Acting IRS Chief Daniel Werfel recently told a congressional committee that the IRS doesn’t unfairly target small businesses. But a letter sent to thousands of business owners is sending mixed messages.
About 20,000 businesses, mostly “mom-and-pops” recently received letters from the IRS recently questioning whether they underreported their income, according to The Wall Street Journal. The letters don’t accuse the business owners of underreporting, but they ask for an explanation of “why the portion of your gross receipts from non-card payments appears unusually low." The letters stem from a program started five years ago that allows the IRS to access merchants’ credit- and debit-card transaction records in order to compare those figures to reported income and identify potential fraud.
According to the IRS, the majority of the tax gap—what Americans owe in taxes versus what they actually pay—comes from underreporting. And IRS data suggests that nearly one-third of the $450 billion tax gap in 2006 came from small businesses.
Tax experts say the letters are sure to invoke fear among small-business owners, who have 30 days to respond to the letters. There can be many legitimate reasons businesses may seem like they underreport income, such as the sale of gift cards or reductions for sales tax collection.
Though small business owners may be easy targets, the letters are sure to stress them out at a time when they are already under ample pressure, from complying with Obamacare rules to dealing with declines in consumer spending. A recent survey by the National Small Business Association suggests that businesses feel like they need more government support—not less. "There's an emotional thing when you get a pretty ominous-looking letter from the IRS, [saying] you might have done some bad things," Tom Reese, owner of Hearing Well Inc., a chain of stores that sell hearing aids in eastern Tennessee, told WSJ.
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