What To Know If You’re Planning To Ditch Your Bank

With concerns about banks constantly in the news—most recently, the Federal Deposit Insurance Corporation (FDIC) confirmed that First Republic Bank
FRC
had been seized by regulators—some in the U.S. are eying alternatives to keeping their savings in banks. For some, the answer is obvious: rely on cash in hand.

I get it. After my great-grandmother’s death, we found small amounts of cash in her freezer (talk about your cold cash). She lived through the Great Depression and didn’t trust banks even in her later years.

She’s not alone. Many of my clients have reported finding cash stuffed in books and under mattresses belonging to loved ones. For others, a used coffee can had worked just fine as a makeshift safe deposit box.

To be clear, I’m not worried about the collapse of the U.S. banking system—it’s not going to happen. But I understand that others have concerns and may be taking steps to rely on cash more while relying on banks less. If you’re considering trying your hand at living outside the banking system, here’s what you need to know about tax and related requirements.

Income

Getting paid in cash is not illegal, and it is not indicative of any wrongdoing like tax evasion. That said, you could be opening yourself up to a higher level of scrutiny, so you’ll want to keep excellent records.

If you sell goods or services, keeping a sales ticker alone isn’t enough since tax authorities may rely on various things, like industry standards, to suggest that there are discrepancies in income received versus income reported. For example, if your income is uneven, and there’s a reason (seasonal business, a drop in demand, etc.), annotate your receipts accordingly. Keep contemporaneous records of sales, including dates and amounts. If you accept a lot of cash on a daily basis, regularly reconciling your cash in with cash out is smart.

If you deal with high dollar sales, you’ll want to also be aware of cash reporting requirements. If you receive more than $10,000 in cash in one transaction or two or more related transactions—typically within 24 hours—you must file Form 8300 with the IRS. Transactions are considered related even if they occur over more than 24 hours if you know, or have reason to know, that each transaction is connected.

Expenses

Legitimate expenses are still legitimate expenses, no matter how you pay. If you pay expenses using cash, get receipts—the more specific, the better. As mentioned above, be prepared to make notations on the receipts if costs are higher than usual (such as a spike in the price of eggs). Hold onto receipts for at least as long as the statute of limitations runs—that includes timing on items you depreciate or amortize.

If those expenses include cash payments to employees, make sure that you’ve still accounted for any appropriate payroll deductions and provide your employees with a payroll stub that makes clear how much they are being paid and any corresponding deductions. Again, be specific. It’s not enough to show the gross and the net—you’ll want to show how many hours were included in the pay period and what benefits, if any, are included. It’s not just good recordkeeping—it may be the law. Some states have rules about the information you must include to comply with tax and labor laws.

Keep Worlds Separated

One of the ways that business owners typically differentiate expenses and income is by keeping separate bank accounts. If you don’t utilize credit cards or bank accounts, you should still keep business and personal items separate. Keep excellent records and make a note of anything out of the ordinary.

Paying Your Taxes With Cash

You have several ways to pay your federal taxes with cash (your mileage with states may vary).

The IRS recommends considering alternative methods, like using a money order or paying online via a prepaid debit card. But if you want to pay with cash, you can do so at one of the IRS retail partners. It’s worth noting that transaction fees apply, and retail partners only accept payments of up to $1,000.

If you want to pay your taxes with more than $1,000 in cash—or you simply feel more comfortable paying the IRS directly—you can visit an IRS Taxpayer Assistance Center (TAC). You’ll need to make an appointment 30 to 60 days before the day you want to pay (call 844-545-5640, Monday through Friday, 7 a.m. to 7 p.m. local time). You must call ahead since many TACs are appointment only, and not all IRS TACs accept cash. If you’re paying more than $10,000, expect a call from the IRS to confirm the date, time, duration, location, and other information. On the day of your visit, the IRS will count your cash and issue a receipt.

And if you’re worried about optics, according to the agency, the IRS does not treat payments by cash taxpayers any differently than those who use other payment methods.

Mailing Cash

Mailing cash isn’t secure, so it’s not a good idea—the U.S. Postal Service recommends using a money order. That said, it’s not illegal to mail cash, and you can mail as much money as you wish into or out of the country. However, if it is more than $10,000 and is moving into or out of the country, you must report it to U.S. customs authorities with a Currency Reporting Form (FinCen 105). Per the CBP, the penalties for non-compliance can be severe.

Traveling In The U.S. With Cash

You should exercise caution when traveling with cash. From a practical standpoint, secure your money when traveling, and don’t make it apparent to others that you have cash.

When traveling in the U.S., even by air, there is no limit to how much cash you can carry. However, you should be prepared to answer questions. If you’re pulled over by law enforcement while traveling by car, or pulled aside by the TSA while traveling by air, have a plan. That includes being truthful when speaking, providing receipts if you have them, and not going out of your way to hide your money, like using false bottoms in bags.

Dan Alban, senior attorney at the Institute for Justice, advises you to “Never, ever consent to a search of your vehicle.” The police will still probably generate a reason to search it if they really want to, he says, but your lawyer can challenge it later if you don’t consent.

While Alban doesn’t recommend saying absolutely nothing during a traffic stop, he advises keeping your responses brief. Just provide your license and registration, he says, and don’t chat about where you’re going to or from or the purpose of your trip. It can sometimes be helpful, he suggests, to answer questions with a question.

Finally, he says that in a traffic stop, do your best to record as much of the encounter as you can—preferably video, but audio is helpful too. It can be useful later.

If law enforcement believes that your cash could be related to a crime, they may take steps to seize it. If the TSA suspects that your money could be related to a crime, they may turn the issue over to a law enforcement agency since TSA has no law enforcement powers.

It’s important to note that under civil forfeiture laws, law enforcement doesn’t have to charge you to take your money—there’s typically a lower standard of proof than criminal forfeiture. For example, in my state of Pennsylvania, the government can legally take property it claims is connected to illegal activity without charging the property owner for a crime.

Traveling Outside Of The U.S. With Cash

If you are crossing the border, there are no limits on the U.S. side regarding the amount of money you can carry. However, if you’re carrying cash or cash equivalent worth $10,000 or more, you must report it to US customs officials using FinCen 105—that’s true when entering or leaving. If you don’t report your cash, it can be taken by the authorities.

If you’re traveling to or from another country, be sure to research requirements in those non-U.S. countries before you leave. For example, all travelers entering or leaving the EU must complete a cash declaration when carrying EUR 10,000 ($10,968.20 US as of today) or more in cash or cash equivalent. The EU may seize your undeclared cash if you don’t follow the rules.

Keep Excellent Records

With the rise of financial apps and digital payments, today’s society isn’t set up to easily accommodate a cash-only life. If you hope to move towards using more cash, planning ahead and keeping excellent records is critical.

In addition to being adamant about receipts, document your behavior. Keep travel logs with notations to support expenses (including the date and purpose of the travel) and income diaries to record tips and other income that might not be reported otherwise.

And remember that moving away from banks doesn’t mean moving away from technology. Take advantage of software that helps you stay organized, including apps that allow you to snap photos of receipts and instantly record income and expenses.

Finally, there’s value in relying on a good tax professional. Even better, seek out one that has experience dealing with cash. They can identify potential red flags and make suggestions for making your cash-only life a bit smoother.