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Cash businesses are businesses that take the majority of their revenue through cash transactions. These businesses could be restaurants, vendors, salons, and or those that offer in-person services.
These businesses have far more chances to be audited by the IRS than other businesses because it’s far easier to avoid paying taxes through cash-only income. This can be a tricky problem because of the difficulties surrounding income verification.
So, how do you verify the income of a cash-only business? If you own or are involved in a cash-only business, being able to verify your income is incredibly important.
The estimated average annual gross tax gap between 2008 to 2010 was $458 billion. An underground economy and good old tax evasion in the formal economy are to blame for this gap. This underground economy accounts for the tax gap because of the undocumented transactions are occurring.
The IRS knows this and thus targets those who are more likely to be hiding income than others. That’s why knowing the methods and skills to help verify the income of your business is more important now than ever.
Several methods can help you verify your income relatively easily. They are:
Through these methods and skills, verifying your income can be a simple task. However, implementing these methods and skills can seem daunting or difficult if you’re unsure of how to proceed.
This guide was created with the intent of helping you understand how to verify the income of a cash-only business. Read on and we will help you to find out how to show proof of income if paid in cash.
Record-keeping skills will be a key factor when it comes to showing proof of income if paid in cash.
Try to document business transactions as often as possible. If you’re able to, a transaction should always be documented. It’s also a frequent question that the IRS will ask cash-only businesses.
Here are methods for improving your record-keeping skills:
The IRS is known to compare the income you make to your competitors to better understand the amount of money that you should have. If you’re looking for suggestions on how to improve record-keeping skills, it may be useful to look at your competition.
If they’re a cash-only business, how are they handling their transactions? What does their process look like? What are their pay intervals? How do they go about proving income? Do they offer a compensation letter?
Balance sheets are one of the three main financial statements you can show the IRS to verify your cash-only businesses’ income. The other two are income statements and cash-flow statements.
A balance sheet will essentially be a look into your financials at a specific moment in time. Things it shows include assets, liabilities, and the owner’s equity. It’s extremely valuable if you’re thinking of how to show proof of income if paid in cash.
Generally, balance sheets are used to show a business’s finances or financial position. These are typically prepared every quarter.
Because the balance sheet will reflect every transaction since your business began, it’s incredibly useful in proving the income of a cash-only business. If you’re going to do any one thing from this guide, you should ensure that a balance sheet is created.
It may not be necessary to constantly provide these, but they should be created at least quarterly. This will help the IRS determine your financial position as of at least a few months ago. This will go a long way in proving your cash-only business’s income.
If you’re looking for tools to help in the creation of a balance sheet, consider utilizing a money counter machine to make your life a little easier.
Accrual accounting is one of the two most common methods for handling accounting needs.
The other method is a cash basis. While it may seem controversial, it’s not. If you own a cash-only business you should look to use accrual accounting to strengthen your income verification.
The main difference between the two will be how income and expenses are recorded. A cash basis accounting system will record income when it’s received and expenses when they’re paid.
With accrual accounting, income and expenses are recorded the second they occur. This is regardless if cash has been exchanged or not. Having this type of accounting system will help you verify transactions, and thus your income, much more easily than through a cash basis.
This will give the IRS a clearer picture of where the money is and how it was received. In other words, it gets your back covered a lot better.
Accounting tools and software can make tracking transactions, payroll, expenses, and other aspects of accounting?.
Regardless of whether you’re a large corporation or a small business, accounting tools and software will be one of your most useful resources.
If you’re looking for software and tools to specifically help you verify the income of a cash-only business, you’ll want to check out cash-flow management applications.
These applications will be able to help you manage the flow of cash as it enters and exits your business. Being able to track cash as it moves through the different facets of a business will go a long way in verifying your income.
With a tool like this, you can prove how much money you’re receiving, where it’s going, and who’s handling it along the way. It’s one of the best ways not only to prove your income but also to verify that your money is going where you believe it is.
There are a ton of cash-flow management tools out in the world thanks to the revolution of the internet.
Here is a list of some possible options when considering cash-flow management software and tools:
Accountants are known to make a great living for themselves. There’s a simple reason for that: they’re effective at their jobs and are incredibly valuable to a business. This is especially true when it comes to verifying the income of the cash-only business.
If you’re new to all of this, hiring an accountant to review your financial records and give recommendations to verify your income can be a great move.
Accountants are commonly asked to help in these types of scenarios, it shouldn’t be anything new to them.
They’ll be able to review your financial records and show weaknesses in the documentation process and advise you on the best ways to correct these issues.
At this point, if you’re still confused about how to best verify the income of your cash-only business, consider hiring an accountant to help you out. With their experience, they’ll be able to take a deep dive into your records and help you better understand what you need to be doing.
In summary, if you own or operate a cash-only business, the chances of you being audited by the IRS are quite high.
This shouldn’t be something to worry about. Having proper documentation, accounting information, and examples isn’t a difficult thing to provide. The key is being prepared for the day it happens as it’s more than likely a reality rather than a chance.
Follow the steps in this guide to prepare yourself. If you want to be as proactive as possible, consider hiring an accountant to help guide you along the way.