I warned you guys. The second the IRS was going to get their hands on the credit and debit card transactions. Moreover, they are right, as I said.
Too many small business entities do not report their income. Too many of them don’t record their cash transactions. Which means they are no better (OK, they actually are much worse) than the fat cats who only pay 10% income tax rates.
And, now, the IRS is sending letters to a slew (+ 20K) of small businesses, giving them the opportunity to own up to their shenanigans. Asking them to explain how they could receive $ 40K or $ 200K from credit card payments- and only have $ 20K or $ 100k of gross revenue. And, this is just the start.
You see, the IRS got permission (OK, they were actually “mandated”) to obtain debit and credit transactions from the card purveyors. These numbers are then compared to the data reported on your tax returns.
The IRS is also considering the fact that many businesses have cash and check receipts. So, if their credit/debit transactions are 90, 95, or 98% of their gross revenue, they will be asking to see your bank records for the year. To insure that all income was reported.
Of course, there could be an innocent reason. You sold $ 20K worth of gift cards. That would be reported by the credit card company- but it’s not reportable income (unless you are on an accrual basis) until those cards are cashed in. [I am giving these guys an out- one that strains credulity. It’s believable if 10% of your business is gift cards, not 50% or 60%…] Another reason could be sales tax collected on those credit card receipts. [Again, that would be 5% or 10%, not 50% or 60%.]
(Oh, I know sales taxes are a liability, but the best way to report these taxes is to include them in your gross revenue- to match your bank deposits, and then deduct the sales taxes you send in to the authorities as an expense. Moreover, most firms collect more in sales taxes than they pay out- because the states provide a small stipend to cover the bookkeeping and management costs involved in collecting those taxes for them.)
The goal of this IRS effort is to close the tax gap- the difference between the money the IRS should collect and what it actually does. Under-reporting income comes to about $ 500 billion a year. That is certainly not chump change.
You can bet those barter transactions that don’t get be reported are clearly in the IRS view, too.
That is interesting, when I was in business I never accepted credit cards only because I was to small to be able to pay the transaction fees the credit card companies wanted. I am glad I don’t have those headaches. It sound like a mess is brewing for the small business companies.
Chef William recently posted..Farmers Market Cocktails
Taking credit cards does reduce one’s gross- but it also means one, more often, gets paid on the spot.
And, with so many folks doing business on the web, that option is more of a necessity.
The trick, Chef William, is to report all of one’s income 🙂