September 15, 2014
Monday PM

Some of you have already experienced a 1099K, or Form 14420, audit. In two years my firm has dealt with more 1099K audits than field audits since 1989. Form 1099K is the IRS form invented only about four years ago that informs merchants how much their credit card sales have been annually. For a year or two there was a line on IRS forms for posting the 1099K amounts that was not even used; then a posting was expected, and in relatively short order we all discovered how this new tidbit of information was going to be used by the IRS.

The stunt starts with a letter that says this, more or less, in the first paragraph: “Our statistical analysis of businesses similar to yours indicates that on average they have 53% of sales using credit cards and 47% cash or checks. Your business reports 85% credit card sales, an amount so skewed, based on these averages, that we have concluded you have undeclared and hidden cash income in an amount no less than $375,000 and no more than $735,000. Please let us know which of these two numbers is closer to correct, and we will assess additional income tax accordingly. Failure to respond to this notice within 30 days, and we will assess what we decide to assess, based on our own fundamentally flawed logic.” I paraphrase, of course.

There are actually two problems here. The more straightforward, yet perhaps more complicated, is how do you prove something that never happened? Think on that a moment. Second, this is a fundamental violation of the basic tenets of English Common Law, sometimes referred to as Natural Law, to wit, a person is innocent before the law until proven guilty beyond a reasonable doubt. In this instance you are branded guilty before the law ‘a priori’ and are somehow expected to prove your innocence of something that perhaps never occurred; all of this before a procedural stacked deck in which you are simply the pawn or victim of a bureaucratic procedure administered by a government employee somewhere in Tennessee.

We have now had two cycles of this nonsense; next year will be the third year. It is reasonable to assume their attacks will become more subtle and more substantive.

While I do encourage all of you to contact our Congressional Delegation to object to this stuff, I duly note I have already done that; and they are as unresponsive as the three toads on a log that they are. (No, I don’t think a Koch brothers toady like Sullivan would be any kind of improvement, but rather Alaska’s very own Ted Cruz.) I think our whole Congressional delegation needs to be trashed, but that is a subject and an act for some time in the future. I simply note I don’t think you will get very far with this bunch toward fixing this IRS thing.

Which means you need to protect yourselves because no one else will. Not so unusual conceptually to be sure, but in this instance it requires something that is incredibly difficult for most small business people in this town: Count your inventory precisely. If you have to spend an extra $500 to $1500 a year to get precise readings on your inventory quarterly and annually, do it. A dumbed down, estimated inventory, and no lawyer or accountant can protect you.

The IRS is poking holes to the extent of trying to invent them where none exist. A competent pro looks at the problem from both sides of the table, and inventory will be the next thing the IRS starts poking at. So far I have been able to keep these dogs at bay; but their job is not to lose every time out, and if I were they, I know where next I will go.

I will be blunt. Count your inventories precisely or get ready to lose your ass.

Received September 13, 2014 - Published September 15, 2014

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