The 2018 U.S. tax season officially began on January 29, local time.
Because many Chinese Americans in the U.S. prefer using cash, and many have cash income, special attention is required for cash income when filing taxes.
Accountants remind people to remember to open business accounts and keep records of every expense. If income is intentionally concealed, the IRS may impose a penalty of up to half of the income.
According to media reports, during tax season, accountants in the Chinese community often encounter clients with cash income. Mr. Li, an accountant, points out that most people with cash income are freelancers, many work in the consulting industry, and some restaurants also use cash. If audited by the IRS, they are usually asked the following questions, so it is best to be prepared:
First, how long have you owned this company?
Second, can you provide any documents to prove that you own this company, such as business cards, company letterhead, and a business license? Accountant Li points out that many clients are fined because they did not apply for a business license. Therefore, cash-based clients must pay sales tax, have employee statements if they have employees, and provide receipts or any newspaper advertisements, etc.
Third, who keeps the company's business records?
Fourth, do you have a separate business account? Accountant Li says that many individuals with cash income do not separate their personal accounts from their business accounts, making it difficult to distinguish between personal and company income.
Fifth, how are income and expenses recorded, and are there accounting records, invoices, or bookkeeping statements?
Sixth, does the taxpayer have any 1099-category tax filing materials? For example, many taxpayers with cash income, such as gardeners, usually do not have 1099-category tax materials. In this case, the IRS will look at whether your expenses are directly related to business activities and whether they are reasonable. Some people report very little cash income while their expenses exceed their income; such cases are considered suspicious.
Seventh, is there any other information related to the business?
Accountant Li points out that, in short, the IRS does not care whether your income is legal; it only cares whether you have paid taxes. If you have not paid taxes, you will be fined. Penalties are divided into unintentional and intentional; the penalty for intentional non-payment is 50% of the income, while for unintentional non-payment, such as filing too late, the penalty does not exceed 25%.
People with cash income will have problems if they report too little. Accountant Li says that in the U.S., a person needs at least $10,000 per year to maintain food, clothing, housing, and transportation, and a family of three needs $30,000 to balance these expenses. The IRS will look at whether your income can sustain your life. Some new immigrants have no income in the U.S. but have income and accounts overseas, which can also be explained.
New immigrants must declare cash deposits in banks
Accountant Li says that, in fact, many banks do not like the habit of people depositing cash, so they simply write you a check and ask you to deposit it at another bank, which makes it easy to be targeted.
This is also a problem encountered by many new immigrants. Among new immigrants, there are many EB-5 investment immigration clients. For example, some people looking at school district housing want to buy a house, so they open a foreign account in the U.S., return to China for vacation after opening it, and then wire $50,000 to the U.S. account each time, or wire money to a Hong Kong account and then from the Hong Kong account to the U.S. account.
He points out that if the amount of cash wired to the account is relatively large, the account manager needs to declare what the money is for and contact the account holder. However, many new immigrant account holders leave a Chinese mobile phone number and a friend's address, so they cannot be reached by mail. But the bank's account manager must declare what the money is for within 15 days. This is a bank anti-money laundering measure, but since the client has no documentation, the account has to be frozen. It is very troublesome for the client to unfreeze the account the next time they come to the U.S.
He recommends that such new immigrants should contact the account manager at the domestic bank and notify the account manager here via WeChat when wiring money into the bank to make a declaration. For example, stating that the $50,000 is for paying tuition for their child, so that the account manager knows the source of the cash, and there will be no problem with the declaration.
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