IRS cracks down on small business for under-reporting cash sales

Posted Aug 30, 2013 by Mike White
Believing many small businesses under-report cash sales, the IRS has targeted thousands of small businesses with a high volume of credit card sales. Businesses that receive a letter on the issue have 30 days to respond.
401(K) 2013
The Internal Revenue Service is cracking down on small businesses in the United States that receive a large portion of a company’s sales through credit card sales, according to a variety of online websites. CNN reported on its website that the government agency has sent out more than 20,000 letters in the last year to inform business owners it believes they may have been guilty of “possible income under-reporting.”
The agency decides which businesses to send the letters to after comparing cash receipts and a business credit card with industry norms. The agency believes a lot of cash transactions are not reported.
One company which received such a letter was the owner of a baking supply company. The owner preferred to remain anonymous. On May 28, the IRS sent a letter to the company noting that 80% of the company’s annual revenue of $549,955 came from credit card sales. The letter stated the agency would expect "a larger amount” of revenue from cash sales.
The business accountant, Steve Schneider, wrote to the IRS in August and stated the company’s numbers were correct. He added the assumptions made by the IRS were incorrect. He noted that the company has switched to more online sales, which usually involve a credit card.
Schneider said that by relying on industry averages, the government agency does not consider how an individual business operates. He said the IRS does not truly have “sufficient data” to mail out the kind of letters that it does to small businesses.
Steve Gift, an accountant for an Italian restaurant in Harrisburg, Pennsylvania, noted that he had to contact the IRS when the credit card information of his client was reported incorrectly. He said that was the case because the federal identification number for the restaurant was changed during the year.
He said the IRS does not look at restaurants the way the agency should. He said his client was targeted because the business being operated was a restaurant. He said the IRS is wrong for assuming restaurants get large amounts of cash payments the businesses do not report. Gift explained that “everybody nowadays charges on their credit card.”
According to, a targeted business has 30 days to respond to a letter. Reportedly, $450 billion is owed on uncollected taxes, and that could be one reason the government agency is targeting small businesses.
According to the article in, many people believe the IRS is justified in cracking down on small businesses to collect unpaid taxes. Others, however, are critical of the tactic.
Some say the IRS is using flawed assumptions. They point out that using a credit card or debit card is the preferred method of payment today for many. This is especially true for certain kinds of businesses.
Congressman Sam Graves, R-Mo., House Committee on Small Business Chairman, said the letters from the IRS could intimidate small businesses. He said the words "Your gross receipts may have been underreported,” could make it sound as though the agency will charge penalties, interest and more taxes.
The IRS disagrees with the criticism. It says its approach is "measured and equitable” and allows “taxpayers the opportunity to explain and fix errors."
The article noted that the IRS will not explain how it determines what the industry averages are that it uses it determining whether to target a business or not.
“For decades, the IRS has overbearingly chased down every penny owed by average citizens and small businesses,” the claims concerning the issue. “Yet at the same time, it turns a blind eye to major corporations who are bleeding the loophole system dry.”
The online magazine notes that people and small businesses that underpay or make mistakes are audited. Those who overpay are not told of their mistakes, however.