When Is Cash Business Criminal?

Pop quiz: Which of the following business transactions could involve criminal behavior?

A. Your restaurant customer pays the tab in cash and leaves a cash tip on the table.

B. The next door neighbor gives your child a $10 bill to shovel snow.

C. You clean a friend’s elderly mother’s home every other week and receive a $100 bill for each cleaning.

D. None of the above.

E. All of the above.

F. It depends.

Keep reading to see the quiz answer below.

According to the “Reporting Miscellaneous Income” webpage of the IRS,

“While most people are aware they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don’t realize that they must also report most other income, such as:

• cash earned from side jobs,

• barter exchanges of goods or services,

• awards, prizes, contest winnings and

• gambling proceeds.”

The IRS webpage explains income reporting requirements further:

“Taxpayers must report all income from any source and any country unless it is explicitly exempt under the U.S. tax code. There may be taxable income from certain transactions even if no money changes hands.”

“Generally, the IRS considers all income received in the form of money, property or services to be taxable income unless the law specifically provides an exemption. This document discusses a few types of reportable income. Information on how to report other types of income can be found in Publication 525, Taxable and Nontaxable Income.”

Generally speaking, everyone must file an income tax return and report cash receipts if they still have taxable income after applying there applicable exemptions, credits, and tax deductions. IRS Publication 531 explains tip reporting requirements for restaurant employees. IRS Publication 929 offers practical tax return filing requirement guidance for children and young adults that are claimed as other taxpayers’ dependents (as of this writing, the 2015 publication is most recent). IRS Publication 554 provides a similarly simple guideline to determine when most taxpayers must file tax returns (as of this writing, the 2015 publication is most recent).

The answer to the quiz at the beginning of this article is, “F. It depends.” If any of the quiz’s first 3 fact patterns describes you, it is important to get the answer right. If you fail to account cash receipts as taxable income when you are filing your income tax return, you are guilty of a federal misdemeanor that is punishable by up to 1 year in prison and up to a $100,000 fine. If you deliberately plan to conduct business in cash for the purpose of evading taxation (Al Capone’s criminal downfall), you are guilty of a federal felony and punishable by imprisonment for up to 5 years and a fine of up to $250,000.

A person described in quiz fact pattern C is the most likely person to be caught in tax evasion for not reporting cash payments because the elderly client may eventually require Medicaid.

The 2016 average annual cost of nursing home care in Indiana is $72,816, so most nursing home residents eventually need Medicaid assistance to pay that cost. Medicaid requires people to justify cash expenditures or face eligibility disqualification. The Medicaid system is increasingly integrating with other government data systems and Medicaid caseworkers are constantly refining their financial inquiries. Medicaid will inevitably force applicants to “squeal” on their cash basis service providers to avoid Medicaid benefits disqualification. Then, when the Medicaid system and the IRS data collection system connect, guess what will happen to the nonreporting housecleaner in fact pattern C?

Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and Jeff is a Fellow of the American College of Trust and Estate Counsel, the American Bar Foundation, and the Indiana Bar Foundation. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator and was the 2014-15 President of the Indiana State Bar Association.

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