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You haven't dispelled this at all. You literally can't reduce revenue on paper when your business revenue is credit card payments. The payments get reported di

by dangus 2y ago

You haven't dispelled this at all. You literally can't reduce revenue on paper when your business revenue is credit card payments. The payments get reported directly to the IRS by the card processor. You can so much more easily fudge numbers if you take in primarily cash. In both cash and credit scenarios the business owner can increase on-paper expenses to lower tax burden, but there's only so much you can do with that without doing things like spending money on unnecessary costs or risking obvious audit discrepancies. If you take cash you can just lie and know that if you ever get audited there is no paper trail apart from the one you have created for yourself. The guy running the cash bar down the street can buy half his liquor from Costco with cash that he never reports receiving, and just pretends like half the bar's sales don't exist. That person would then only report the revenue to the portion of drink sales that go to a legitimate distributor. In this scenario both the distributor and the bar's receipts all line up and look legit, so the IRS would literally have to come down to the bar and count customers to prove anything was amiss. We can call this "financial mass surveillance" to make it sound bad and scary, but what's more scary to me as an average taxpayer is businesses evading taxes so that all the things I depend on like Medicare and Social Security get underfunded. As a W2 individual, I have no way to avoid taxes in a similar way.

AnthonyMouse 2y ago
> You literally can't reduce revenue on paper when your business revenue is credit card payments. The payments get reported directly to the IRS by the card processor. The revenue isn't on the credit card. Example: You go to the mechanic to have your brake master cylinder replaced. The part is $100 so they charge you $100 for the part and the credit card company says they have $100 in revenue, which gets deducted because they paid it to the parts company. But what you've actually given them is $100 and your old master cylinder, which can be rebuilt and put into another car and is worth $50. So they've reported $100 in revenue for the part, deducted the labor it took to rebuild the old part in addition to replacing yours (which also negates their profit on the labor), and now they have no profit on the books and a $50 profit off the books in the form of a serviceable part. Example: Someone frequents a local restaurant, eats there every day, doesn't pay for it. The restaurant is making a tax loss on this, incurring deductible expenses with no reported revenue. But the person eating the food is the landlord for the restaurant owner's personal apartment and is giving a discount on the rent. > If you take cash you can just lie and know that if you ever get audited there is no paper trail apart from the one you have created for yourself. This is also a myth. When you take payment in cash, the buyer gets a receipt. All the IRS has to do is go to your establishment, make an anonymous cash purchase to get a receipt (or get one from any other buyer(s)) and then when they audit you the revenue from that transaction had better be in your records or you're caught. > all the things I depend on like Medicare and Social Security get underfunded Note that corporate income taxes don't actually fund Medicare and Social Security at all. Both programs are funded by separate taxes that apply only to wages -- and have an income cap. It's one of the dumbest things in the tax system, but as it stands there is no money going from ordinary net profit-based income taxes to either of those programs regardless of what kind of payment system is in use. > As a W2 individual, I have no way to avoid taxes in a similar way. It's not because you file a W2, it's because you're not committing tax fraud. W2 workers who commit tax fraud will e.g. have the company expense a personal laptop and then bring it home without reporting it as income. I would hazard a guess that the majority of W2 workers have at various points used company equipment for personal use without declaring the value as income, and in the more brazen instances of this it makes up the majority of their de facto compensation. But some of those people also get caught, just like some of the people who don't report payments made in cash.
- dangus 2y ago
  I'll start my rebuttal just by saying that it's not just me saying that cash businesses have a higher rate of tax fraud, it's something that's been studied: https://www.sciencedirect.com/science/article/abs/pii/S0176268017302239 https://www.sciencedirect.com/science/article/abs/pii/S01762... Your mechanic example essentially requires a very specific business scenario to execute. The landlord example is also one that requires a very specific business scenario. E.g., I run a video game studio that is spending the next 3 years working on a game, how is that landlord going to pull off that scam? Are they going to sleep in my conference room at night and deduct it from my rent? In your example the landlord eats at the restaurant every day, but they can't really barter in this way with all their tenants. The main point is that you with cash you can commit the fraud in the first place, not that you're going to necessarily survive an audit. The IRS from what I can tell audits a fraction of a percent of taxpayers every year and dedictate most of their resources to higher earners. The IRS going to your establishment requires that they dedicate resources to you in the first place. But there's a really simple mechanism for defeating this cash bar audit example: only commit tax fraud with transactions from the regulars. The IRS agent walks into the bar, is a stranger, and by default their transaction is one of the legit ones. You only run the scam with customers you recognize coming in multiple times over a span of months or years. I'll give you that Medicare and Social Security aren't paid for by business income...however, a business committing social security tax fraud with paid wages can do so much more easily using cash, so really the argument is similar – in that case it just involving checks and direct deposit instead of cash. An employee insisting on a check or direct deposit is helping ensure tax fraud doesn't happen. I imagine it's even easier to lie about hours than it is to lie about receipts, or exchange a mix of goods and money for labor. Heck, with cash, the employee doesn't even have to exist as an employee. How is the IRS going to know that you actually have two dishwashers and not one? Pay the undocumented dishwasher's salary from the cash transactions from the regulars. As a W2 employee I have no way to avoid taxes because I have no money flowing that isn't reported to the IRS. And this idea that a large amount of W2 employees are using company assets for personal use is pretty silly, most probably don't even have any assets from the company. And, no, going on Amazon on your company laptop to buy socks doesn't qualify as significant enough personal use to equate to tax fraud.

by dangus 2y ago

AnthonyMouse 2y ago

> You literally can't reduce revenue on paper when your business revenue is credit card payments. The payments get reported directly to the IRS by the card processor. The revenue isn't on the credit card. Example: You go to the mechanic to have your brake master cylinder replaced. The part is $100 so they charge you $100 for the part and the credit card company says they have $100 in revenue, which gets deducted because they paid it to the parts company. But what you've actually given them is $100 and your old master cylinder, which can be rebuilt and put into another car and is worth $50. So they've reported $100 in revenue for the part, deducted the labor it took to rebuild the old part in addition to replacing yours (which also negates their profit on the labor), and now they have no profit on the books and a $50 profit off the books in the form of a serviceable part. Example: Someone frequents a local restaurant, eats there every day, doesn't pay for it. The restaurant is making a tax loss on this, incurring deductible expenses with no reported revenue. But the person eating the food is the landlord for the restaurant owner's personal apartment and is giving a discount on the rent. > If you take cash you can just lie and know that if you ever get audited there is no paper trail apart from the one you have created for yourself. This is also a myth. When you take payment in cash, the buyer gets a receipt. All the IRS has to do is go to your establishment, make an anonymous cash purchase to get a receipt (or get one from any other buyer(s)) and then when they audit you the revenue from that transaction had better be in your records or you're caught. > all the things I depend on like Medicare and Social Security get underfunded Note that corporate income taxes don't actually fund Medicare and Social Security at all. Both programs are funded by separate taxes that apply only to wages -- and have an income cap. It's one of the dumbest things in the tax system, but as it stands there is no money going from ordinary net profit-based income taxes to either of those programs regardless of what kind of payment system is in use. > As a W2 individual, I have no way to avoid taxes in a similar way. It's not because you file a W2, it's because you're not committing tax fraud. W2 workers who commit tax fraud will e.g. have the company expense a personal laptop and then bring it home without reporting it as income. I would hazard a guess that the majority of W2 workers have at various points used company equipment for personal use without declaring the value as income, and in the more brazen instances of this it makes up the majority of their de facto compensation. But some of those people also get caught, just like some of the people who don't report payments made in cash.

dangus 2y ago
I'll start my rebuttal just by saying that it's not just me saying that cash businesses have a higher rate of tax fraud, it's something that's been studied: https://www.sciencedirect.com/science/article/abs/pii/S0176268017302239 https://www.sciencedirect.com/science/article/abs/pii/S01762... Your mechanic example essentially requires a very specific business scenario to execute. The landlord example is also one that requires a very specific business scenario. E.g., I run a video game studio that is spending the next 3 years working on a game, how is that landlord going to pull off that scam? Are they going to sleep in my conference room at night and deduct it from my rent? In your example the landlord eats at the restaurant every day, but they can't really barter in this way with all their tenants. The main point is that you with cash you can commit the fraud in the first place, not that you're going to necessarily survive an audit. The IRS from what I can tell audits a fraction of a percent of taxpayers every year and dedictate most of their resources to higher earners. The IRS going to your establishment requires that they dedicate resources to you in the first place. But there's a really simple mechanism for defeating this cash bar audit example: only commit tax fraud with transactions from the regulars. The IRS agent walks into the bar, is a stranger, and by default their transaction is one of the legit ones. You only run the scam with customers you recognize coming in multiple times over a span of months or years. I'll give you that Medicare and Social Security aren't paid for by business income...however, a business committing social security tax fraud with paid wages can do so much more easily using cash, so really the argument is similar – in that case it just involving checks and direct deposit instead of cash. An employee insisting on a check or direct deposit is helping ensure tax fraud doesn't happen. I imagine it's even easier to lie about hours than it is to lie about receipts, or exchange a mix of goods and money for labor. Heck, with cash, the employee doesn't even have to exist as an employee. How is the IRS going to know that you actually have two dishwashers and not one? Pay the undocumented dishwasher's salary from the cash transactions from the regulars. As a W2 employee I have no way to avoid taxes because I have no money flowing that isn't reported to the IRS. And this idea that a large amount of W2 employees are using company assets for personal use is pretty silly, most probably don't even have any assets from the company. And, no, going on Amazon on your company laptop to buy socks doesn't qualify as significant enough personal use to equate to tax fraud.