The IRS has recently begun cracking down on small businesses. Nearly 20,000 small business owners have received notifications of possible income under-reporting since fall of 2012. The notifications have come in light of an IRS analysis that compares percentages of gross receipts from cash transactions versus credit card transactions. If the ratio is different than what they would expect, they send out a notification.
This can be a serious issue if you don’t use great care in your bookkeeping. Many of the businesses that receive these notifications are able to go back through their books and provide explanations as to why the ratios are off. Internet sales, for example, would result in higher numbers of credit card transactions versus cash. A change in tax ID number may also set off alarms. There are a number of perfectly valid reasons that the ratios could differ. The IRS allows businesses to explain and fix errors in their reporting. Because of this, small business owners need to be particularly careful in their documentation. If your numbers are different than industry averages, you need to be able to explain why.
While some argue that cracking down on small businesses – the backbone of America’s industry – is not the answer, statistics are speaking otherwise. The IRS has found that more than $450 billion in taxes goes uncollected. Of this, nearly a third of that can be accounted for by under-reporting in small businesses. The IRS wrote that the goal is 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.” As long as they are careful in their bookkeeping, this crackdown can actually be a benefit to small businesses around the country.
Sometimes a second pair of eyes reviewing your bookkeeper’s work can reduce the crackdown you see above. We can schedule a free business consultation with you to review your current methods and develop a lasting partnership.