Uncle Sam’s sniffing around in your affairs is not limited to your private emails and cell phone conversations. Your small business’s paper and electronic trails may be leaving behind the heady scent of money strong enough for Uncle Sam to track. And Uncle Sam does like to track, more than a Bluetick Coonhound from the South.

Recently more than 20,000 small businesses received an IRS Notice with a header howling, “Notification of Possible Income Underreporting.” The Notice then barks out loudly, “Your gross receipts may be underreported.”  The Notice whines about what the IRS believes to be your reportable income, then sets a 30-day time period for your response. Following that is Uncle Sam’s command to go over to your corner and sit and think about how much cash your business actually earned during the year.

How does Uncle Sam come up with the income he thinks your business has collected during the year?  The Notice yelps about Form 1099-K, better known as Merchant Card and Third Party Network Payments, which discloses how many non-cash receipts your business brought in. Then the Notice moans about how your non-card business receipts aren’t comparable with those of other businesses in your neighborhood:

“Businesses of your type in comparable locations consistently report a larger portion of gross receipts from non-card sources, including cash and checks.  Given the amount of Form 1099-K reportable transactions attributed to your business, a large amount of noncard revenue would be expected.”

The problem with Uncle Sam’s approach is that it doesn’t show the bones of its research – the “comparable locations,” for instance, or its methods for data collection, and it doesn’t cough up any of that data for the taxpayer.  Uncle Sam’s tone is scolding and condescending and designed to make your paws cover your eyes in shame.  And it’s meant to make you ‘fess up to things that maybe aren’t even true.
The overall result?  An image problem.  Uncle Sam accuses the taxpayers of underreporting.  Isn’t that what Uncle Sam’s doing?  Underreporting?  With the vague, but threatening Notices, Uncle Sam is playing yet another game to pounce on taxpayer information in less than honorable ways.  And that’s just plain sneaky.