Has the IRS overreached in audits of small businesses?

The National Small Business Association (NSBA), a small business advocacy group, has launched a new Web site, PreventIRSAbuse.org, designed to uncover potentially abusive Internal Revenue Service (IRS) audit tactics and inform its members about efforts by the IRS and Congress to use small business audits to enhance revenue. The NSBA site asks members to contribute their own experience with audits and challenges the fairness of the IRS characterization of the "Tax Gap."

Examples of new enforcement tactics, according to the San Francisco Chronical, include two little known provisions in the Housing and Economic Recovery Act of 2008 recently signed by the President that will require banks or companies like VISA and MasterCard that process a merchant's debit and credit card transactions to file a form with the IRS disclosing the dollar amount of payments the merchant received on those cards each year. The new law also allows a 28 percent withholding of a company's total sales if taxpayer identification can't be verified by credit and debit card companies.

Banks and other credit card processors must file the credit card information form beginning in 2011. The merchant will get a copy of the form, which will be similar to the 1099 information forms companies use to report other payments to the IRS.

The rule does not apply to merchants who make 200 or fewer online sales totaling $20,000 or less in one year, but it does apply to companies that process online payments, such as PayPal and Google Checkout.

The law is expected to raise about $10 billion in revenue over 10 years.

The provision, which was recommended by the Department of Treasury to narrow the tax gap, was included in the housing bill as an offset for the first-time buyers tax credit. according to the Web site for the National Association for the Self-Employed's.

In a press release, Kristie Darien, executive director of NASE's legislative office, said, "While we agree that Congress needed to address our nation's housing crisis, the NASE is deeply disturbed by the language on electronic transactions reporting which will only add to the regulatory burden on the micro-business community."

The NASE plans to continue to educate legislators on the negative impact this tax regulation will have on small business and will fight to repeal this provision before it is set to take effect in 2010.
 

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