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Tax gap, tax-cheating software tools and what to do

Zappers are a device that allows some sales to just not get reported. They are also known as “automated sales suppression devices." An article in August 2011 in Governing magazine noted the reality that business owners could remove millions of dollars of sales and income from their records ("In An Uphill Battle, States Fight Tax 'Zappers'" by Holeywell).(Also see this August 2008 New York Times article.)

To help combat them, BloombergBusienssweek reports that five states have enacted legislation outlawing them ("State governments target tax-cheating software" by Adams, 4/3/12). The states: Florida, Georgia, Maine, Utah and West Virginia. This article also notes:

"Boston University tax law professor Richard Ainsworth, an authority on the issue, estimates that 30 percent of the predominantly cash businesses in the states are using tax zappers."

Of course, it is not only the states losing money - so is the federal government. I wonder if any of this is factored into the recent tax gap estimates from the IRS of a $450 billion annual tax gap.

Legislation outlawing the sale or use of these devices sounds like a good first step, but the problem is that people already willing to break the law are unlikely to be deterred by another law they might also find is easy to skirt. The devices can also likely be purchased from outside of the U.S. And there are alternatives such as the old-fashioned approach of just not reporting cash sales.

Additional solutions? There have been proposals in the past to require small businesses to use a single bank account for their revenues and deductible expenses so that reporting from the bank can help the IRS and state tax agencies know what happened. See for example, page 261 of this 2011 GAO report. This isn't perfect, but should help.

What do you think?




Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Outlawing the Zappers, and reqiring a single account both have limitations. There is no assurance that a "single" account is, in fact the only one, and since much of this activity is currency, there are alternatives [purchase of gift cards, for example, for personal use]. A "foolproof" solution may not exist. Predictive patterns from costs incurred may help as suppliers certainly will isit on being paid [some in cash, perhaps], plus visible lifestyle - the classical audit - may still be "state of the art".