Critics question IRS initiative targeting small businesses

Small business owners across the country are receiving letters from the IRS questioning if they are reporting all of their cash income, in a new push by the agency some are saying could unnecessarily create fear in the small business community.

The Wall Street Journal reports the initiative is an attempt to respond to what the agency feels is a widespread failure by small businesses to report all their cash sales.

The agency says the letters are not the same as an audit, and it is simply seeking more tax information from the businesses. However, some lawmakers and business owners who received the letters say the initiative is alarming.

"There's an emotional thing when you get a pretty ominous-looking letter from the IRS, [saying] you might have done some bad things," small business owner Tom Reese tells the Wall Street Journal. "I really work hard with my accountant to make sure that I not only follow the law, but follow the letter of the law."

One letter the IRS sent is headlined, "Notification of Possible Income Underreporting."  It notifies the business owner "your gross receipts may be underreported" and says they must complete a form "to explain why the portion of your gross receipts from non-card payments appears unusually low."

One lawmaker says the letter’s tone implies wrongdoing from the start.

"The letter implies that this is a serious matter that could lead to assessments of additional tax, penalties and interest," says a letter sent to the IRS Friday by Rep. Sam Graves, R-Mo., chairman of the House Small Business Committee.

Though the IRS has only sent letters to small percentage of businesses so far, around 20,000 of the estimated millions in the U.S., the agency says they hope to expand the program in the coming months.

One small business owner says the initiative will likely create fear among business owners, as it is often difficult to match credit transactions with income.

"There are so many reasons why, even if you're the most honest tax payer, you're not going to match (what card records show),” Fran Coet, who runs an accounting business in Westminster, Colo., tells the Wall Street Journal.

For example, Coet says, when a company sells a gift card it does not count for accounting purposes as a sale, but appears as such to credit card companies.

In a statement to the Wall Street Journal, the said the agency is “working diligently to minimize burden on both taxpayers and tax professionals” in implementing the new program.

The agency has been under fire in the past few months when it was revealed it was unfairly targeting conservative groups for special scrutiny when they applied for tax-exempt status.

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