WorldWide Drilling Resource

37 WorldWide Drilling Resource ® FEBRUARY 2014 Drilling Into Money Not Boring by Mark E. Battersby Audits that ain’t and Audits that are Thousands of small business own- ers have received letters from the IRS (Internal Revenue Service) questioning whether they are underreporting their business income. IRS officials say the letters many small geothermal, water well drilling, and irrigation business owners have received in recent months are not the same as an audit but rather are simply requests for more information. Although potentially alarming, this is the latest move in the agency's effort to combat what it sees as a widespread problem: failure by businesses, includ- ing mom-and-pops, to report all cash sales, to minimize their tax bills. Under- reporting of income comprises the major- ity of the so-called "tax gap," the difference between what Americans owe and pay, according to IRS data. In 2006, the most recent year available, the total tax gap was $450 billion. Underreporting account- ed for $376 billion of that total, and underreported small business income totaled at least $141 billion. One typical letter to a small busi- ness owner is headlined "Notification of Possible Income Underreporting." It begins, "Your gross receipts may be underreported." The letter instructs the owner to complete a form "to explain why the portion of your gross receipts from non-card payments appears unusu- ally low." It says the business owner must respond within 30 days. The letter implies it is a serious mat- ter which could lead to assessments of additional tax, penalties, and interest,” according to Representative Sam Graves of Missouri, chairman of the House Small Business Committee. The IRS defended its approach as "measured and equitable in several ways, including giving taxpayers the opportu- nity to explain and fix errors." It added: "An important component of this proj- ect is [to] 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." The latest IRS initiative is creating fear among business owners. After all, it is often difficult to match credit trans- actions with income. As just one exam- ple, many small equipment dealers and others are required to collect sales taxes. Although reflected in credit transactions as “income,” sales tax is actually a lia- bility and is not reported as revenue. As for those letters questioning whether the drilling business is report- ing all of its cash income, remember, the IRS says the letters are not the same as an audit, it is simply seeking more tax information from the business. Be sure to follow through as a response is demanded within 30 days and, as with any IRS correspondence, the letters should not be ignored. Mark Mark E. Battersby may be contacted via e-mail at admin@ worldwidedrillingresource.com