The allure of tax fraud seems infectious within some industries. Professionals with Enrolled Agent careers may aim to avoid tackling tax difficulties for individuals in these lines of work or embrace the challenging opportunities. An EA seeking people likely to incur IRS trouble is certain to find positive results getting to know owners of “gentlemen’s clubs”, which are most often referred to with the colloquial term “strip clubs”.
A common theme at these establishments is the transaction of business in cash. Omitting cash payments from taxable income is a huge temptation. But, as Enrolled Agent study materials point out, income paid in cash is just as taxable as checks and credit card payments.
Strip club owners are known for their lax financial records, inaccurate tax reporting, and general avoidance of tax professionals. Consequently, their actions – or inactions – often trigger accuracy related penalties. Treating these situations as EA problems permits resolution using basic tax skills. The owners of these businesses are certainly viable candidates for EA representation.
A recent example is Kirk Roberts of Salina, Kansas. He owned the Wild Wild West Gentleman’s Club and recently pleaded guilty to three counts of filing false income tax returns. He admitted to underreporting his income for the tax years of 2006, 2007, and 2008. In fact, he underpaid his federal income taxes by $153,510 because he failed to report cash receipts totaling $537,942.
If Roberts had received consultation from an EA, several crucial directives for would have enlightened him. The first recommendation entails establishing a sound method for tracking business income, regardless of whether payment is made in cash. The club clearly collected cash based upon its policies with patrons. Each customer paid a cover charge at the door that ranged from $3 to $5 per night.
In addition, the dancers paid $25 to $50 per night to the house for use of the stage plus another $35 per hour for use of the private “champagne rooms.” Apparently, the dancers are independent contractors and not employees having taxes withheld from wages. This elicits further need for deploying Enrolled Agent education to account for contract labor expense and issue 1099s.
Cash registers at Roberts’ business did not record the fees collected. However, Roberts deposited the cash collected at the club into his personal bank account. He obviously was unaware of the IRS ability to trace these deposits. In fact, the IRS probably investigated the matter based upon required filing by the bank of cash transactions reports. Moreover, personal transactions with a bank customer involving $2,000 or more that appear to comprise money laundering or a violation of the Bank Secrecy Act are reported through a Suspicious Activity Report.
Next on the list of Enrolled Agent jobs for Roberts should have been filing accurate tax returns. Utilizing an EA for preparation of tax returns is much less stressful on taxpayers than needing an EA to fight with the IRS about settlement of delinquent tax liability. Lastly, any person receiving more than $10,000 in cash during a single year from engaging in a business transaction or series of related transactions must file IRS Form 8300.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.