Is a Cash-Only Small Business Asking for Trouble?

Date: April 04, 2016

For 40 years, Boston-area
restaurant Nick’s Famous Roast Beef has drawn legions of hungry fans, including
one Yelp reviewer who declared, “There was a time
when I could say that most of the cells in my body were built from Nick’s Super
Beef specials with extra mayo and cheese.” But recently, Nick’s—which accepts
only cash payments—landed in the spotlight for a different reason: The owners
were charged with tax fraud.

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For a small business owner, dealing in
cash has its advantages: no credit card transaction fees and no customers who
won’t pay up. But are the benefits worth the potential pitfalls? We talked with
Bradford Cohen, a criminal defense
attorney in Fort Lauderdale, Florida, who has handled numerous tax-related
federal cases involving cash-only small businesses. Here, he shares what small
business owners need to know about dealing in cash.

Know Uncle Sam will be watching.

“Let’s start with the fact that the government hates
cash businesses, cash transactions and cash transporting,” Cohen says. “That
doesn’t mean that all cash businesses will get audited, but they raise
suspicion.” Even outside of business operations, a small business owner can
attract attention and raise red flags, Cohen says. “I had a case that started
strictly because my client (a cash-only small business owner) drove a Rolls-Royce
and was 30 years old,” he says. “An IRS agent saw him at a gas station, ran his
plates and pulled his tax returns.”

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Help: Free E-Book

Beware of big transactions.

Every time a small business owner
withdraws or deposits $10,000 or more, the bank is required to notify the
government. If a small business owner regularly withdraws or deposits less than
$10,000 in cash, Cohen says he or she could be investigated for money
structuring—attempting to evade the $10,000 reporting requirement.

Recently, Cohen represented a business owner
who bought used cellphones in bulk, withdrawing $5,000 to $8,000 in cash each
day to complete the transactions. “There was no claim of any wrongdoing aside
from that they felt he was structuring his withdrawals to avoid the bank
requirements to report the transaction,” Cohen says. His client was charged by
federal authorities and received a 24-month prison sentence.

Document
everything.

According to Cohen, it’s essential that cash-only
small businesses keep impeccable records on deposits, purchases and
point-of-sale transactions. “The more you have demonstrating why you made what
you made and what you deposited, the better,” he says. When Cohen was representing
a bar that was charged with not paying enough liquor tax, he attacked the claim
with proof that the bar’s promotions (including 25-cent beer nights) accounted
for the amount of liquor the business was purchasing compared to its sales, and
even had investigators measure drink pours to show that bartenders often
overpoured. The documentation Cohen provided convinced the government to
drop the case.     

Call
in the pros.

The government automatically
is suspicious of cash-only businesses, so you have to go above and beyond to
make sure you adhere to any and all regulations regarding deposits, withdrawals
and paying the correct amount of taxes,” Cohen says. He recommends that small
business owners hire an accountant and a lawyer—a move that will also help if
you’re investigated or audited.

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