I once had a client who asked me about whether or not to deposit cash payments. They weren't doing it.
RED FLAG.
In this case, a few years before, the firm had been hit with a large and unexpected tax bill in April, and it took all the cash in the bank away. They then decided to no longer show the cash deposits on the books, thus avoiding the tax. This practice reveals to me two things. First, that the firm had not known what to expect regarding taxes because they had never been through it before. And second, they had a lousy or non-existent bookkeeper/accountant.
Regarding the current situation of not depositing the cash, there are several problems. First, this is called Tax Evasion, and you can go to jail for that, yes, even if you’re a lawyer. You know what the difference between tax evasion and tax avoidance is right? If you’re on one side of the bridge and see the IRS coming and you go to take another bridge, that’s tax avoidance. But when you see the IRS coming over the bridge, and you decide to blow up the bridge, that’s tax evasion.
Look, I’m not attempting to be judgmental here, do what you’re going to do. It’s none of my business until you ask me to help you with your business and I find that there is cash not being reported correctly. That affects how we make our decisions. Furthermore, my faith in God and his word tells me that he expects us to pay our taxes, period.
Here are some questions to ask yourself if you are currently taking some or all of the cash payments from your clients and not reporting it:
- Do you plan on selling your practice or bringing on partners, ever? If you do, the rule is, potential buyers don’t pay for money that isn’t reported and further it may cause you to lose a potential buyer if they find out you’ve been cheating on your taxes. If you plan on bringing on a partner, you’ll find it difficult to explain and account for the cash you take. Not to mention now two families have to keep the same secret. Not easy.
- Do want to build a business that is bigger than you?
- If you do, you’ll need to be sure you have accurate numbers and excellent systems. We can’t do that if you don’t report all the income.
- Is the cash you are taking resulting in you taking a higher than average market based wage?
- If so, you’re taking too much from your business and you’re choking its ability to grow. Cash is the lifeblood of any business, and you must have it to fuel your growth.
- Do you see paying taxes as a bad thing?
- I’m here to tell you that paying taxes is a sign of success, not failure. Let’s build your business so you can pay taxes and have everything that you need.
- Do you have an excellent advising team such as a bookkeeper and accountant who likes to operate in the grey, not the black areas of tax planning?
- If not, I highly advise that you get one.
By the way, for those of you who think you’re getting away with something that you’ll never get caught doing because you “don’t leave a paper trail”, you’re just kidding yourself. If you are audited, the IRS is smart enough to identify what your average client value is worth. And they are smart enough to either pull your client files or go to the courts where what you do is public knowledge and do the basic arithmetic; and bam, you’re toast.
Here’s my advice: deposit your cash, take the right tax avoidance steps to lower your taxes and set your business up for success, not failure.
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