Business Expenses Paid with Cash

Recently I have a couple business clients tell me that they paid for expenses using cash, but I'm unsure of their ability to provide a receipt. One of the clients I can see clearly withdrew money from the business and another one I questioned why I was not seeing more of a specific type of expense, to which the response was that they were paying cash for the expenses.

The one which I can see them withdraw the funds from is an upseller that goes to a lot of auctions, estate sales, etc. The cash purchases from that one are relatively small comparatively in volume and amounts, so I'm not as concerned about this one. The normal explanation of the IRS throwing out the deduction if question is fine here.

The other client is a coffee seller. They buy imported beans from Ethiopia that has a few reps here. If they are unable to get a receipt for their purchase are they out of luck for tax purposes? This is a major part of their business which has me concerned.

Thanks!

Client can get receipts at auctions.

Tell client to make a contemporaneous list of their cash purchases

For future reference; doesn't help you now.

For now, are the clients believable? Have them come up with the expense list. It is their responsibility, not yours.

I believe these guys, which is saying something because one of my previous clients comes to mind whom I would be very skeptical of. The coffee seller I wasn't seeing consistent coffee purchases which is why I asked them why I don't see it these outflows more.

I keep the books for both of these companies (both relatively newer clients). I'm trying to nip this now to prevent more in the future.

If they don't have receipts or a log how do they know how much they paid for the expense?

I guess the whole "log" thing is what I'm trying to figure out if that suffice or not. I'm not sure if they've done this or not, I have a follow-up with them.

Coffee importer with US-based reps...why can't they obtain invoices or receipts?

Do they have emails in which quantities and prices are agreed to?

If they don't have receipts or a log how do they know how much they paid for the expense?

I agree with Cathy and I would not want to deduct expenses for which there are no receipts or other documentation.

Where does the cash come from ... to pay for the coffee beans in Ethiopia? It should be paid from the biz bank account. If it wasn't, where is the cash, is it under a mattress, and where did it come from?

How can you pay cash to Ethiopia without a bank or intermediary involved? Maybe they mail a money order?

What you can do, but I do NOT recommend it until you find out where the cash comes from and how they pay the reps in Ethiopia, which is to add the cash paid for the coffee beans to the income. The cash comes from somewhere ... who paid whom and for what?

You can also let go of the client ... you may not want to know more ...

Interesting thread.

Perhaps a stupid question, but at a more broad level, what is your obligation to make sure each transaction is properly substantiated as the bookkeeper, tax preparer, etc.?

At what point is this the clients responsibility rather than your own?

I am assuming that you don’t ask for receipts on all transactions when a tax return is prepared.

Asking out of curiosity because I’ve debated not fully substantiating each expenses for lower tier clients I do bookkeeping for (although providing a framework for them to DIY it).

Interesting thread.

Perhaps a stupid question, but at a more broad level, what is your obligation to make sure each transaction is properly substantiated as the bookkeeper, tax preparer, etc.?

At what point is this the clients responsibility rather than your own?

I am assuming that you don’t ask for receipts on all transactions when a tax return is prepared.

Asking out of curiosity because I’ve debated not fully substantiating each expenses for lower tier clients I do bookkeeping for (although providing a framework for them to DIY it).

If the client provides me with a reasonable document that specifies income and expenses then I will prepare a return. If their records are a joke or they never kept any then i want something that verifies what they have.

Some examples. Wife of schedule C heating and A/C shows me her records. She paid for all utilities using the business checking account even though he worked out of the home. I reclassed these to draws and did business use of the home.

Another example. Tree trimmer used QBO, has a home office. His P and L showed such a small profit, he would get EIC. Since I have another tree trimmer client, with similar receipts and much higher profit. I started looking closer. The first guy had no payroll and no contract labor. He imported his bank statement into QBO. Well about 80% of the expenses were personal. His profit was much higher than the second guy.

Sometimes you have to go with your gut feeling. The first tree trimmer was a new client and hadn't filed a tax return for over ten years. You betcha I'm going to take a very close look.

Does your answer change if you find out the client is really buying cheap illegal labor used in his/her business?

Does your answer change if you find out the client is really buying cheap illegal labor used in his/her business?

So far I hadn't had to deal with that. The tree trimmer who had payroll did have a bunch that we sent out 1099s. The other guy wouldn't admit to doing that.

Thanks for your reply.

I understand the ability to identify potential audit risks, but am more curious on what your obligation is to make sure a client is substantiating expenses.

Other than guiding them on the risks of not having supporting documentation, what risk does that pose to you as a preparer/bookkeeper, etc?

Again, probably a stupid question.

Let's see if I can sum it up with a little common sense.

Every preparer has their own idea of where to draw the line. I call it respect for the system. If you don't respect the system, find something else to do.

Obviously you should not knowingly prepare a false return. And I think we would all agree that regardless of whether there is any realistic chance of getting in trouble, and regardless of your monetary needs, you should withdraw if your gut tells you the information is false. Willful blindness is not OK.

Thanks for your reply.

I understand the ability to identify potential audit risks, but am more curious on what your obligation is to make sure a client is substantiating expenses.

Other than guiding them on the risks of not having supporting documentation, what risk does that pose to you as a preparer/bookkeeper, etc?

Again, probably a stupid question.

This is best answered by taking an Ethics course. They advise you to use common sense when allowing a deduction. You're a professional and you have to use common sense. A client, according to the IRS, is responsible for proper records keeping and retention. If they fail to do so, then it's their responsibility to try to obtain the information. Clients of mine have set-up various accounts with their suppliers. Whether they paid with cash, check, credit card, or bartered services, the supplier can provide a listing of all purchases on that account. Cancelled checks from their bank provide some documentation.

Look at it this way. You have clients that are eligible for credits or HoH. Even though you personally know them each year you're required to certify that they are eligible for HoH and/or credits.

Let me give you an example. Gambling establishments provide Win/Loss statements for those who have an account and use the account for gambling. If they don't use their account then the report is not accurate.

This client has been with us for 30 years. We know him. We've dined with him and his ex wife at their place and ours. The man went totally nuts at two casinos last year. He had accounts at both and I believe him when he says he used his account at both places. I can't prove he didn't but 30 years of a business relationship tells me to take him at his word. Is it possible he has a bookie? Yes but he's smart enough not to tell me because he knows I'm honest.

Let's see if I can sum it up with a little common sense.

Every preparer has their own idea of where to draw the line. I call it respect for the system. If you don't respect the system, find something else to do.

Obviously you should not knowingly prepare a false return. And I think we would all agree that regardless of whether there is any realistic chance of getting in trouble, and regardless of your monetary needs, you should withdraw if your gut tells you the information is false. Willful blindness is not OK.

Yes, 100% agreed regarding false information.

Was curious on level of extent you’d go to if a client had valid biz expenses, but you questioned whether they were properly substantiated.

The client is signing the return under penalties of perjury. So long as it seems reasonable and doesn't get out of hand or violate some rule, I'd discuss, prepare as directed, and advise re T accounts (comparing sources and uses of cash.)