investigating cash only business

Most businesses earn a modest income, even after-tax payments to the IRS. Still, there are many questions around businesses that conduct sales through a currency-only exchange. In fact, there’s often a heightened curiosity for cash-only type businesses across the United States. Namely, is it legal to accept only cash and what happens when they’re investigated? Is it simple for forensic accountants to discover monies that may not be disclosed in the books?

The short answer is, simply, yes.

Yes, it’s legal to operate cash-only businesses so long as appropriate taxes and laws are met. On the other hand, some owners of businesses that receive payment in cash, especially for a significant amount of their sales, will choose to hide some or all such sales by pocketing the cash and not entering the sales into their records. Not reporting cash income can be detrimental to your business.  Typically, a business will do this to

  1. To avoid paying more taxes
  2. Show a reduce cash flow

Forensic accountants are professionals that can investigate such occurrences. Curious to know how exactly forensic accountants proceed with investigating cash-only businesses? We’re disclosing some of the processes below.

not reporting cash income

Responsibilities of Forensic Accountants

Forensic accountants are often called on by individuals whose case is heard in court, or defense attorneys who are seeking discovery on behalf of their client, specific to their cash-only business. Whatever the source, a forensic accountant is tasked with analyzing books, records, and operations of said businesses to determine whether, or if at all, these stores or firms are conducting sales while failing to report each and every dollar.

Further, much of the investigative process differs from usual accounting activity and is, usually, more closely related to what the IRS may conduct during an audit. We can walk through the entire process of discovering and identifying lost accounts for businesses such as these. The resources outlined usually are enough to find the vast majority of assets and what most of our clients utilize our forensic accounting services for.

Not reporting cash income is a main source of concern for most individuals seeking a forensic accounting investigation. Here are some sample techniques used in investigating cash-only businesses:

Tax Returns & Financial Statements

Analyzing tax returns and financial statements is usually the first step in investigating a cash-only business, especially if conducted over a multi-year scope. Not reporting cash income will be clear from tax returns. This gives forensic accountants at least a basis for discovering key points of interest in how cash-only businesses operate. The technique used during this stage is finding any outliers, unusual activity, and/or unusual trends.

The objective generally is to find items of concern that would indicate something outside the norm of a particular business’ practice. For instance, a forensic accountant may look for spikes in growing sales and sudden drop-offs that seems to quickly recover within a few months or years. Similarly, they would look at how these businesses’ bank accounts reflect income. If there are additional monetary increases in the bank, but not reported on the accounting sheets, it could be an indication of discrepancies in how a cash-only business is keeping track of their books. Every last dollar should be reported.

forensic account cash only business

Industry Statistics

Another area of interest for forensic accountants is industry and market statistics. Part of the process in investigating cash-only businesses is understanding how these types of businesses compare with other industry leaders and the overall market. If businesses are operating within their means and lawfully, then they should be operational within a given range. A good example of this might be a business that, after total sales, is showing a significant reduction in gross profit compared with a similar business in the same industry.

Profit margins, typically, are well balanced within any given industry. For example, if most businesses that earn $1M in sales are operational at a gross profit in range of 60 to 70 percent, then they should all be within a similar range. A cash-only business in the same industry that reports, say, 30 percent gross profit could be indicative of unreported cash sales.

Inventory vs Sales Records

Cash-only businesses are often retail-type industries. Although there are still instances where businesses accept cash that may not have a physical product, those are few and far between.

For this reason, forensic accountants will typically investigate inventory records and compare them with overall sales records. Discrepancies in these trackable items can help investigative accountants discover what and how cash-only businesses have been operating. For instance, if inventory should show more sales than what is recorded (plus products available) then mathematically things can’t add up. At this point, it is the forensic accountant’s job to discover where the missing inventory is, or if it was sold without being properly recorded in financial sales records. This doesn’t always bode over well for cash-only businesses.

cash only type businesses

Employee or Payroll Records

If employees are being paid to work certain shifts with which no sales are recorded, it could indicate an under-the-table type of business. Comparatively, employees who are paid to work on any given day should accurately reflect general or average sales for projected days, weeks, or months.

Other techniques that forensic accountants use in investigating cash-only businesses is simply observation. Ask questions such as:

  • What is the number of customers visiting in a given day/week/month?
  • What is the number of deliveries in a given day/week/month?
  • What are the average sales?

Forensic accountants have also been known to interview current and previous employees to evaluate typical or average sales amounts. They may ask if there’s anything of suspicion to note.

In general, forensic accountants must perform procedures and analyses that can provide not only a clear picture of how cash-only firms conduct business, but if they’re operating outside of the law. This usually means correctly identifying if the business is not reporting cash income. Additionally, it’s usually the responsibility of forensic accountants to disclose specific numbers and accurate figures that coincide with ongoing research and investigation. They must always document what evidence was discovered.

CJA Forensic Accounting

CJA Forensic Accounting provides a full range of services for forensic accounting needs across the United States including investigating business that are not reporting cash income incorrectly or not at all. Contact us today to learn more about our services including fraud investigation, dispute services, litigation support, contract compliance testing, false claims, and forensic accounting.