IRS has sent out tens of thousands of letters to small businesses asking them to explain the difference between the businesses’ receipts reported on the tax returns and reported by third parties, as well as the difference between the cash receipts reported on the tax returns and the average cash receipts for similar businesses (see links here, here, here, and here). These informal letters are not actually audits, but does the average Mom & Pop shop know that? Also, if the recipient doesn’t answer the letter, does that make them more likely to get audited?
I would love to see an actual copy of this kind of letter. If you have gotten one, please email it to me at jdf @ johndfaucher.com.
Conservative commentators point to this as evidence of the IRS’s “war on self-employment.” I don’t think that the IRS is fighting a war on self-employment: it’s just trying to do the job of collecting taxes and impart the same amount of pain on all taxpayers. The IRS’s bite is numbed somewhat by the cocoon of a full-time job with a paycheck and tax withholding; the small business person, who watches the money come in and go out, is much more conscious of the payments that need to go to the sovereign, and has much more control over whether those payments actually get made. W-2 employees have a lot less incentive and opportunity to cheat on their taxes than small business owners; like Willie Sutton, the IRS targets small businesses because that’s where the money is.
August 21, 2013