Proving the source of cash requires providing documents that trace the money to a legitimate, lawful origin. Common evidence includes bank statements, tax returns, sale contracts, or invoices. The documentation must show the funds are accessible (liquid), typically requiring records from the last 30 to 90 days, though, in some cases, documentation going back years may be needed to show the origin of a lump sum.
Documents that can prove Source of Funds include bank statements, salary payment documents, property sale records, investment statements, inheritance records, and tax returns.
A proof of cash is a bank reconciliation that includes not only the prior-period and current-period balances but also reconciles the book receipts and disbursements for the period(s) with the bank statement(s).
Legitimate sources of funds include earnings from employment, business income, investment returns, loans, and inheritances. These sources are generally verifiable through official documentation such as pay slips, tax returns, and bank statements.
Depositing $2,000 in cash isn't inherently suspicious and is well below the $10,000 reporting threshold for banks, but it can raise flags if it's part of a pattern (structuring), inconsistent with your normal income, or involves other red flags like frequent large cash deposits from others, leading to a potential Suspicious Activity Report (SAR). To avoid issues, have clear records for the cash's source, like invoices or sales receipts, especially if you deal in cash often.
Examples of documents and data you could use to identify the source of funds or source of wealth in higher risk situations include:
The IRS "$600 cash rule" refers to the requirement for third-party payment apps (like Venmo, PayPal) to report payments for goods/services over $600 on Form 1099-K, but this threshold has been delayed, with a phased-in plan, so for tax years 2023 and prior, the old rule ($20k/200+ transactions) applies, while the $600 rule (any amount over $600) is being phased in for later years (e.g., planned for 2024) to ease the transition, though all business income, regardless of reporting, must be reported by the recipient.
The "$10,000 bank rule" refers to federal laws requiring financial institutions and businesses to report large cash transactions (deposits, withdrawals, payments) of over $10,000 in currency to the government to combat money laundering and financial crimes. Banks file Currency Transaction Reports (CTRs) for cash activity over $10,000, while businesses file Form 8300 for similar payments, both sending info to FinCEN and the IRS to track illicit funds.
The following are typically accepted:
'Source documents can be receipts, copies of checks, copies of invoices, deposit slips, or anything else that proves that a transaction occurred. Accountants need source documents so that they can accurately document the financial transactions that occurred during an accounting period.
Recent tax returns can provide a comprehensive view of your earnings. Bank statements are another option, highlighting deposits that match your income claims. Additionally, an employment verification letter from your employer, detailing your income, can serve as proof.
A paper trail of potentially suspicious deposits is created after Form 8300 is transmitted to the IRS. Depositing cash at an ATM or with a bank teller, so long as it is below the $10K threshold, will usually not be reported.
Red flag #1: Suspicious sources of funds
Deposits into accounts or online wallets that are “significantly higher than ordinary with an unknown source of funds, followed by conversion to fiat currency, which may indicate theft of funds.”
The most common documents are:
There are many alternatives to pay stubs, including tax returns, bank statements, employer income letters, 1099s, Social Security statements, court-ordered payments, unemployment benefit letters, annuity statements, interest and dividend income statements, and bonus/incentive payout records.
You can deposit any amount of cash without being automatically flagged if it's under $10,000 in a single transaction, but banks must report deposits of $10,000 or more to the IRS via a Currency Transaction Report (CTR). While large, legitimate deposits are fine, making multiple deposits to stay under $10,000 (structuring) is illegal and triggers Suspicious Activity Reports (SARs), leading to potential account freezes or law enforcement scrutiny, so transparency with your bank is best for large sums.
The IRS "10k rule" primarily refers to the requirement for businesses and financial institutions to report cash transactions over $10,000 by filing Form 8300 (for businesses) or a Currency Transaction Report (CTR) (for banks), under the Bank Secrecy Act. This rule helps combat money laundering, tax evasion, and terrorist financing, requiring reporting for single transactions or related transactions totaling over $10,000 in cash within a year, with penalties for non-compliance.
Supporting Documents
Suspicious sources of funds
Typical red flags include: Deposits from many different individuals or companies, possibly indicating an attempt to obscure the origin through smurfing. Deposits from multiple geographic areas outside the client's normal business zone often point to attempts to evade pattern detection.
Here are some acceptable ways to show proof of funds: Bank statements: A basic financial document from your checking or savings account that shows your current account balance. Account verification letter: A letter from your bank or financial institution, verifying the funds available in your account.