Enforcement Programs Aimed at Small Businesses

Small businesses spend an average of $74 an hour to comply with the lengthy and complex federal tax code.1 Despite these efforts, certain business practices could attract unwanted attention from the Internal Revenue Service.

Here’s a closer look at two relatively new IRS campaigns that could affect some small-business owners. Before you take any specific action, be sure to consult with your tax professional.

Income Irregularities
The federal government suspects that businesses may underreport cash sales in order to lower their tax bills. Banks and other companies that process payments must issue Form 1099-K to merchants with more than 20,000 transactions totaling more than $200,000 annually in credit-card, debit-card, or electronic payments (such as PayPal). A copy of the form is also sent to the IRS.2

When a business’s sales come from an unusually large share of card transactions, the IRS may send a letter asking the owner to explain why reported cash receipts seem relatively low. Owners have 30 days (or 60 days if they live outside the U.S.) to provide a detailed explanation, complete worksheets, and forward documentation to the IRS.

There are many legitimate reasons why a company’s actual sales may not match the data. For example, a 1099-K doesn’t take into account items that would reduce the amount of income being reported (such as sales tax, charge-backs, returns, gift cards, shipping charges). A 1099-K notice is not considered an audit, but it could lead to one if the response does not satisfy the IRS.

Worker Status
The IRS is also cracking down on business owners who misclassify workers as contractors to avoid payroll taxes and other employment-related expenses.3 Employers don’t withhold or pay income and payroll taxes for Social Security, Medicare, and unemployment for contractors as they do for employees.

The tax code’s definition of an independent contractor is somewhat murky. An appropriate classification is based on the employer’s degree of control and the length of the relationship, among other factors, some of which may be open to interpretation.

The IRS is operating under the assumption that 30% of the nation’s workers are misclassified.4 Unfortunately, a payroll audit could result in significant downtime, legal expenses, and possibly even penalties when employers are found to have misclassified workers on their payrolls.5

Our philosophy is to listen, discuss your options, and present solutions. Click here to watch our short video and learn how Ten Haagen Financial Services may be able to help you with your goals and needs.

We welcome your questions and comments. Remember, when planning your financial future, the sooner, the better!

JON TEN HAAGEN, CFP, RPC
Your Investment Portfolio Repairman
Founder and CEO
Ten Haagen Financial Group
191 New York Avenue
Huntington, NY 11743
631-425-1966
516-658-2827
jonlth@tenhaagen.com
www.tenhaagen.com
Connect with us on LinkedIn and Facebook.

1) National Federation of Independent Business, 2013
2) Entrepreneur.com, August 27, 2013
3, 5) The Wall Street Journal, March 13, 2013
4) FoxBusiness.com, March 4, 2013

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2014 Emerald Connect, LLC.