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Cash Businesses Must Maintain Records

By admin of MillarLaw A Professional Corporation On Thursday, April 16, 2015

A recent Tax Court case (Kunkle v. C.I.R.) reiterates the need for cash businesses to maintain proper books and records.

“Section 6662 imposes a 20% penalty upon the portion of any underpayment attributable to (among other things) negligence or disregard of rules or Regulations.

The term “negligence” includes any failure to make a reasonable attempt to comply with the tax laws, and “disregard” includes any careless, reckless, or intentional disregard. Sec. 6662(c). Negligence also includes any failure to keep adequate books and records or to substantiate items properly. Sec.1.6662-3(b)(1),Income Tax Regs.; see Olive v. Commissioner, 139 T.C. 19, 43 (2012).”

Some taxpayers may claim that record keeping is too burdensome or that they have Fifth Amendment concerns about possibly providing governmental agencies with data which could be used against them. Such businesses and business owners include bars and restaurants, convenience stores , marijuana dispensaries and all other businesses that receive cash payments from customers as a significant part of their revenue. However, as can be seen from the above quote, there are penalties, both civil and criminal that can be imposed for failure to maintain accurate books and records. The cited civil penalty is just the beginning, for the potential for a 75% civil Fraud penalty exists as well as prosecution exist. There are opportunities to minimize penalty exposure based upon reasonable cause.

“Section 6664(c)(1) provides an exception to the imposition of the accuracy-related penalty if the taxpayer establishes that there was reasonable cause for, and that he acted in good faith with respect to, the underpayment. The decision as to whether the taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs. Circumstances that may signal reasonable cause and good faith “include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer.”

We at MillarLaw are experienced at helping taxpayers who have otherwise failed to adequately document their income and expenses, with audit responses and voluntary disclosures (both domestic and offshore). We can work with clients to establish “reasonable cause” defense where appropriate. Don’t let misinformation guide you to a wrong decision.

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