The IRS is tightening up on it's Offer in Compromise program (settling tax debt for pennies on the dollar-still possible but tougher to get), hiring tax private debt collectors to close the Tax Gap and increasing the number of audits.

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IRS Closes in on the Tax Gap-Cash Businesses Put in Spotlight

As summer grew to a close, Liz attended the IRS Nationwide Tax Forum where she learned about the latest from the horses mouth-IRS.

I went up to the Bronx to check out the Tigresses. Cushy life those girls have. I heard all about this on the train back.

Seems the IRS is looking to close what it calls the “Tax Gap”.

This is the difference between what the IRS actually collects and what it could collect if taxpayers payed all they owe . The IRS intitated a study and found this gap to be a greater $300 Billion with a B dollars per year. They are serious about collecting it.

The tax gap finding came from a study named the National Research Project . This study of 46,000 individual income tax returns in 2001 was completed over three years. Individual income tax returns include the “Schedule C” that unincorporated businesses file.

An unincorporated business is also known as a “DBA” or sole proprietor. Although the people whose returns were studied were not necessarily called in for an audit, filing a “Schedule C” generally increases your chances of an audit. In a future column I will discuss the pro's and con's of Incorporating or forming an Limited Liability Company vs being a sole proprietor

This Gap is made up of people 1) Who don't file returns 2) Undereport thier Income 3) Underpay their Taxes. Underreporting makes up of 80 % of the total tax gap. The rest is made up of made up of underpayment and non-filing at 10% each.

Businesses-DBA's/ Sole proprietors contributed most to underreporting income. The smallest contributors were people who got W-2's or otherwise had the tax taken out at the source.

The IRS is particularly looking at businesses that deal mostly in cash like Pizza Parlors and Contractors (Mastic and Shirley look out).

The IRS is tightening up on it's Offer in Compromise program (settling tax debt for pennies on the dollar-still possible but tougher to get), hiring tax private debt collectors to close the Tax Gap and increasing the number of audits.

It's key tool for closing the Gap is the Automated Underreporter Program or “AUR”.

This program matches income reported to the IRS on forms like the 1099 given to subcontractors to what has been reported on the individuals income tax. This summer we saw a flurry of “CP200” notices which ask the taxpayer to pony up the tax on the unreported income.

The IRS reports that overall 4.4 million “AUR “ (CP200) notices were issued in 2006. Taxes assessed were more than 4 billion. This is an important tax collection tool that the IRS plans to expand.

What should you do if you get a “CP200” or any notice from the IRS or the State? First, don't panic. Just remember all they want is their money and unless you have willfully and intentionally committed fraud, coughing the funds up is all you have to worry about.

Second, deal with it immediately.

Third, if you communicate with them, make sure it's in writing.

Fourth, make sure all communications are sent Certified Return Receipt.

Fifth, if dealing with the government gives you the willies, hire a Tax Professional to do it.

Hiring a Tax Professional will be cheaper than paying the additional taxes, penalties and interest the government will eventually collect from you and help avoid the aggravation that goes along with having your bank account raided and comic book collection seized to pay the taxes.

A Tax Professional can minimize the taxes you have to pay or see if the claim is valid at all.

Your best defense against being asked to pay additional taxes is keeping good records. The burden of proof is on the government.

Receipts, bank statements, canceled checks , records of where the income came from. Businesses should have formal books based on these prepared by an accounting professional.

A tax return that matches your books and records is your best defense.

Thank you for your interest, and please remember we offer a free Outsourcing Report to business owners in Long Island and New York.


Best wishes,

Elizabeth Marasco, MBA
Bookkeepers Plus, Inc.
354 Neighborhood Rd
Mastic Beach
NY 11951
Phone: 631-949-5864
Fax: 631-207-8349

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