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IRS Increases Scrutiny of Small Businesses

August 13, 2013

The IRS is zeroing in on small businesses to review their tax compliance. Even if owners have filed their business taxes, they may receive IRS notice Notification of Possible Income Reporting. This notice is sent if the IRS thinks your gross receipts may be underreported.

The notice is sent if “Your tax return and Form(s) 1099-K, Merchant Card and Third Party Network Transactions, show an unusually high portion of gross receipts from card payments and other Form 1099-K reportable transactions. Your type of business consistently has a much lower portion of gross receipts from card payments and other Form 1099-K reportable transactions, and a higher portion of gross receipts from other sources (e.g., cash and checks).”

The IRS recently sent this notice to a large number of small businesses. As the notice only speculates that there may be underreported income, the IRS can safely send this notice to any business to review its income and expenditures.

The difficulty is not that small businesses are receiving this IRS notice, but that they are required to file IRS Form 14420 Verification of Reported Income if they do. The IRS requests that small businesses explain why their gross receipts may be higher than usual, which can cause owners unnecessary stress.

IRS Form 14420 must be sent to the IRS within 30 days from the date of the Notice of Possible Income Reporting. The IRS does not reveal their source of information that triggers the notice. Any small business owner can receive this notice. It may cause unnecessary trouble for small business owners who are clear with their taxes.

It is speculated that the IRS is using credit and debit card details to judge from expenditures whether there might be underreported income. That is, if the expenditures of a small business are higher than usual, there might be an increase in income. The IRS states it is only gathering information, not charging small businesses of tax fraud. For small business owners, it is yet another tax headache they will need to bear.

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