Tags: IRS | small business | card | cash

Customers' Card Use Causes IRS to Target Small Businesses

By Michelle Smith   |   Tuesday, 20 Aug 2013 07:53 AM

Customers often swipe a card to pay for their purchases. This seemingly simple act could help attract unwanted attention from the IRS, which is targeting small businesses with low cash sales.

The IRS has sent 20,000 'Notification of Possible Income Underreporting,' letters to small businesses. And there are more to come, Forbes reports.

In the letter, the agency suggests that a business may have under-reported its sales. The IRS claims to make this assumption after comparing a business' credit card and cash receipts to industry averages. If the credit card sales seem to greatly outweigh the cash transactions, that is viewed as possible signal of faulty reporting.

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The business has 30 days to reply to the IRS with an explanation.

Cracking down on small businesses might make sense, according to CNNMoney. The IRS has found that approximately $450 billion is owed in uncollected taxes and the practice of underreporting by small businesses accounts for about $140 billion of that.

While some believe the IRS is just doing what a tax collecting agency should, others criticize the tactic.

Some argue that the assumption is flawed from the very beginning, because for many people credit cards and debit cards are the preferred method of payment, especially for certain types of purchases.

House Committee on Small Business Chairman Sam Graves, R-Mo., is concerned the IRS' letters may intimidate small businesses.

Graves points to the wording of the letter, which begins by saying, "Your gross receipts may have been underreported."

While the IRS claims it is just seeking additional information, Graves says it sounds like the agency is looking for much more. Graves wrote to the IRS saying it sounds like this could mean more taxes, penalties and interest, Forbes reports.

The IRS dispels the criticism, according to CNNMoney, saying it's approach is "measured and equitable in several ways, including giving taxpayers the opportunity to explain and fix errors."

But as Forbes points out, the IRS doesn't even reveal its source of information. The agency is allegedly using industry averages to assess businesses' transactions, but the IRS doesn't say what these industry standards are or where they came from.

It sounds like you are being asked to prove that you didn't underreport your income. That's proving a negative, and could require extensive correspondence and documentation, Forbes adds.

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