Cash Business Audit Risk

[hcjontax]

If I have a small business which has cash revenues of $40,000/year, how does the IRS verify/validate that I am reporting an accurate figure?

[VolvoGirl]

If they have questions they will contact you.  You need to show proof.  You need to keep good records like bank statements, invoices & receipts.  Do you get cash or checks?  Checks should be deposited to a business account.  I even deposit the cash.  Are you using a program like QuickBooks or Quicken for your business?    

[hcjontax]

I dont use any software, and the only record would be the cash deposits into the business checking account. There are no checks. Would that be good enough for the IRS if they asked, or would they say that they need more documentation as someone could easily deposit only small amounts of cash.

[SusanY1]

You would need to keep additional records to indicate what the payments are for (such as invoices, a log book, or even notes on a calendar will do.)  The notes need to reference the service rendered or good provided, the date, and to whom the services/goods were provided.  The amount received for the transaction should be listed out as well.

If your business has expenses, similar records of those should also be kept.  What were the expenses for, and when?  What was the business purpose of the expenses (particularly if it's not clear such as miles driven, meals, or other expenses that could be either personal or business such as travel.) 

Good records are key - the burden of proof is on you as the taxpayer, if you are questioned.