IRS Reviews Letters Sent to Small Businesses, Defends New Approach

By Charles S. Clark

August 12, 2013

The Internal Revenue Service in recent days has faced criticism from a House committee chairman and from business owners quoted in a front-page Wall Street Journal story for letters sent to thousands of small businesses suggesting they might have underreported income.

The complaints come at a time when the agency is already under political fire for one of its units’ inappropriate extra scrutiny of conservative groups seeking tax-exempt status.

“A small business that receives one of these notices is very likely to feel alarmed and threatened,” Rep. Sam Graves, R-Mo., chairman of the Small Business Committee, wrote on Friday to Faris Fink, the IRS commissioner for small business and self-employed.

“The letter implies that this is a serious matter that could lead to assessments of additional tax, penalties and interest,” he continued, but the taxpayer is told only that the reported income is off from a computed average. It “gives the taxpayer no idea how much or the source of the information so he can verify the claim and confirm that it is a valid comparison.”

What’s more, Graves wrote, the owner is required to respond within 30 days, “but is not told exactly what he or she is expected to prove.”

The IRS letters, numbering some 20,000, are part of an effort to improve taxpayer compliance based on 2008 housing legislation that allows the tax agency to use debit-card receipts for third-party verification of a business’ reported income. Saturday’s Journal article quoted business owners in Tennessee and Colorado saying the program is “creating some heartache in the small business community.”

The IRS is reviewing the complaints, it said in a statement emailed to Government Executive. “We want to reassure the relatively small number of business owners who receive these letters that the IRS is requesting information based on what the taxpayer reported on the return. Those who have received these letters retain all their taxpayer rights.”

The agency is “working diligently to minimize burden on both taxpayers and tax professionals,” the statement said.

“We want to stress that our approach is measured and equitable in several ways, including giving taxpayers the opportunity to explain and fix errors,” it continued. “An important component of this project is help ensure that people who are non-compliant don’t get an unfair advantage over those that play by the rules and follow the law.”

By Charles S. Clark

August 12, 2013