Avoid this Small Business Tax Trap By Tony Novak, CPA 20,000 small businesses across the U.S. have recently received letters from the IRS with the heading ""Notification of Possible Income Under-reporting." The letter begins, "Your gross receipts may be under-reported." Of course this is an alarming notice that creates fear among business owners. But what triggers the letter and what can small businesses do to protect themselves? Why is the IRS concerned? Under-reporting of cash receipts by small businesses accounts for about $100 billion of uncollected tax revenue each year. How does the IRS get information? Since 2008, the IRS has access to electronic records of business credit card receipt records. It compares this banking data with the gross receipts reported on the business tax return. The matching of credit card data with filed tax returns gives IRS the information needed. What triggers the letter? An unusually low ratio of cash receipts reported in relation to credit card receipts triggers suspicion that cash is under-reported. What can be done? If you receive a letter, respond with an explanation as to why there is a valid business reason for the unusually low portion of cash sales. It may be wise to consult with an accountant who is familiar with your industry. Analysis of the ratio of cash to credit card receipts is used by accountants to gain an understanding of your business. If the ratio is atypical for your industry, a good accountant will explore the issue long before the IRS sends one of these intimidating inquiries.
Posted on: Mon, 19 Aug 2013 20:29:46 +0000
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