FOR IMMEDIATE RELEASE

            SEPTEMBER 13, 2006

FROM:  WAYNE UNZE (797-1100)  

VAUGHAN COMPANY BUSINESS OPPORTUNITIES

RE:  BE AWARE (BEWARE) OF THE TAX GAP

My friend, Don Kamin (Accounting Associates owner) recently returned from a

national IRS tax forum and informed me that the IRS commissioners addressed

the issue of the “Tax Gap” – the difference between what taxpayers should pay

and what they actually pay.  Two major components of the Tax Gap are the

underreporting of small business income and the overstatement of expenses.

Owners of small, closely-held businesses typically enjoy many financial and tax

advantages that the general workforce does not, including higher incomes, control

over their entrepreneurial destiny and tax write-offs – some legal, some not. 

 A sampling of the more common legal deductions would include:  travel expenses

to business-related meetings and seminars, 50% of the cost of meals with business

associates, health-care benefits, amortized start-up expenses and depreciated

equipment costs.  Some of the “overstated abuses” include non-business-related

travel, entertainment and meals, personal use of company auto, personal use of

company credit cards, consumption of company supplies, “skimming” from the

cash drawer and other imaginative “slight of hand.”

To determine the extent of the Tax Gap, the IRS surveyed 46,000 businesses.  The

survey showed that the missing taxes from small businesses alone may be in the

neighborhood of $109 billion - a neighborhood the IRS now wants to excavate.

In another study, the California Franchise Tax Board identified the types of

businesses that had the highest noncompliance rates.  Antique dealers led the list

with a tax underreporting rate of 60 to 70 percent.  Next were restaurants (55 –

 65%), used car dealers (45 – 55%), auto repair shops (40 – 50%) and landscaping

businesses (35 - 45%).  Some of the noncompliance was willful and some was

due to ignorance of the law. 

Based on my experience, New Mexico would probably fall into line with the

California statistics.  In fact, I would submit that 75 to 85% of the small

businesses which handle “cash” sales are likely to be guilty of some skimming.

According to the IRS, business owners are required to report all income including

the usual  (cash, checks, credit, interest and dividends), as well as the unusual

 (barter, rent, cancelled debts, promissory notes, damage awards, injury payments

referral fees and kickbacks).  As a result, the IRS is stepping up its enforcement

efforts by increasing the number of audits, and subsequently, assessments for

offenders. 

The IRS will also utilize additional third-party reporting requirements, such as

asking financial institutions to report basis (the sales price minus the purchase

price) to determine the taxable capital gain on a transaction.  In particular, the IRS

will focus on analyses and audits of S-Corporation tax returns.  This will have a

direct impact on future business sales.

How can small business owners prepare for this new IRS assault?  Of primary

importance is for them to review and update their books and records.  Many small

corporations and LLCs have not updated their corporate minutes and other

records to conform with IRS requirements.  Financial documents must also be

reviewed to make sure they are both accurate and complete.  In some cases it may

be prudent to amend past tax returns to stave off an unwanted audit and possible

penalty and interest charges.

By using preventive maintenance measures consisting of better record keeping

and the exercising of “write-off restraint,” small business owners can weather the

storm associated with this new IRS focus.