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No matter your small business, you will sometimes receive cash in payment for goods and services. It does not happen as frequently as it did in the past, but it still happens.
It is tempting to pocket the cash. When you do this, however, you are stealing from your business.
Every business runs on some sort of accounting system. It can be simple and informal or it can be elaborate and formal.
The IRS can get very creative in going after business owners who pocket cash. Keep in mind that your own records can point to discrepancies that will give you away.
Example: Robert used to run a one-man delivery service. He was very successful. He picked up groceries from the supermarket and delivered to customers who paid him in cash. He expanded to deliver auto parts to repair shops, restaurant meals to shut-ins, and he had an arrangement with a couple of pizza shops. The payments and tips went into Robert's pocket--until the IRS caught up with him. In an audit of an auto repair shop, and alert auditor noticed the delivery arrangement. This led them to Robert.
Once the IRS gets on a trail, they do not stop. These people have careers to protect. They are building their own reputation, and if you get in the way, you are toast.
Example: June runs an upscale restaurant. She regularly sends out the white tablecloths to a laundry. This showed an IRS agent that the number of tablecloths that went to the laundry did not agree with the number of meals served. People who paid in cash were not being entered on the restaurant's books. June's tax return was adjusted by the IRS and she paid both a hefty fine and back taxes that they figured she owed.
Example: Jon runs a bakery. When the IRS came calling to do an audit, he proudly showed them his books. He thought he had everything in order. What they found was a big discrepancy between the amounts of raw materials (flour, oil, sugar) that he ordered and the amounts of baked goods sold his account books showed. The discrepancy indicated that Jon was probably pocketing cash received for baked goods.
Example: Kate is a massage therapist. An IRS audit of her operation showed that bank deposits did not agree with her appointment book records. The IRS agent accused Kate of pocketing cash, and she is still fighting with the IRS to resolve the matter.
There are many legitimate ways to get money out of a business and into your personal account. Talk with your accountant or tax professional. Whatever you do, always deposit cash received in your business bank account. Pocketing cash is asking for trouble.
Siphoning off and pocketing cash received by your business is both dangerous and counterproductive to the long term health of your small business. Better to spend your energy building the business.