I Only Pay in Cash!
This short (but true) story shares how information moves around a certain community. The end result might surprise you.
Guy here owns a Chicago restaurant. It’s an “old school” Chicago hot dog shop. He sells big, juicy Italian beefs, polish sausages, burgers and hot dogs. Everything used to come with French fries. But now fries are extra.
The business takes credit or debit card payments. But it also takes cash. A lot of cash. How much cash? Guy doesn’t tell. But it’s a lot of cash. He always liked it that way.
He liked to pay his suppliers with cash. The employees were paid in cash, too.
Most of his cash never goes to the bank. Mostly, it is the card payments that go through the bank. He would brag about his cash on hand. He would say:
I Only Pay in Cash, IRS Tax Attorney (Naperville IL)
“You know why I only pay my people in cash? When I pay my people on payday, they don’t have to wait for checks to clear. Plus, they have to show up to get paid. I have to see them. They tell me their hours; I pay their straight rate. And we’re all good.
“But cash is cash. What they do with it is up to them. They can pay their own taxes. Not my business. Not my problem. Plus I don’t have to prove my real income to nobody. NO-BOD-DEE!! Cash is cash.”
He got audited by the Illinois Department of Revenue for sales tax. He was afraid because he had never been audited before. Surprising as it is, the owner counted his sales and paid nearly all his sales tax. Can you believe this? Guy told us that the Illinois ST-1 audit mostly went fine. Mostly.
But in Illinois, the Form ST-1 sales tax audit leads to other, additional audits. Here are some basics of what the Sales Tax Revenue Agent will confirm:
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Are all tax returns filed (business and personal)? Did you have federal tax?
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Do the other tax return numbers match the sales and sales tax amounts reported to Illinois?
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Are all Employee taxes reported and paid?
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Does there appear to be more income, cash or otherwise, than the other tax returns and bank statements show?
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Are the employees’ federal and state withholdings paid accounted for, and documented?
Other things the auditor may consider are:
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Can the employees claim unemployment compensation, if necessary?
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If questioned, will the employees tell a story that matches your story?
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Did your employees report their cash compensation on their own tax returns?
Guy was arrested by Illinois for payroll tax.
In the true case here, the auditor asked for his employees’ W2 forms. (There were none.) Guy told us that additional audits lasted for nearly a year. In the end, our restaurant owner here was not reporting his payroll tax and was underreporting his income to the IRS. He thought that he was avoiding tax. But instead, he was evading the tax.
It turns out that failure to withhold, account for, and pay over tax is a felony in Illinois.
Guy was arrested by Illinois (yes, for tax). He only stayed in jail for 5 days, but the tax, penalty, interest and jail time really hurt his business. (And this is how we met Guy.)
It is amazing how interconnected the Illinois Department of Revenue and other tax authorities are with each other. Fortunately, he was not also investigated by the IRS for the same offense.
The point here is to avoid being sloppy with cash payments, little to no “paper trail”, and filing inconsistent tax returns. Having no paper trail is not an easy way to avoid paying taxes.
Just ask our restaurant owner, our Guy.