Every last single one of them? I doubt it. But many coin-ops and retail businesses, including dry cleaners do cheat on taxes according to the auditors I am friends with. I do not know how they catch them, but they try.
I worked at a drycleaner in the 1980s that only took cash and check. Back then processing credit cards was more of a hassle. Also, and this still applies today, the credit card company charges a percentage of the sale so it is less profitable to take them than cash. Dry cleaning isn’t like consumer electronics where a credit card allows a customer to splurge beyond their budget. One more point is that even in my suburban midwestern location, bad checks were a reality. I can see bad checks being a real incentive to go cash only, especially in a higher crime area.
One other consideration is that there are many, many dry cleaners and the business model doesn’t vary a whole lot. The IRS probably has a fair idea of how much one of them is going to make, and if you report way lower it could easily trigger an audit.
I don’t think you need unreported income to explain the existence of cash-only dry cleaners, although I don’t doubt it happens.
This is one way. But of course, businesses can just be doing badly, so it’s usually not just a low income that sends up the red flag. People can get VERY greedy with regard to their underreporting–so much so that they forget to make it plausible. Maybe their reported income doesn’t jibe with their expenses. Or maybe something that they’re saying just doesn’t really make sense.
Imagine, if you will, a small local pizza place.
–They have 8 employees. Why would they have so many employees if they were truly making so little money?
–They are claiming $X expenses for ingredients, but they are reporting pizza sales of less than $X. Huh?
–Most of the reported sales are paid by credit card, which would be atypical for this type of business.
If an IRS guy notices any of these discrepancies, then he might take a closer look. Then he’d find other obvious discrepancies, which would make him want to do an audit.
Personally, I’d think that most cash businesses of a certain type underreport to some extent, and the IRS knows it. But, to use an analogy, they’re less interested in the guy who’s cruising along at 72 in a 65 zone than in the guy who’s weaving in and out of traffic at 90mph. And it’s a lot easier to prove your case against the latter guy.
It wasn’t dry cleaning, but I looked into buying a laundromat at one point. Doing some basic research, I found that the IRS used water consumption figures to establish volume; they weren’t going to count quarters or trust an owner’s statements. I assume that they do the same for dry cleaning, substituting chemical consumption and disposal costs and possibly comparing the number of cloting items on hand to determine sales volume.
The IRS has number of metrics to gauge how much “business” a business is doing. A certain level of under reporting is built into the system and it’s a constant dance between the entrepreneurs and the IRS as to how much they can get away with. Some businesses get stupid and greedy and if the IRS is pissed off enough they will come after them.
It is interesting to me that even with the cheating how may times an aggressive audit will cause a small business to fold and collapse. Even taking cash lots of small businesses that cheat are still not making all that much money.
If they were skimming, say, 10%, of the gross and got caught, that’d be a tax bill of roughly 3% of gross, plus penalties and interest. It’d only take maybe 2 years-worth of them digging to come up with a total bill of 12-15% of one year’s gross. 15% of one year’s gross is probably 3 years aggregate proft net of honestly computed taxes & expenses.
Damn few small businesses or businessmen can come up with a cash call to disgorge 3 years worth of profits. Business & personal PK is the ususal response. That’s where those “we’ll fix your tax lien” lawyer ads get their customers.
Alternate theory: cash-only service-oriented businesses are good fronts for money-laundering operations. There’s something deliciously appropriate about laundering your money with your dry-cleaning business, too.