Cash: The ‘Tax-Free’ Myth and the IRS Reality Check

Ah, cash—the preferred tender of childhood lemonade stands, weekend garage sales, and, let’s be frank, less-than-reputable transactions. It’s tempting to view cash as the ultimate “off-the-books” resource, magically exempt from the scrutinizing eye of the Internal Revenue Service (IRS). This notion, however appealing, is categorically incorrect. Let’s be clear: cash is income, and neglecting to report it could make you the protagonist in a very unfortunate financial drama, devoid of any comic relief.

The Language of Money Speaks Volumes to the IRS

When it comes to defining “income,” the IRS is unequivocal. According to Internal Revenue Code (IRC) Section 61, income encompasses money, property, and services. So, that newly-earned $20 bill from your dog-sitting gig? It’s not merely pocket change; it’s reportable income. It is worth noting that in 1955 in (Commissioner v. Glenshaw Glass Co.) the Supreme Court ruled that income includes “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” In simpler terms, if you gain wealth and have control over it, it’s taxable income. While this case was not about the method of payment received, it was about receiving funds that were, in fact found by the court to be income. The method that you receive the payment whether it be cash, check, credit card, PayPal, or Venmo doesn’t change the fact that it is income. 

 The Myth of Cash: A Mirage of Immateriality

The common misconception that cash is inconspicuous because it lacks a digital or paper trail is perilously deceptive. Let’s get rid of the idea that cash is invisible to the IRS before they correct you themselves, likely in a way that you won’t enjoy. 

Cash Derived From Illegal Activities Is Still Income

In 1961, in the landmark case of James v. United States, the Supreme Court answered a key question: Does embezzled money count as income? The answer is a resounding yes. Illegally acquired money, it turns out, is not exempt from taxation. One might even describe it as an ironic twist of fate: engage in unlawful activity and find yourself subject to lawful taxes. Remember, Al Capone was convicted of tax evasion and reportedly boasted, “They can’t collect legal taxes from illegal money.” He was wrong and ended up in prison.

The Risks of Non-Disclosure: An Unfortunate Drama

Not reporting cash income (or any income received) is risky and can lead to penalties, back taxes, and even criminal charges for tax evasion. This is governed by another unyielding statute: IRC Section 7201. The repercussions can include both significant fines and, in certain cases, imprisonment. A plot twist best avoided, wouldn’t you agree?

Your Guide: The Tax Professional

Within the complex world of tax laws, a qualified tax professional is your go-to guide. Think of them as your tax wizard, keeping you out of trouble. It’s always better to ask them questions before you make a move. Trust us, it’s easier to get it right the first time than to fix a mistake later.

The Moral of the Story

To sum it up: cash might feel like “free money,” but when it comes to taxes, it’s anything but. Ignoring it won’t lead to a happy ending; instead, you could find yourself in a costly mess. The smart move? Talk to a tax expert to make sure you’re accurately reporting and paying what you owe.

Tax Questions Deserve More Than a Google Search or TikTok Video

In an era of information overload, it’s tempting to turn to Google or even social media platforms like TikTok for quick answers to your pressing tax questions. But when it comes to financial matters as complex and individualized as taxes, general search results and flashy 60-second videos often fall short. This article will explore why consulting with qualified professionals is the safest bet for accurate and personalized tax advice.

The Lure of Flashy TikTok Videos

TikTok videos, often produced to entertain rather than educate, can offer overly simplified, catchy tax “tips” that lack the context and depth needed for proper tax planning. Even worse, some might even present misleading or incorrect information as tax-saving hacks. Remember, these videos aim for views and engagement, not necessarily accuracy.

The Risks of Unvetted Information

Anyone can post advice online, and that includes tax guidance. While the person behind a video or tweet may mean well, there’s no way for you to gauge their expertise or the accuracy of their information. The result? You might end up following bad advice that leads to tax trouble.

One-Size-Fits-All? Not with Taxes

Taxes are intricate, and what works for one person won’t necessarily work for another. Google searches and social media platforms simply can’t account for the specific variables that affect your individual or business tax situation.

The High Cost of Getting It Wrong

If you follow incorrect advice, you risk IRS penalties, additional tax payments, and the dreaded audit—a stressful and time-consuming process that nobody wants to experience. Some of the advice I have seen equates to straight up tax evasion which is a federal crime. 

Missed Financial Benefits

You could also miss out on valuable tax credits and deductions because the online advice you received was generalized or incorrect. The end result? Paying more in taxes than you need to.

Advice You Can Trust

Unlike anonymous online sources, qualified professionals offer personalized advice based on a deep understanding of the latest tax laws, your income, your expenses, and your specific financial situation. We spend hours in continuing education to keep up with the latest changes in taxation. When we dispense advice it is backed up with citations in the tax code. 

Peace of Mind

When a qualified professional handles your taxes, you can rest easy knowing that you’re in compliance with the law and that you’re taking advantage of all the tax benefits available to you. While Google and social media platforms like TikTok can offer quick answers and flashy tips, they’re no substitute for qualified advice when it comes to something as important and individualized as your taxes. The risks of getting it wrong—from IRS penalties to missed financial benefits—are simply too high. Qualified tax professionals offer the expertise and personalized guidance that can provide both financial benefits and peace of mind. So, the next time you’re tempted to take tax advice from a TikTok video or a quick Google search, think twice and consider consulting a qualified professional instead.

At least once every month or so, a client or prospect comes to us after having formed an LLC. They are proud and ready to get all those tax savings that they heard about from friends or social media that they will get. They have visions of writing off their household expenses or automobile purchases. After all, they are now a business owner, and that means the “write-offs” will follow.

WRONG!

Usually, my first question is, “Why didn’t you call us first?” and there is usually some shrugging, or they saw on TikTok how easy it would be. If you take away nothing from this article, let it be that you should ALWAYS talk to your tax professional before making major decisions, including forming a business entity.

Now back to the part where I burst their bubble. An LLC (limited liability company) is, by default, a disregarded entity for federal tax purposes if it has a single owner or member. That means it is not recognized as an entity like a corporation is by the Internal Revenue Services. LLCs are recognized at the state level. But wait, you say – lots of people have LLCs. Indeed, they do; oftentimes, someone will form an LLC for liability protection, so you should always consult a competent attorney to form your entity. You should not do it yourself.

An LLC is versatile in the fact that you can elect to have your LLC treated as a C corporation or S corporation, or if you have more than one member, then a partnership. If your LLC has one owner only, then it defaults to a disregarded entity, in which case you will file a Schedule C just like a sole proprietorship. The same schedule c you likely filed before if you were self-employed.

Now, sometimes it can make sense to elect to be treated as a C corporation or an S corporation. For that determination, you should consult with a tax professional. Many times people will elect s corporation status because they were told it was a good idea to save money on taxes when in fact, this was a huge mistake. Not only have you increased your costs for yearly compliance, but you have also added responsibilities such as paying yourself a salary and a reasonable salary at that. With that being said, there are a multitude of tax benefits that an S corporation or C corporation can take advantage of IF and only IF it makes sense based on your circumstances.

Now to burst another bubble – None of these benefits include “writing off” (deducting) your groceries, mortgage payment, personal vehicle expenses, or that trip to Europe. If you deduct these items, you will likely find yourself in trouble with the IRS. Telling the auditor that “Well, TikTok said this was legit” will not work, and you will be subject to penalties, interest, and possibly criminal penalties.

It is much cheaper, in the long run, to get competent advice before you make a major life decision, and as always, “If it sounds too good to be true, it likely is.”

As a full-service accounting firm, a major desire of our clients is for us to help them to cut their tax bills. We certainly have the knowledge and expertise to save you as much as possible when we plan throughout the year and prepare your taxes, but there are also ways that you can reduce your tax bill on your own. In today’s blog,  The Youngblood Group, LLC provides tips on how you can lower the amount you’ll pay when April 15th rolls around. (more…)