Most businesses accept all types of payments from their customers or clients: this includes credit card transactions, checks, bank transfers, and even cash. After all, they are in the business of generating revenue, and one form is as good as another. Granted, in these electronic times, cash transactions are few and far between; it is estimated that over 95% of all financial transactions occur without the physical exchange of cash. And understanding cash is the first step to understanding IRS Form 8300.
When Cash Is King
It may seem like there shouldn’t be any instances to carry or use cash in our modern society, but cash is still king wherever it goes. In fact, some businesses opt for cash transactions instead of accepting paper checks and plastic cards. One prime example of a cash-only business is the newly-emerging cannabis industry. Thanks to conflicting federal and state laws concerning marijuana, many cannabis stores operating in the 33 states where it is legal (recreational and/or medical) only accept cash transactions because they have difficulty finding credit card companies willing to accept them as merchants.
The main difference between cash and other transactions is record keeping. Any transaction that goes through a bank (credit card, wire transfers, checks, money orders, etc.) is automatically recorded with pertinent information, such as date of transaction, name and TIN of payer, name of payee, and amount of funds. These records can be retrieved and examined by the IRS, when necessary.
But cash transactions are a very different kettle of fish when it comes to record keeping. Financial institutions are kept out of the loop when a cash transaction occurs, leaving no records to access later. While tracking where every dollar goes is both impractical and unnecessary, there is a point when the IRS wants to know about large money transactions.
Meet IRS Form 8300
Like everything else, the IRS has a form for that: specifically IRS Form 8300 (Report of Cash Payments Over $10,000 Received in a Trade or Business). And the name of the form tells us at what amount the IRS wants to know about cash transactions: more than $10,000. This law only applies to trades and businesses; an individual may pay any amount of cash to another individual without reporting it to the IRS.
This form has proven valuable to law enforcement agencies investigating money laundering attempts since the information provided on the form reveals sufficient information to assist authorities investigating cases of drug dealing, terrorist financing, tax evasion, and any other criminal activity where large sums of cash are involved.
It is not only when sales of services and goods occur that IRS Form 8300 is filed. Other cash transactions that must be reported include:
- Lending or paying back all or part of a loan (either a new or existing loan)
- Expense reimbursements
- Rental of property, either real or personal
- Sale of property, either real or intangible
- Exchanging cash for cash (i.e., dollars to Euros)
- Buying negotiable instruments (examples include bills of exchange, certificates of deposit, checks, drafts, and promissory notes)
- Contributions to escrow accounts or custodial trusts
When You Must File IRS Form 8300
The IRS will require you to file IRS Form 8300 if you meet all five of the following criteria:
- The cash transaction involved is over $10,000,
- Either a lump-sum payment or installment payments over the past 12 months (or the next 12 months) exceeds $10,000,
- The business or trades receive the cash as a business transaction regularly performed,
- The same buyer (or their agent) provides the cash, and
- The cash is received by the business in one transaction or a group of related transactions
Here are three situations of money transactions exceeding $10,000 with an explanation of whether IRS Form 8300 would need to be filed or not:
- No reporting required – you sell you car for $12,000 and the buyer paid you in cash; because you are not a car dealer, but an individual selling personal property, it is not necessary to file IRS Form 8300
- Reporting required – you own an art gallery, and a client paid $15,000 cash for a work by an upcoming new artist; as a business owner performing a regular business transaction, you must file IRS Form 8300
- Reporting required – you work as an agent for a loan collection agency and get a borrower to pay $11,000 in cash, which you deliver to the agency; as an agent, you are required to complete IRS Form 8300 providing the borrower’s information
What Cash Is
Normally, cash is exactly as described: currency of the United States and other nations. Circumstances under which bank drafts, cashier’s checks, money orders, or travelers checks more than $10,000 in value are considered as cash are either:
- When the business is aware that the instrument is used as a way to avoid filing IRS Form 8300, or
- It is considered a designated reporting transaction
A designated reporting transaction refers to the retail sale of certain items that hold an intrinsic value exceeding $10,000 and which could easily be converted back into cash equivalent to the original cost. There are three categories which qualify as designated reporting transactions when exceeding $10,000 in value:
- Tangible property, such as boats or automobiles, but not including land or buildings
- Valuables like antiques, artwork, collectibles (coins, stamps, etc.), gems, metal, and rugs
- Travel or entertainment, counting all items in one trip or event as one transaction
The following are two examples to explain when reporting is necessary and when it isn’t required:
- No reporting required – you buy a used car from a local dealer for $14,000, paying with a cashier’s check. Filing IRS Form 8300 isn’t required even though the face value is over $10,000 (and will be explained further in the next section)
- Reporting required – your neighbor is a travel agent, so you put together an event for your family involving flights, hotels, and tickets; you gather the money from everyone else and give your neighbor two money orders totally $11,000. Your neighbor will file IRS Form 8300, as this is a designated reporting transaction (travel and entertainment over $10,000)
What Cash Is Not
In the above section, the first example showed an automobile purchase using a cashier’s check for $14,000 which was exempt from filing. This is because whenever you purchase monetary instruments (bank drafts, cashier’s checks, money orders, or travelers checks) exceeding $10,000 in value and use cash to buy the instrument, the financial institution performing the transaction will file a FinCEN Currency Transaction Report (CTR). Because of this filing, the transaction is considered satisfactorily reported.
Therefore, what is not cash (even when drawn for amounts above $10,000) are personal checks and standard monetary instruments (bank drafts, cashier’s checks, money orders, or travelers checks) acquired from a financial institution.
The Tip of the IRS Form 8300 Iceberg
There are many facets and nuances involved in determining when to report cash, or cash equivalent, transactions to the IRS. The above information merely scratches the surface of an important, yet often misunderstood, law that can incur hefty fines and penalties as high as $1.5 million per year if not properly reported.
When you operate a business that could involve cash transactions valued above $10,000, you need to know when and how to report such incidents. In that case, as in any other tax situation, you need Civic Tax Relief by your side. Our expertise and services cover the four essential elements of tax law: consultation, preparation, resolution, and settlement. We will resolve any current tax concerns and help you avoid future tax problems.