Most business owners go about running their affairs diligently, following the rules and paying their taxes as prescribed by federal and state tax law. On the other hand, there are some taxpayers who attempt to take advantage of the self-assessing nature of the tax system, that is, taxpayers tell the government how much they owe in taxes and it is up to the IRS or state taxing authorities to discover inaccuracies and challenge them. One of the ways that some business owners aim to cheat the system is by simply underreporting income. Although there are many taxpayers who attempt to over-inflate business expenses, some attempt to illegally lower their gross receipts, thereby lowering their overall tax burden. Revenue suppression software or “zappers” have become quite popular among those attempting to skirt tax obligations, and likewise, have fallen into the sights of the IRS and state taxing authorities.
A “zapper” is software that works at the taxpayer’s point-of-sale to reduce the amount of cash receipts recorded for record-keeping purposes. The software in its most basic form keeps two sets of books. The first is a true reflection of the gross receipts of the business, both cash and credit. The other is a skewed version of the first with a portion of the cash receipts “skimmed”. The skimmed books are kept for official record-keeping purposes (specifically for tax preparation) and the books that reflect the true amount of business receipts are typically destroyed or hidden by the owner. If and when the business is the subject of a tax examination, the skimmed financial documents are produced and the IRS or state tax examiner is left to determine the validity of the information on the return.
Tax authorities, be it the IRS or the California Franchise Tax Board, are not too happy about the existence of this technology. In order to combat this relatively new practice, they have developed several enforcement and investigatory strategies, some of which are described below.
John Yin, a resident of Everett, Washington, pleaded guilty in December to wire fraud and conspiracy to defraud the U.S. government. Yin, according to a press release by the Department of Justice, sold revenue suppression (zapping) software to Seattle businesses that allowed them to avoid paying approximately $3.4 million in taxes to the IRS and the State of Washington. Yin is scheduled to be sentenced later this week.
A common method used by the IRS when it is believed that a business is not correctly accounting for the cash that they receive is to place undercover agents in and around the business in question. The clandestine agents observe the ratio of cash to credit card transactions and that information is compared against the business’s tax return and financial documents to determine if a discrepancy exists.
There are several other methods that taxing authorities use to sniff out taxpayers using zappers. The bottom line is that if you are using revenue suppression software, the IRS and state taxing authorities have made it clear that they will prosecute and imprison those who use or even sell such technology. If you are a business owner who is the subject of a state or federal tax audit, it is in your best interest to contact an experienced tax audit defense attorney. An experienced tax attorney can evaluate the specific facts of your case and represent you in every stage of the examination.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience in representing California business owners who are facing trouble with the IRS or California Franchise Tax Board. Our zealous advocates are ready to develop a strategy to help you mitigate the potential negative consequences of an IRS or state tax audit or investigation. Don’t lose another night’s sleep over tax troubles. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.
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