Own a Small Business? Get Ready for (Another) IRS Crackdown

If you own a small business, you probably feel like you live in the crosshairs of the IRS. Accounting and filing tax returns is already an exhausting task, with the IRS demanding that you file countless letters, forms, and paperwork. Not to mention that huge check you write to the agency every year!

Given all of this, the last thing you want to hear is that the IRS is stepping up its scrutiny of small businesses yet again… but that is exactly the case. The IRS has begun examining the credit card payments that small businesses receive each year, comparing that number to the cash income that is reported, and seizing on any indication that a business may be underreporting cash income.

They do this by comparing the percentage of credit card sales reports versus cash sales reported to that business’ industry average. They then look for and go after businesses that vary substantially from the averages.

A recent CNN Money article explains:

The Internal Revenue Service has sent out letters to 20,000 small businesses since fall 2012, notifying them of “possible income under-reporting.”

 The IRS says it is trying to identify businesses that get “an unusually high portion” of their reported sales through credit card transactions. The thinking is that a lot of cash transactions might be going unreported.

To decide who gets letters, the IRS compares a business’s credit card and cash receipts with industry averages.

One recipient was the owner of a baking equipment supply company (who preferred to remain anonymous). The IRS sent her a letter on May 28 saying that 80% of her $549,955 in annual revenue came from credit card swipes.

“A larger amount of noncard revenue would be expected,” the IRS letter warned.

The business owner was given 30 days to review her records and respond in writing with an explanation. Her accountant, Steve Schneider, wrote back to the IRS this month explaining that the numbers were accurate, but the agency’s assumptions were wrong.

“Over the years, the business model has switched to more online sales,” Schneider told CNNMoney. “These types of customers tend to pay with credit cards.”

In a written statement, the IRS said the aim is to “ensure that people who are non-compliant don’t get an unfair advantage over those that play by the rules and follow the law.”

The IRS also said its approach is “measured and equitable in several ways, including giving taxpayers the opportunity to explain and fix errors.”

Now, if you’ve ever dealt with the IRS, you know that what they consider “measured and equitable” often seems anything but. And you know that “giving taxpayers the opportunity to explain” really means “send us boatloads of thorough documentation… or else!”

The bottom line is that the IRS is adding yet another layer of scrutiny for small business owners. It’s certainly frustrating, considering how dependent our economy is on the work of small businesses, that owners are going to have to spend more time than ever dealing with the IRS.

The good news is that we can help. If you are facing an IRS dispute, we can help you get the agency off your back so that you can get back to running your business. Contact us today if you would like to learn more!