While the odds of being audited by the IRS are low (just over 1% of all individual tax returns), self-employed and non-salaried small business owners are more likely to be asked to document their returns than other tax payers. Why? Because they receive no W-2s from employers, they are essentially on the honor system when it comes to reporting income.
According to interviews with 30 state revenue collectors conducted by Bloomberg, states also are now looking for ways to “crack down” on “small business tax cheats.” Bloomberg’s interviews reveal that states will be increasing their small business compliance efforts using several methods:
Florida is working on a program to use car sales data collected by its Department of Highway Safety to make sure auto dealerships report sales figures accurately. Tennessee and Texas have similar programs to keep beer and tobacco retailers honest by gathering data from wholesalers. Georgia, Indiana, Louisiana, and Massachusetts are among states working with legal information company LexisNexis to cross-reference tax filers’ personal information against historical addresses.
In Connecticut, business permits are withheld if a retailer owes state taxes. Similar plans are being considered in New York and North Carolina.
State-to-state data sharing.
Tax fraud information regarding individual tax-payers is shared between Kansas and New Mexico. California and New York won’t issue refunds to tax payers who have tax debts in the other state. Nevada monitors residents and businesses that buy expensive items in states that don’t charge sales tax.
In Illinois, a series of investigations targeting gas station owners helped the state collect $90 million in tax revenue and resulted in jail time for unscrupulous business owners.
For more, read: How States Are Cracking Down on Small Business Tax Cheats (Bloomberg Businessweek)