Cash-based businesses can pose a challenge for the IRS, as they may be susceptible to tax fraud.
To address this issue, Section 6050I(a) requires businesses to report any cash payments exceeding $10,000. This provision enables the IRS to track substantial cash payments made to cash-based businesses, and Form 8300 is the designated form for reporting such payments.
In Chief Counsel Advice Memorandum 200707001, the IRS provided an example involving a car dealership and a salesman who worked as an independent contractor for the dealership. The memorandum offers guidance on whether the dealership had to report cash payments made by the salesman on Form 8300, and it illustrates some of the challenges that arise in enforcing Section 6050I(a) reporting requirements in the context of cash-based businesses.
Facts & Procedural History
This IRS guidance involves an automobile dealership. The dealership purchased cars through auction and resold them.
While the dealership would write the checks for the cars that were purchased, a salesman who worked for the dealership directed the purchases. The salesman worked for the dealership as an independent contractor.
The salesman would also sell the cars, receive the payments for the cars, and deposit the payments (less his commission) into the dealership bank account.
The IRS guidance provides the example of the salesman depositing $6,000 of cash and a $4,500 cashier’s check into the dealership’s bank account. The question is whether the dealership has to report the cash payment on Form 8300.
About Section 6050I
Section 6050I(a) requires that any person engaged in a trade or business who receives more than $10,000 in cash in one or more related transactions file a return with the IRS.
The word “receives” in Section 6050I(a) has been interpreted to mean actual, physical receipt. In other words, if the cash is deposited into the taxpayer’s bank account by someone else, it is not considered a reportable payment under Section 6050I.
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.
As one can surmise, the purpose of this form is to track these payments. If people report these transactions to the IRS, then, in theory, the IRS will not have to conduct as many income tax audits to ensure that the taxpayer ends up paying tax on the income.
Does the Dealer Have to File a Form 8300
This IRS guidance opines that the dealership does not have to report amounts deposited by the salesman to the dealership’s bank account. It reached this conclusion because the governing tax law provision only applies to cash that is received “directly.”
The deposits to the dealership’s bank account were not deemed to be received “directly” and, therefore, the payments were not required to be reported on Form 8300.
So, in this scenario, where the taxpayer sold a car for $10,500 and the buyer deposits the cash into the taxpayer’s bank account, the taxpayer does not need to file a Form 8300 because they did not physically receive the cash.
But What About the Salesman?
Under this ruling, it appears that the salesman could deposit any amount into the dealership’s bank account and the automobile dealership would not have to report its receipt on Form 8300.
This does not address the independent contractor and whether he has to report the deposit as the funds were not deposited into the salesman’s bank account. But what if they had first been deposited into his account?
The money did not belong to the salesman and he would, in theory, be holding the funds in trust for the dealership. It is not clear whether he would have to report the cash on Form 8300.
Automobile dealerships are particularly problematic for the IRS as they deal in large sums of cash. The pricing of used cars is also an issue. Many used cars that are sold probably fall just above or under the $10,000 threshold. Automobile dealerships can also structure their financial affairs to avoid these reporting requirements. This IRS guidance provides an example of how car dealerships might go about doing just that.