Does cashing personal checks at checkwriters bank show up in an audit?
She thinks that cashing some of these checks at the checkwriter’s banks effectively makes it so that she was paid in cash. AFAIK, as long as each transaction is below a threshold (think it’s $10,000), she’s free and clear — it’s as good and as untraceable as cash. However, as mentioned above, the payer must technically pay some kind of a payroll tax, and the payee must pay income tax. But there’s no real way to track it, and the IRS will not notice this unless your friend a) has no other visible means of support and b) buys big-ticket items, like cars, boats and houses.
The bank may find it suspicious that your friend is regularly cashing large checks (even if they are well under $10k) without having an account. They might report this to the IRS, but they might also report it to the FBI, who might then suspect your friend of laundering money. Even if you have an army of lawyers, it is better to just pay the tax you owe (but not more 🙂 and have your money free and clear.
Assuming we are talking about small checks, like a few hundred dollars or less, your friend is right. Banks will not report these transactions to anyone and it would be virtually impossible for the IRS to trace them to her. The only way she is likely to get busted is if the IRS determines that she spends more money than she reports as income. They’d have to audit her for some other reason, like a random audit and they’d have to find a significant mismatch between her lifestyle and income. Otherwise, her customers aren’t going to 1099-MISC her, it won’t trigger any cash transaction reporting by the bank and she is unlikely to be a household employee. Personally, I’d rather pay the tax for the peace of mind, but that wasn’t the question.
