Any attempt to conceal income is a criminal offense under 26 USC § 7201 which criminalizes any attempt to evade or defeat taxes. Many concealment schemes can be quite complex, involving creating sham entities in the forms of Trust, savings accounts or corporations. But what may be the most common concealment scheme is also probably the most simple tax evasion scheme there is: cash.
Most of our income is reported automatically to the IRS when we receive our paychecks. Not only is the income reported, but the taxes are already deducted and paid to the Internal Revenue Service. But of course not everyone receives all of their income in the form of regular paychecks from their employer. Many people –especially those in service industries— are paid in cash for their work.
And when an individual is paid in cash, the income is not automatically reported to the IRS, and the taxes are not deducted. But this does not mean that the income is not taxable. All income, in any form, is taxable. So while the IRS may not be immediately aware of income in cash, it still must be reported and taxes must be paid. Failure to report this income will also violate laws against failing to report income to the IRS and laws against making false statements.
But cash is not merely the tax evasion scheme of the service industry. Business owners have figured out that extensive dealings in cash can assist them in concealing income from the IRS. These individuals are also likely to find themselves prosecuted under even more statutes, including laws against structuring bank deposits.
While it is specially obvious in this case, like tools that can be used to conceal income, there is nothing inherently illegal about using cash. And while a taxpayer will not be able to avoid paying taxes on unreported income, criminal penalties are only justified for willful tax evasion. It is not enough that a taxpayer received unreported income in cash for the IRS to prosecute the taxpayer. Only those who use cash as a means of evasion can be successfully prosecuted.