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Caution: IRS Initiative May Target Small Business Underreporting Issues


8/20/13

Synopsis:
 
Thousands of small business owners will be receiving letters from the IRS asking them to reconcile the income reported on their tax returns with third-party information that the Internal Revenue Service has received. The IRS will examine the data collected and could then initiate a larger-scale procedure in the coming months.
 
Issue:
 
The IRS is sending 20,000 information request letters to small business owners in an effort to determine whether these owners are underreporting business income. This may be the first part of a larger initiative by the IRS to boost federal tax receipts by ensuring that small businesses report all of their cash sales.
 
In recent years, the IRS has received records of credit-card and debit-card transactions for numerous small businesses reported on Form 1099-K, which was unveiled for 2011. The agency has then been comparing this data to the information these businesses reported on their tax returns. If the comparison shows that a large percentage of a business’s receipts come from card transactions, and cash receipts are low, the IRS may send the business a letter requesting additional details.
 
The IRS has stated that the letters do not constitute an audit but are instead a request for more information. Taxpayers who receive the letter must provide an explanation and respond to the IRS within 30 days.


What Does CohnReznick Think?
This is another example of the IRS attempting to reduce the “tax gap,” the difference between the tax revenue that is received based on tax filings and what the IRS believes is the proper amount of tax revenue that would be received if every taxpayer reported the proper amount of income and claimed the proper amount of deductions. CohnReznick professionals can assist you in responding to such correspondence.


Contact:
 
For more information, please contact Neil Becourtney, Partner, at 973-364-6671.
 
To learn more about CohnReznick’s tax services, please visit our webpage.


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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