IRS probe of small businesses questioned by Congress

First it was taken to task for apparently targeting conservative nonprofits for undue scrutiny of their tax-free applications. Now, lawmakers on Capitol Hill are wondering if the Internal Revenue Service isn't being somewhat heavy handed in going after some small businesses.

The source of the concern stems from a letter that was sent out to about 20,000 small companies across the country. The reports don't break out where the firms are located, but we suspect there are at least a few in the Washington, D.C., area and surrounding suburbs. 

The letters are under a heading that reads "Notification of Possible Income Underreporting." The content of the letters inform the receivers that the amount of gross receipts they've reported from credit or debit card transactions, as opposed to cash deals, seem too high for the type of business they are in, and it demands an explanation as to why. It goes further and says that failure to reply could lead to "further compliance action."

The IRS insists the letters do not amount to a threat of an audit. They say the letter is simply an attempt on the government's part to let the companies know they might have made an error in reporting and give them a chance to explain and correct mistakes if necessary.

But some lawmakers question the move. In one letter to the agency, the head of the House Small Business Committee said letter recipients might justifiably fear that they are already suspected of underreporting and could be facing taxes. He says the vagueness of the letter could also leave recipients unsure of just what information they need to provide.

Facing an IRS audit can be a significant strain on a business, emotionally and financially. But as this story suggests, even the hint of an audit can be intrusive. Such inquiries deserve to be met with a strong defense, which is best mounted by an experienced attorney.

Source: WashingtonPost.com, "IRS probing thousands of small businesses, raises eyebrows in Congress," J.D. Harrison, Aug. 13, 2013

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