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IRS: Does cashing personal checks at checkwriter's bank show up in an audit?
January 17, 2006 9:18 PM   Subscribe

IRSAuditFilter: If one were to, sayy, cash personal checks at the checkwriter's bank, would the IRS know?
posted by anonymoose to Work & Money (17 answers total) 3 users marked this as a favorite
 
You're not talking about wages, right? Just a personal check?

My understanding is that if the check is a gift of up to $10,000, it's not taxed. Above $10,000, it's taxed, but it's the giver that has to pay the tax, not the recipient.

If you're being paid by your job with personal checks, though, the IRS will definitely know, if you don't report it if your employer is filing the forms they're supposed to fill out.

Regardless of whether or not that's happening, though, you're supposed to properly report your income and I imagine if they did find out you'd be penalized. People get busted for that fairly regularly.

(Not an attorney or an accountant. And this is not TaxEvasionFilter.)
posted by BackwardsCity at 9:25 PM on January 17, 2006


Maybe I'm not clear on what exactly you're asking though. What is your situation, and what exactly are you afraid the IRS might find out?
posted by BackwardsCity at 9:26 PM on January 17, 2006


Trying to settle a debate with a friend; said friend teaches private music lessons and gets personal checks. She thinks that cashing some of these checks at the checkwriter's banks effectively makes it so that she was paid in cash. I figure there must be some way the IRC would prevent this, but can't come up with any concrete ways it could be tracked.
posted by anonymoose at 9:32 PM on January 17, 2006


er..IRS, not IRC
posted by anonymoose at 9:36 PM on January 17, 2006


She thinks that cashing some of these checks at the checkwriter's banks effectively makes it so that she was paid in cash.

AFAIK, as long as each transaction is below a threshold (think it's $10,000), she's free and clear -- it's as good and as untraceable as cash. However, as mentioned above, the payer must technically pay some kind of a payroll tax, and the payee must pay income tax. But there's no real way to track it, and the IRS will not notice this unless your friend a) has no other visible means of support and b) buys big-ticket items, like cars, boats and houses.
posted by frogan at 9:40 PM on January 17, 2006


Banks are required by a recent (post 9/11) law to report cash transactions in excess of $10,000 to the IRS. However, I've read that some banks voluntarily report transactions above lower thresholds — I've got no idea how common this is or how much money needs to be involved, or whether the IRS pays any attention to these reports.
posted by IshmaelGraves at 9:41 PM on January 17, 2006


If you are paying someone to give you private music lessons, you most likely are treating that person as an independent contractor. You do not pay payroll taxes for them. You pay payroll taxes for employees, not independent contractors. You simply pay them in cash (or cash equivalent) for their services. That does not, however, relieve them of the responsibility to report this as income and pay the appropriate taxes on that income, but that's more of an honor system thing. For a few bucks here or there, the IRS isn't going to bother going after it. And cashing a check at the payor's bank for a small amount of money will not be reported to anyone. (IANAA, but I am an accounting student.)
posted by AstroGuy at 9:53 PM on January 17, 2006


After she cashes the checks, does she keep the money under the mattress? Almost nothing is unrecorded these days -- it's just a matter of how much trouble it would be to find the information. There are still records of those transactions when she cashes the checks, but they'd have to be looking for them (that is, they'd already know she's being paid by these people and are just tracking down the evidence).

But if she's putting the cash into her own bank account, I would expect that if the IRS decides that it has reason to investigate her, one of the first things they would do is look at the records of her bank account and start asking "Where did you get this money you're depositing?"

So your friend may be correct in that this income will not be announced to the IRS as she is making it, but they can find out about it if they come looking for it. And there are lots of possible clues that can suggest to them that someone may have some undeclared income. (Not to mention that there customers, for one reason or another, might be reporting on their tax returns the fact that they are paying her this money for her services)

Remember that tax is the one area of law where you're guilty until proven innocent. (e.g. you have to file a tax return rather than telling the government to prove that you owe them anything) AFAIK, they could decide that those deposits are income and tell her to prove they they aren't. (IANAL, IANAA, etc.)
posted by winston at 10:02 PM on January 17, 2006


The short answer is that the IRS doesn't generally care about paltry amounts of money. I believe everything over about $5k gets reported to the treasury, and over $10k gets reported to the IRS.

Your friend's scandalous behaviour will almost certainly go unnoticed.
posted by I Love Tacos at 10:10 PM on January 17, 2006


The bank may find it suspicious that your friend is regularly cashing large checks (even if they are well under $10k) without having an account. They might report this to the IRS, but they might also report it to the FBI, who might then suspect your friend of laundering money.

Even if you have an army of lawyers, it is better to just pay the tax you owe (but not more :) and have your money free and clear.
posted by b1tr0t at 10:14 PM on January 17, 2006


Most banks have a reporting limit of $3000, not $10,000.

How much are piano lessons? What's wrong with being paid in cash?
posted by Marky at 10:50 PM on January 17, 2006


Assuming we are talking about small checks, like a few hundred dollars or less, your friend is right. Banks will not report these transactions to anyone and it would be virtually impossible for the IRS to trace them to her.

The only way she is likely to get busted is if the IRS determines that she spends more money than she reports as income. They'd have to audit her for some other reason, like a random audit and they'd have to find a significant mismatch between her lifestyle and income. Otherwise, her customers aren't going to 1099-MISC her, it won't trigger any cash transaction reporting by the bank and she is unlikely to be a household employee.

Personally, I'd rather pay the tax for the peace of mind, but that wasn't the question.
posted by Lame_username at 11:00 PM on January 17, 2006


Banks will not report these transactions to anyone and it would be virtually impossible for the IRS to trace them to her.

IANABB, while the banks may not do anything, wouldn't either the bank of the check writer, or the bank of the check casher keep either a paper or electronic copy of each check. Copies, which if the IRS were feeling petty could be used as evidence of unreported income?
posted by dial-tone at 11:15 PM on January 17, 2006


Your friend's scandalous behaviour will almost certainly go unnoticed. - I Love Tacos

Unless, as lame_username said, she (or possibly the people she's cashing cheques from) gets audited for some other reason, and they go looking. Then there could be penalties for tax evasion. If it's all for small amounts, the chance of it caming back to bite her is relatively small, but it is a risk. How likely is she to be audited for other reasons? It's my understanding that self-employed people and small business owners are more often audited than your typical employee, for instance. How much risk one is willing to take will vary from person to person.

Like lame_username, I'd rather just pay the taxes I owe and do my part to keep our country running and have peace of mind, but that's just me.
posted by raedyn at 6:16 AM on January 18, 2006


Not to mention that her customers, for one reason or another, might be reporting on their tax returns the fact that they are paying her this money for her services

Not to encourage tax evasion, but it's almost inconceivable that piano lessons could be used as a deductible expense on one's tax returns. So they are NOT going to be reported to the IRS. Nor, if a customer's taxes were audited (contrary to what raedyn said), would the IRS follow the trail of checks (payments to the butcher, baker, candlestick maker, etc.) to whoever got paid. The purpose of an IRS audit is to look for unreported or misreported income and bogus expenses, deductions, and credits. Period.

On a side note: if one reports income to the IRS, which would involve Social Security payments (which quite possibly could be HIGHER than income tax payments), that improves future Social Security entitlements. Also, having reportable income means being able to put money into a Keough account.
posted by WestCoaster at 10:50 PM on January 18, 2006


The purpose of an IRS audit is to look for unreported or misreported income and bogus expenses, deductions, and credits. Period. - WestCoaster

Yes. And if she's getting audited anyways, that IS unreported income that it's possible they may locate. Or if her customer is getting audited, and HAS tried to deduct what they pay for her services, it could come up. No one here is claiming it's a huge risk or likely to be caught, but it's not impossible. There's still a paper trail. What amount of risk the piano teacher is comfortable with is up to her to decide. It might be more or less than you or I would be okay with.
posted by raedyn at 6:20 AM on January 19, 2006


Is there any record of checks cashed at ones own bank?
There is no record on the bank statement, but can someone get info on the number and amounts of checks that have been cashed on a bank account?
posted by naicherman at 9:56 PM on April 17, 2006


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