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The Tax Prophet Newsletter   Issue # 37 June, 2006

REDUCE TAXES!

CHECK OUT THE TAX PROPHET'S Action Guides


In This Issue:
Introduction
3-Pronged Approach
Prime Targets
Internet
New Measures
Conclusion


IRS Targets Small Business
For Audit


Introduction

To close the estimated $345 billion in uncollected annual tax receipts (the "tax gap"), IRS has pinpointed small businesses and the self-employed, as the major culprits.

An independent survey by the National Research Program revealed that an estimated whopping 43% of the tax gap can be traced to this group.

3-Pronged Approach

IRS have developed a three-pronged strategy to narrow the tax gap. First, it locates pockets of non-compliance through independent surveys.

Next, it educates the target group regarding their tax responsibilities, recognizing that the tax gap involves honestly confused taxpayers, as well as deliberate tax cheats. This outreach stems from the beating IRS took in Congress about a decade ago for failing to provide "customer service" in helping taxpayer comply with the law. To insulate itself from Congressional criticism, IRS now engages in an informational campaign before lowering the boom.

Finally, IRS bares its fangs and vigorously pursues those who persist in underpaying their taxes after fair warning, including criminal prosecutions for tax evasion.


Prime Targets

According to California's Franchise Tax Board (FTB), restaurants were the worst offenders, with levels of non-compliance between 55% and 60%. Used car dealers were next with levels between 45% to 55%, followed closely by auto repair shops at 40% to 50%. Rounding out the list were landscaping companies with 35% to 45% non-compliance.

FTB claims California's tax gap is approximately $6.5 billion, with sole proprietors as the main offenders.


Internet

The tax gap includes unreported internet sales. An estimated 430,000 internet businesses generate close to $50 billion in revenues, none of which is effectively tracked by IRS, since internet sites to not report customer sales.


New Measures

To help close the gap, Congress passed legislation requiring federal, state and local governments to withhold taxes equal to 3% on services or property provided to the government, starting in 2011. Government agencies must also report payments and amounts withheld to IRS. Also, the Bush Administration has proposed that credit and debit card companies report to IRS payments made to merchants.


Conclusion

Once again, it seems that IRS is focusing on small businesses and self-employed individuals, rather than gunning for large corporations and major crime-related tax evaders, such as organized crime, money launders and drug dealers. This time, however, IRS appears to be on target. As a practical matter, the tax returns for this group may be the easiest to audit.

Withholding tax on payments by government agencies, along with increased reporting by government agencies and credit and debit card companies, should effectively reduce tax cheating by all businesses, large or small.



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All contents copyright 2006 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet is a registered trademark of Robert L. Sommers.