The IRS is cracking down on the underreporting of cash transactions. Recently, IRS Letter 5036, IRS Letter 5039, and IRS Letter 5043 were sent to approximately 20,000 small business owners. The IRS letters have the heading of “Notification of Possible Income Underreporting.” The letter(s) notify small businesses that their gross receipts may be underreported based on the tax return and the Form 1099-K, Merchant Card and Third Party Network Transactions.
The Form 1099-K is a fairly recent information return that reports the gross amount of credit card and debit card transactions to IRS. The letters ask the taxpayer to review the information used in preparing their tax return to ensure that income was reported from all sources, including card, cash, checks, and other sources. The letter encourages the taxpayer to amend their tax return, if inaccurate, to report the additional income. If the taxpayer believes that the return is accurately filed, then the letter demands a written explanation as to why the portion of gross receipt from card payments and other 1099-K reportable transactions may be higher than usual.
If you receive a notification of possible income underreporting, you should contact an IRS attorney to review the tax year or years in question and to respond to the government. Any time that the IRS suggests underreporting income, it has the taint of criminal tax exposure or civil tax fraud. If gross receipts are unreported by $50,000.00 or more then, the IRS fraud technical advisor will become involved during a tax audit. The fraud technical advisor determines whether to refer the case to the IRS Criminal Investigation (CI) or to assert the civil fraud penalty. Sometimes through parallel investigations, IRS CI can surreptitiously be working in the background.
Generally speaking, the IRS has three years from the date of filing to audit a tax return. However, the IRS has six years to audit a tax return if there is a substantial understatement. A substantial understatement is defined as an omission of 25% or more of gross income. There is no period of limitations on assessment for a false or fraudulent return with intent to evade tax. The IRS bears the burden on the extended statute of limitation, assessment periods.
At the Law Offices of Todd S. Unger, Esq. LLC, we can help you respond to the Notification of Possible Income Underreporting. Todd S. Unger, Esq. is an IRS attorney whose practice is devoted exclusively to civil and criminal tax controversies with the IRS or New Jersey Division of Taxation. Call now for a free confidential consultation.