The IRS has recently targeted small businesses with a high volume of credit card sales believed to have under-reported cash sales.
Since fall 2012, the IRS has sent letters to 20,000 small businesses notifying them of “possible income under-reporting.” In its determination of which businesses receive letters, the IRS compares a business’ credit card and cash receipts to industry averages, CNN Money reports.
The IRS found that approximately $450 billion is owed in taxes and has gone uncollected, and small business under-reporting accounts for approximately $140 billion of uncollected tax.
In a written statement, the IRS said it seeks 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,” adding that the approach is “measure and equitable in several ways, including giving taxpayers the opportunity to explain and fix errors,” according to CNN Money.
While many have said the crackdown is just the IRS doing its job, some have criticized the IRS’ assumption as flawed because credit cards and debit cards have risen in popularity as a payment method, particularly for certain types of purchases, MoneyNews reports.
House Subcommittee on Small Business Chairman Rep. Sam Graves (R-Mo.) voiced concern that the IRS letters may intimidate businesses, pointing to the wording and tone of the letter.
“A small business that receives one of these notices is very likely to feel alarmed and threatened,” Graves said, according to Accounting Web. “The letter implies that this is a serious matter that could lead to assessments of additional tax, penalties and interest.”
The IRS said the letter does not mean an audit will be conducted and that the agency is requesting that only a small number of employers review their returns.
“We want to reassure the relatively small number of business owners who receive these letters that the IRS is requesting information based on what the taxpayer reported on the return,” the IRS said, The Washington Post reports.