by Brian Mahany
Welcome to the digital age. The IRS has announced it will be electronically tracking credit and debit card information to spot taxpayers with unreported income. Although initially aimed at merchants, the technology now exists to monitor individual taxpayers as well.
The 2008 Obama jobs bill (Housing and Economic Recovery Act of 2008) contained a provision requiring banks and third party payment processors such as PayPal to begin collecting data on payments to merchants. Beginning next year, the IRS will match payments to those merchants with information reported on the merchant’s income tax return. If a merchant appears to have more income than reported, automatic backup withholding can be imposed forcing the merchant to seek a refund. For example, if your PayPal account shows you took in $300,000 but your return says something less, the IRS can impose mandatory withholding leaving you to prove that you were correct in order to get your money back.
In concept, the plan should generate billions of additional revenue for government coffers. The tracking efforts should also help merchants who honestly report their income. (When I ran Maine’s tax department, in-state merchants frequently complained about New Hampshire businesses operating in Maine that failed to collect sales tax.) When profits margins are quite thin, a few percentage points in price can be the difference between a business’s success and bankruptcy.
Unfortunately, despite 3 years to get ready for the new law, the an internal report by the Treasury Inspector General found the IRS not yet prepared for a program which begins in a few months.
Businesses worry that a miskeyed tax ID number may mean that they unfairly get subject to backup withholding even though all their income is properly reported. There are also concerns about how to account for cash returns – the merchant bank sees only the income but not the cash back to the customer. It’s also more paperwork too and ultimately the cost of that paperwork gets pushed on to the consumer or comes out of profits. Neither are very palatable.
Privacy experts worry that the new law gives identity thieves one more opportunity to wreak havoc.
Businesses that don’t properly report taxes should really worry. In many industries it is not uncommon for businesses to maintain two sets of books or simply pocket cash. While the new reporting requirements won’t eliminate that, it is getting increasingly easier for the IRS to spot tax cheats. Since the IRS shares audit info with states, expect more targeted sales tax audits down the road too.
Surprisingly, there has been little outcry from the business community. Once the new reporting starts expect many complaints. The TIGTA report, issued July 26th, hopefully was released in time for the IRS to make the necessary changes to insure that mistakes do not occur on their end.
If you are a small business and have tax compliance issues, give us a call. We have successfully helped many taxpayers come into compliance, defend audits and fight interest and penalty assessments. For more information, contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at
Mahany & Ertl, LLC – America’s Tax Lawyers. Offices in Wisconsin, Michigan, California & Maine. Services nationwide.
[Full copy of the Treasury report at http://www.treasury.gov/tigta/auditreports/2011reports/201140065fr.pdf]