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Cash Transactions That Invite an IRS Audit:

Large figure cash transactions are red flags for tax authorities globally. They are certainly more difficult to probe and catch tax evasion than electronic funds transactions. For cash businesses and individuals alike, large cash transactions or repetitive cash payments can call for an IRS audit.

IRS aims to bridge the gap between the taxes you file and the taxes you should. You may get away with an occasional large cash transaction, but certainly not more than once.

Here are a few reasons that individuals must take care of to avoid IRS audit visits.

Dealing With Cash Too Often

You may have a good savings balance in your bank account, but remember any transaction above $10,000 will be probed. If you deposited anything above that limit, and do not file for supporting income evidence, you will still get the objection marks.

The probes with cash transactions are stricter. The IRS, banks, and other regulatory authorities are all keener to minimize large cash transactions. The obvious reason for that is cash transactions are difficult to track. Money laundering, theft, and tax evasions are all rooted in cash transactions.

Important: the IRS also keeps an eye on what it calls “structuring” the transactions. Even if you split the large cash amounts and deposit in different days, you may still not get away with it.

Dealing With Large Amounts of Foreign Currency

If you have a foreign source of income and you have reported it, then it must not bother you. But occasionally, families travel and keep foreign currencies. It may happen by chance to you that you make a few large FC conversions without reporting the income or supporting document. If you make some earning through FC, report that income source under the 1099-misc and the full income on 1040.

Cash Businesses without Supporting Documents

Many small retail businesses run on a cash basis. It is permissible to make all the transactions in cash for your business. But you must back the expenses and income records with matching cash balances. Even if you’re paying for regular expenses such as daily supplies from petty cash balance, collect receipts.

Once again the high frequency of probes with cash businesses is linked with suspicious activities. The IRS will particularly compare your business income with industry and area averages. Even if you’re filing proper tax returns but deal with the bulk of the cash, you may get a visitor from the IRS.

As a business owner, you must prepare the cash logs and supporting documents before filing the tax returns. An effective way of mitigating this risk to go through a business audit before filing the tax returns.

Dealing in Digital Currencies? Think Again

Digital currencies and Cryptos are certainly difficult to track, guess what? That’s the reason IRS is stricter to trace digital currency transactions. If you open an account with a digital currency broker and earn all of your income legally, still your chances of seeing an IRS auditor are significant. Digital currency transactions are notoriously dangerous than paper currency transactions.

Some key points to remember when dealing with cash transactions both as an individual or a business:

  • All significant cash transactions must be reported to the IRS on the 8300 form

  • Record and document all cash entries related to your business

  • Report any foreign accounts or currency held

  • Avoid at all costs dealing with large digital currency transactions

  • Include any indirect sources of income for personal and income where you get paid in cash or otherwise

  • Avoid large cash withdrawals

Even with cumulative family income or any other one-time large transaction made in cash, you must carefully report the income source first. Failing to report an income source and hiding the cash transactions are two different triggers that you show to the IRS.

Financial regulators, banks, and tax authorities all are particularly sensitive on cash transactions that come out of scope. If you make any large cash transactions, do secure yourself with backed documents and income records.


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