The Internal Revenue Service has sent letters to thousands of small business owners questioning whether they shorted the coffers this past year, sparking criticism from some lawmakers who believe the agency is bullying mom-and-pop companies.
Under the heading “Notification of Possible Income Underreporting,” the letters started going out to small employers this summer demanding they review and confirm that they accurately reported their income on last year’s tax returns.
So far, the letters have been sent to about 20,000 employers across the country, who were targeted based on information the department has started collecting about credit and debit card transactions, the letter states. In short, the agency is hunting for firms that reported an unusually large share of receipts from card transactions, questioning whether they left out some harder-to-track cash payments, which are more often underreported.
A form attached to the notice requires companies to “explain why the portion of your gross receipts from non-card payments appears unusually low for your type of business.” Not responding “may result in further compliance action,” officials warned.
“We want to reassure the relatively small number of business owners who receive these letters that the IRS is requesting information based on what the taxpayer reported on the return,” officials wrote in a statement sent to On Small Business, adding that the agency is “giving taxpayers the opportunity to explain and fix errors.”
Still, some lawmakers are taking issue with the tone of the letters and their apparent implication.
“This gives the impression that the IRS is looking for more than just additional information,” House Small Business Committee Chairman Sam Graves (R-Mo.) wrote in a letter to the agency officials, noting that the first line states “your gross receipts may have been underreported,” which he says “implies that this is a serious matter that could lead to assessments of additional tax, penalties and interest.”
Graves also took issue with the agency declaring that the firm’s receipts vary widely from industry averages but not stating by how much or the source of the information, making it unclear for employers exactly what they need to prove in their response.
“A small business owner who receives one of these notices is very likely to feel alarmed and threatened,” he added, later asking the agency to modify its notices and procedures for seeking additional information.
The agency’s audit screening process has been under the microscope since officials admitted to unfairly targeting conservative groups earlier this summer. In response, Graves has started digging deeper into the methods the agency uses to select which small business tax returns are given a second look.
During a congressional hearing last month, IRS Acting Commissioner Daniel Werfel assured lawmakers that “we don’t have any particular evidence at this time” that the political criteria used to screen nonprofits was ever used for private companies.
At the time, however, Werfel said the agency also does not take into account a company’s location or industry for review — yet the new letter states that employers who received them stood out from “businesses of your type in comparable locations.”