There’s a scary question I often get asked whenever tax season rolls around:
“I received cash, and I don’t really have to report that, do I?”
Wrong. If you received any cash throughout the year, regardless of the amount, it’s considered income, and you are required to report it. Truthfully, if you tell any reputable tax preparer that you received cash, they can no longer complete your return unless you agree to report it.
And here’s the problem. If you don’t mention your cash income to your certified public accountant (CPA), they may not be able to pick up on it for you.
Although some new tools and programs allow them to perform a “reasonableness” test, they’re not looking at the ins and outs of your operation, tallying your inventory, or crunching the numbers to ensure that all your numbers reconcile. They’re simply looking at your income and expenses, via the records you provide them, and reporting them to the Internal Revenue Service (IRS).
During an audit, on the other hand, the auditor is taking a much deeper dive into your business’s financials, and they will want to see that everything lines up. You don’t want to let things escalate to that point!
4 Reasons to Report Cash Payments to the IRS
Need a reason to report cash income on this year’s tax return? Here are four!
1. The IRS Likely Already Knows About It
There’s a very good chance that what you consider “cash” may have already been reported to the IRS. This is because the person who paid you could have issued a 1099 form. Even if you didn’t receive the form, make no mistake—the IRS did!
Today, even most gig economy jobs report your income to the IRS. This means you’re on the hook for those taxes, and if you fail to report it, there could be severe repercussions—audits, penalties, or even jail time.
Even if you own an all-cash business, an auditor is highly trained and follows a detailed manual when auditing cash businesses. In order words, they know early on whether they have the full picture.
2. It’s Illegal NOT to Report It!
Simply put, failing to report any kind of income is fraud.
I was once completing a return for a pizza restaurant, and the owner assured me that he was reporting all their income. Oddly enough, they were audited.
The auditor asked them how much cheese they used for the average pizza and compared the total number of pizzas sold to the amount of cheese that was purchased. Even after accounting for spoilage, it turns out that the business should have sold twice the number of pizzas that they claimed they sold.
It didn’t take the auditor very long to figure out that the business was selling additional pizzas on the side for cash, and none of this income was being reported!
3. You Could Be Missing Out on Tax-Saving Deductions
If you’re not reporting all of your income, you’re probably not reporting all of your expenses either, which means fewer deductions and less money saved on your taxes!
I once worked with another client who had just started making a little money from his YouTube channel. He didn’t plan on reporting the cash, which would’ve been a colossal mistake.
He had invested in all kinds of equipment that he was able to take depreciation on. He had internet and other tools that he was able to claim as deductions. He even had some car mileage and travel expenses he was able to write off.
After tallying these expenses, the business showed a loss, which lowered his overall tax liability—but only because he reported the cash in the first place!
4. Take Advantage of the Earned Income Tax Credit (EITC)
The earned income tax credit is a tax break designed to help workers and families who earn low to moderate income. This isn’t a tax deduction—it’s a credit, meaning it directly reduces your tax bill.
However, to qualify for this credit, you need to show income, and the amount increases until it eventually phases out. This means that reporting your cash income could increase your earned income credit and put more money back in your pocket!