Legal Issues

How States Are Cracking Down on Small Business Tax Cheats


Small businesses and the self-employed stiff the federal government on billions of dollars (PDF) in unpaid taxes each year, according to IRS estimates of the tax gap. That’s the difference between taxes owed and the amount actually collected. States also have tax gaps: California’s is about $10 billion annually, and the Golden State is investing $670 million over five years in technology to improve its collections, expected to raise an additional $1 billion a year in tax revenue.

California isn’t alone. According to interviews with revenue officers from 30 states published last week by Bloomberg BNA, states are betting on new compliance tools aimed at collecting billions of dollars in unpaid taxes. While those efforts aren’t focused solely on Main Street, there are plenty of developments small business owners would do well to keep up on. Here are four takeaways from the BNA report:

Big data is for tax collectors, too. We hear plenty about how big data can help companies, large or small. Tax collectors are finding new ways to use data, according to BNA. 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.

Licensing leverage. State tax collectors are also working with other agencies to put pressure on delinquent taxpayers. Connecticut is withholding permits to retailers that owe state taxes. New York is working on a similar plan, and North Carolina may soon prevent businesses that owe taxes from getting or renewing liquor licenses.

Good neighbors. Kansas and New Mexico are sharing data with other states to keep tabs on fraudsters, according to BNA. California and New York have entered into a formal partnership: If a taxpayer is due a refund in one state, but owes a tax debt in the other, the refund will be automatically used to pay the state holding the tax debt. Nevada, meanwhile, is watching for residents and businesses that buy expensive items such as cars and aircraft in states that don’t charge sales tax.

Jail time. In Illinois, judges are increasingly willing to lock up tax cheats. 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.

Clark is a reporter for Bloomberg Businessweek covering small business and entrepreneurship.

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