Cash-intensive businesses are at a greater likelihood to be audited for the primary reason that cash does not lend itself to third-party reporting. The IRS Form 8300, which documents such transactions greater than $10,000 is the government’s attempt to combat that. That still leaves other smaller exchanges less reportable, but by no means invisible.
With the exception of cannabis-related businesses that are, for a variety of reasons, locked out of financial institutions and are unbanked, most businesses will not want to keep physical cash, at least large quantities of it, for a prolonged period of time. Invariably, the deposit of those funds into a financial institution will likely create some kind of paper trail.
That paper trail might not be complete, and if that becomes an issue, in an examination, there would be a variety of tools that the IRS would have, or any taxing agency, for that matter. Analyzing things for cash is not just a federal income-tax matter. It has implications on employment taxes, and even at that state level, employment sales taxes.
Even at times where a business fails to report their correct amount of cash sales, indirect methods of proof exist for the IRS and other tax regulators to review. These include examining reviewing additional types of records, for example, we’ve seen matters before where tax invoices which note “discount for cash payments,” but miraculously the books and records show no receipt of cash. Similarly, on a retail-type business, sales and use taxes, 100% of their gross receipts are either in checks or credit cards, and the anecdotal response is, “You must have received something in cash,” and that then begins the speculation and the opportunity to look into other areas.