There are many small business owners that run a cash-based business. Restaurants, Bars, Coffee Shops, Lawn Care Services, or General Contracting Services are all types of businesses that can rely heavily on cash payments. For these small business owners, cash-based transactions are a normal part of doing business. Cash offers the type of immediate financial flexibility needed to stay operational. However, with such types of payments, it may become tempting to pocket some of that income and underreport your earnings to the IRS. It can be easy to think that no one will notice, or that you can fly under the radar to avoid paying taxes. However, the consequences of not accurately reporting your income can be severe.

CONSEQUENCE #1:  THE IRS

First and foremost, tax fraud is a serious crime that can result in fines, penalties, and even jail time. The IRS has a range of tools at its disposal to catch those who are not accurately reporting their income, and they are not afraid to use them. Additionally, even if you are not caught right away, there is always the risk that you will be caught in the future. If this happens, you could face a significant tax bill, plus interest and penalties. Do you really want to be looking over your shoulder for the IRS over the life of your business?

CONSEQUENCE #2:  INACCURATE VALUATION

Beyond the legal consequence of failing to accurately report your income, there are also other drawbacks that can significantly harm your business. For example, if you are looking to bring on partners or investors, they will want to see accurate financial statements that reflect the true value of your business. If you have been hiding income, your financial statements will be inaccurate and misleading, which can make it much more difficult to attract the partners and investors that you need to grow your business. No investor worth their while will want to be a part of a business that they know is committing tax fraud.

Similarly, if you are looking to obtain a loan, a lender will need to look at your books and records as well. If you are showing a lower income on your financial statements, your loan application may be denied, or you may be forced to accept a lower loan amount than you truly need for your business. This can be a significant obstacle to growing your business, especially if you are in a competitive market.

CONSEQUENCE #3: A FAILED EXIT STRATEGY

Finally, when it is time to exit and sell your business, your financial statement will be an integral part of any due diligence process. A potential buyer will want to only pay for the reported value of the business. Therefore, when you hide income, the reported value of the business will be much lower and in turn make it nearly impossible to obtain the best possible price for your business. Moreover, it will likely cause potential buyers to walk away from the deal once they learn how you have been reporting income.

In short, failing to accurately report your income can have severe consequences for your business. Not only is it illegal, but it can harm your ability to attract partners, investors, or potential buyers. It is simply not worth the risk. Accurately reporting your income may require more effort and record-keeping, but it is a necessary part of running any successful and legally compliant business.