Small Business in IRS Sights 

Thousands of small-business owners have received letters from the Internal Revenue Service questioning whether they are under reporting their business income, a harbinger of a broader initiative aimed at boosting federal tax receipts and ensuring compliance, according to the Wall Street Journal.

The program is the latest move in the agency's effort to combat what it sees as a widespread problem: failure by businesses, including mom-and-pops, to report all cash sales in order to minimize tax bills.

Tax officials say the letters don't constitute an audit and instead are simply a request for more information. The IRS says it is sending out about 20,000 letters to business owners as the program cranks up. While that is a small portion of the total number of U.S. small businesses, which is estimated in the millions, some tax accountants say they expect the program to expand.

The IRS program stems from a 2008 change in the law that gave the agency broader access to merchants' credit- and debit-card transaction records. The IRS has been comparing the data to information that small businesses report on their tax returns. If the data suggest an unusually large percentage of a business's receipts come from card transactions, the IRS might send a letter asking the business owner to explain why cash receipts seem relatively low.

Under reporting of income comprises the majority of the so-called "tax gap," the difference between what Americans owe and pay, according to IRS data. In 2006, the most recent year available, the total tax gap was $450 billion. Under reporting accounted for $376 billion of that total, and under reported small-business income totaled at least $141 billion.

The IRS in a statement said the agency is "taking its first early steps" in using the new data, and promised "to carefully review the results of these initial steps." It said the agency is "working diligently to minimize burden on both taxpayers and tax professionals."

The agency defended its approach as "measured and equitable in several ways, including giving taxpayers the opportunity to explain and fix errors." It added: "An important component of this project is [to] help ensure that people who are non-compliant don't get an unfair advantage over those that play by the rules and follow the law."

The IRS has told accountants that a principal aim of its program is to verify the quality of the card-transaction data the agency is getting.

Source:  Wall Street Journal at http://online.wsj.com/article/SB10001424127887323838204579003093483824248.html