially untraceable cash.
You best believe that the congress is pursuing to change the current reporting environment. In a few years, most online companies will be forced to report any payment sent and received. And if they aren’t forced, the financial institution that’s doing the transacting will have to do so.
So yea, I could hide maybe $10k here and $15k there.
But why? I can already legally hide up to $53k of my income by stashing it in a retirement account.
If it’s $1-2k that you’re gonna hide then it’s probably not worth the IRS’s time nor yours to go through the fuckfest of trying to hide that money.
What happens to all the cash that’s hidden?
It’s spent on luxury. Boats and cars and plastic surgery. That’s where most of the money goes. It’s not like you can buy securities with it. Real estate? Unlikely. Starting a business? Maybe, but not if you have to buy equipment for it.
A Clinic With Cash Payments
Let’s say you have a clinic with 40% of patients paying you in cash.
What could you do with the cash? If your gross income is $1 million, $400k would be cash. You wouldn’t be able to hide it all, otherwise, you’d raise eyebrows.
So if you hid $200k and reported the rest, what could you do with that $200k?
You can’t buy real estate because that would be discoverable in an audit. Even if you never get audited, you’d have to look over your shoulder making you feel like a criminal. All that for a shitty $200k building?
You can’t buy cars because the IRS can look at the cars registered under your name.
You can’t buy the car for someone else either because the tax for the car would still be paid by you. Agaion, discoverable.
You could pay a plastic surgeon to get rid of that saggy skin. But if you’re going to waste the money on luxuries then what’s the point of risking your business or an audit?
You could put it in a safe or pay for coffee, food, gasoline, vacations, home renovation, appliances and other in-person purchases.
You can’t invest it in publicly traded securities. You could maybe invest it in someone’s business but they likely wouldn’t take it because without reporting it, it would mess up their bookkeeping.
Essentially, it seems to me that you could siphon cash off the top of any business in order to pay for luxury items, but I don’t think you could do much else with it unless you have the kind of business that deals in only cash which is a rare business to begin with.
Report It And Invest It
It seems to make more sense to report the cash income, pay taxes on it and invest it. Sure, you’ll pay more tax on it than the investment will return in the first couple of year.
Assuming you pay 30% in taxes and get an annual return of 5%, within 7 years you will make up that 30%. It might seem long but unless you are planning on living off your investments in the next 7 years, you likely will profit well past that 30%.
The Peace of Mind
If you’ve ever done anything wrong in your life that you were fairly sure you could get away with then you certainly felt the thrill of it. You undoubtedly also recall that feeling of always having to worry about any potential consequences.
This tends to make us be more conservative. Sure, we may have stashed $100k in cash away and hid it from the IRS. What’s the point if our next moves are all going to be passive or timid moves? That’ll make you lose much more in the future than the shitty little $100k you gained.