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IRS Audits Tax Procedure Tax Returns

Cash Payments Deposited by Salesman & the Form 8300

Cash-based businesses pose a number of problems for the IRS. They may also be involved in tax fraud. The Form 8300 allows the IRS to track cash payments for this very purpose. Chief Counsel Advice Memorandum 200707001 provides an example involving cash payments deposited by a salesman for a car dealership.

Facts & Procedural History

This Advice Memorandum addresses whether payments to the automobile dealer’s bank account by an independent contractor salesman that exceed $10,000 must be reported on Form 8300. The facts in the Advice Memorandum propose that the independent contractor salesman’s deposit consisted of $6,000 of cash and $4,500 via a cashier’s check.

The Form 8300 for Cash Payments

Form 8300 is the Form designated by the IRS for business owners to report the receipt of cash payments in excess of $10,000. This form makes it possible for the IRS to track substantial cash payments made to cash-based businesses.

It is hoped that by being able to track these payments, the IRS will be able to conduct income tax audits to ensure that the payments are reported to the IRS by the taxpayer and that the taxpayer ends up paying tax on the income.

This Advice Memorandum opines that an automobile dealer does not have to report amounts deposited by an independent contractor salesman to the automobile dealer’s bank account, because the governing tax law provision only applies to cash that is received “directly.” Thus, deposits to the automobile dealer’s bank account are not deemed to be received “directly” and, therefore, they are not required to be reported on Form 8300.

But What About the Bank?

Under this ruling, it appears that the salesman could deposit any amount into the automobile dealership’s bank account and the automobile dealership will not have to report its receipt on Form 8300. That leaves open two questions: (1) does the bank have to report the deposit and (2) does the independent contractor have to report the deposit? The Advice Memorandum addresses the first question, but not the second.

The Advice Memorandum did not have to address the bank. The facts posed in the memo did not include a cash payment in excess of $10,000 (Under the facts, there was only a $6,000 cash payment and a $4,500 cashier’s check payment – which does not qualify as “currency”).

What about the Salesman?

What the Advice Memorandum does not address is whether the independent contractor salesman must report the amounts he received from the person who purchased the vehicle. The answer seems to be “probably not,” because the monies did not belong to the salesman.

The question would be a bit trickier if (1) the cash received exceeded $10,000 and(2)(a) if the independent contractor salesman were really an employee and not an independent contractor and, if so, (b) if the salesman removed enough of the $10,000 cash payment as a commission to himself to reduce the payment below the $10,000 threshold.

In the first hypothetical it appears that the independent contractor may not have to report the payment, as he would merely be a conduit through which the monies pass to the automobile dealer’s bank account. In other words, state law and/or the business contractual arrangement may not afford him sufficient rights in those payments such that the independent contractor “received” the proceeds.

With the second part of the hypothetical it appears that payment to the employee would in fact be “received” by the automobile dealership, which would require the automobile dealership to report the cash receipt.

On the other hand, the answer is much less clear if the employee salesman has the ability to remove his commission prior to turning the proceeds over to the automobile dealership, assuming that the commission were large enough to reduce the cash payment below the $10,000 threshold. This would probably require the business contract between the dealership and the customer to set out what part of any cash payment is going to the dealership and what part is going to the salesman (even then, the IRS would argue that the employee salesman was also really a partner in the automobile dealership, making such payments be deemed received by the automobile dealership).

The Automobile Sales Industry

There is little doubt that automobile dealerships are particularly problematic for the IRS, especially since the number of used car sales is substantial and the money limits associated with most used car sales probably fall just above or under the $10,000 threshold.

Automobile dealerships are also a problem for the IRS as they are in the position to aggressively structure their financial affairs to take full advantage of these opportunities (one only has to think of the third party financing and other loans to start thinking of the possibilities — such as tax refund loans).

In an era of increased IRS enforcement, I bet we start to see an increasing number of IRS challenges to how automobile dealerships structure their financial affairs. Automobile dealerships should have an experienced tax attorney review their financial arrangements to help ensure that they are compliant with our tax laws.