With California being the world’s eighth largest economy, there is a constant need for money to flow into the coffers of the state. This being the case, the California Board of Equalization (BOE) has every incentive to ensure that it is collecting the correct amount of state tax from California businesses. One of the larger challenges that the BOE faces is determining whether a taxpayer is actually paying their fair share of state taxes. That task becomes increasingly difficult when the businesses at issue are small to medium-sized and are largely cash-based.
In a prior blog posting, the Tax Law Offices of David W. Klasing reported on a new law that was being backed by the BOE that made it a crime to use “zapper” point-of-service programs. Zappers or phantom-ware are pieces of software that are integrated with the bookkeeping software and other point-of-service equipment at small and medium-sized establishments and will generally “skim” or “zap” and amount of cash transactions in order to create the appearance that the business is brining in less cash than they actually are. The programs typically create two sets of books: one that reflects the actual earnings of the company and one that is used for taxable revenue reporting purposes.
The Skinny on the New Law
Under the new law, convicted taxpayers could receive jail sentences of up to three years and face fines of up to $10,000 for each offense. The punitive penalties are levied in addition to any unpaid taxes on unreported income. Either taken apart or together, the financial implications of being found to have violated the new zapper law has the potential of being financially crippling both to the business and its owner.
Zappers are most commonly used by small restaurants and convenience stores that see a large amount of cash transactions. In a presentation at the Tax Administrators Technology Conference last year, it was estimated that over 2.3 billion dollars of tax revenue is lost each year in the U.S. with regard to the underpayment of taxes from restaurants alone. Convenience stores were also estimated be responsible for a 1.1 billion dollar cumulative shortfall in revenue due to the under-reporting of taxable income.
California isn’t the only state that has implemented laws to try and curb the practice. 16 other state legislatures have passed similar legislation making the use of zappers and phantom-ware illegal. The crackdown has even prompted state business associations to give their members a warning about the new laws. The California Restaurant Association issued a bulletin that explained the many benefits to having advanced point-of-service software but also cautioned business owners about both the potential for misuse and the very real possibility that there will be severe consequences for those business owners ho choose to break the law.
Enforcement of the zapper law draws on a traditional tactic used by the BOE and the IRS: sending agents to covertly monitor the cash intake at establishments suspected to cooking their books. And although it seems hard to believe that the government would send undercover investigators into businesses, convictions based on this type observation are common. In fact, a California business owner was sentenced to 10 years of formal probation and ordered to pay over $700,000 in restitution last week for under-reporting income by over $525,000. Although the Tracey businessman was not charged with regard to the new “zapper” law (because at the time of his prosecution, the law had not yet gone into effect), business owners who are being accused of under-reporting their income to the BOE or the IRS have a lot to worry about.
Another scary reality for business owners is the fact that the BOE has begun the criminal investigation of taxpayers who are suspected of using zappers, phantom-ware, and other point-of-service software and devices that help taxpayers manipulate their income in order to pay less tax. With the ball rolling on criminal investigations with regard to zappers, it is certain that criminal prosecutions for violating the law prohibiting such technologies will increase and the BOE will be relentless in its enforcement efforts.
Contact a Tax Lawyer with Audit and Zapper Experience
Whether you are a business owner who wants to come into compliance with the new zapper law, are fearful that you are being investigated, or are already subject to an examination or investigation, consulting with an experienced tax lawyer is likely the best move that you can make. The attorneys and tax professionals at the Tax Law Offices of David W. Klasing have years of experience in not only zealously advocating for our clients in audits and criminal investigations, but we also have experience in defending taxpayers that have been investigated under the new zapper law. When going up against the BOE or the IRS, nothing good can come out of taking the journey alone. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.