6300  22 Mile Road, Suite 3

Shelby Township, MI  48317

(586) 323-1200

Red Flag for an IRS Audit

If you operate a company that deals in large amounts of cash, it's no secret that the IRS is watching you. The government knows that a significant portion of unpaid taxes can be attributed to cash-based businesses.


Operating a cash business can be a red flag for an IRS audit. Like bomb-sniffing dogs, auditors are trained to search every nook and cranny of the cash-based business world to detect cheating.


Here's one example given in an IRS training manual that shows auditors how to reconstruct the gross receipts of coin-operated laundromats. "Divide the total gallons of water consumed, as shown by the taxpayer's water bills or by correspondence with the local water company, by the number of gallons required by each wash load. Multiply this result by the rate per load to arrive at a gross income from washing machines."


Auditors use similar techniques to estimate income from clothes dryers and vending machines so the IRS has a good idea of the laundromat's income to compare with its tax return.


This is just one instance of how the tax agency examines a particular business. The IRS has numerous "audit technique guides" for various industries so auditors can learn the unique characteristics of each (See list below).


"Each cash business has unique features," an IRS training manual asserts. "By identifying the taxpayer's opportunities, the examiner is more focused on the investigation."


There's another pitfall facing cash-based companies. The law requires any business that receives more than $10,000 in cash in a single transaction, or a series of related transactions, to report the deal to the IRS. This must be done within 15 days, using an IRS form.


Your company can become an audit target if you're listed on one of these IRS forms as having spent $10,000 or if you operate a business that the IRS believes isn't properly filing the forms. Check with your tax adviser to make sure you file the proper paperwork.