10 / 19 / 11

Why the IRS is After Small Business

According to the IRS, around 99% of taxpayers pay their taxes.

At first, that may sound good...

Until you consider that the kind of money we're talking about is 1% of 3 Billion Dollars...

What's the "Tax Gap"And How It Affects You

On March 29, 2005, the IRS released a major research project that examined the difference in what Americans actually pay in taxes - and what they should pay.

...otherwise known as the Tax Gap.

Their findings revealed that "the nation's tax gap increased slightly to between $312 billion and $353 billion in tax year 2001."

Collection efforts and late payments decreased that number another $55 Million, but the net gap was still left between

$257 billion and $298 billion.

The IRS Commissioner at the time, Mark Everson, said "Even after IRS enforcement efforts and late payments, the government is being shortchanged by over a quarter-trillion dollars by those who pay less than their fair share. People who aren't paying their taxes shift the burden to the rest of us."

So to the IRS, someone has $257 billion to $298 billion of their money, and they want it.

So who has it?

How Much of Their Money Do You Have?

According to the IRS, the 3 main reasons they aren't getting their $257 billion to $298 billion every year is:

" People underreport their income

" People underpay their taxes

" People don't file their returns

Notice that I didn't say "businesses" or "corporations"...I said "people".

That's because, according to the report, "Individual income tax is the single largest source of the annual tax gap, accounting for about two-thirds of the total ($171 billion to $198 billion)."

And, of the people who are responsible for $171 billion to $198 billion tax gap, it's the ones who underreport income who are responsible for more than 80% of that total (136 Billion to $158 Billion) - not the ones who underpay or don't file.

According to the IRS, "Most of the understated income comes from business activities, not wages or investment income." So, in other words, the IRS is looking for around

$136 Billion to $158 Billion of "under-the-table" money - money that's being made by sole proprietors, partnerships and S-Corporations that is not being reported as income.

What the IRS Is Doing To Close the Gap

"We're moving aggressively to reduce the tax gap," IRS Commissioner Everson said about the report. "With proper funding, over a number of years we will be able to close a significant portion of the gap."

In fact, in 2006 President Bush called for an 8% funding increase for IRS enforcement activities, keeping his watchful eye on closing the tax gap.

IRS data also shows that Independent Contractors file taxes 96% of the time when a 1099 is filed...but only 46% of the time when it's not.

There are 3 Proposals before Congress right now that directly target collecting these missing tax dollars:

- Make credit card companies report each merchant's sales to the IRS.

- Require businesses to issue 1099's not only to Independent Contractors, but also to corporations that they pay more than $600/year.

- Make businesses withhold taxes for any independent contractors who ask them to, as well as verify their tax ID numbers.

If You're Part of the Tax Gap and the IRS Finds Out On Its Own...

As you can see, the U.S. Government is coming for their money. If you are guilty of withholding payment from the IRS, chances are good that they will find out one way or another.

They are on a mission to close the tax gap...and if you're an Independent Contractor, Sole Proprietor, Partnership or an S-Corporation, they may be particularly interested in seeing what you've been up to. They have vowed to increase the number of audits of small businesses.

If you suspect that you are in trouble with the IRS, don't wait until they come knocking at your door. Don't risk having them shut down your business and put a swift end to your livelihood.

Even if you feel that you've gone "beyond the point of no return", you can still be helped. Remember, the IRS is interested most of all in getting their money as easily as possible.

By coming to an installment agreement, an Offer-in- Compromise, or another form of legal payment option, it's a more of a "hassle-free" method for the IRS than wage garnishments, bank account seizures, tax liens and other drastic measures. Plus, it costs less to the government.