UNDERREPORTING BUSINESS INCOME CAN BACKFIRE IN SELLING YOUR BUSINESS

As a business attorney, I’ve represented several clients who have sold or bought existing businesses. Sometimes the seller of the business will intimate, or even outright admit, that they have underreported their income on the business tax returns.

Of course, now that the seller wants top dollar for the business, the seller faces a hard choice: Admit to income tax fraud or get a lower price on the business sale. Last year, a business owner in this situation found himself sentenced to federal prison. Tony Cowden owned a pizzeria. When he met with potential buyers, they questioned him on how the reported income could justify the sales price. Cowden explained that he did not report much of the business’ cash, including sale of lottery tickets and revenue from arcade games. What Cowden didn’t know was that the potential buyers were undercover federal agents! In the end, Cowden went to federal prison for 18 months.

The moral of this story is not subtle. If you don’t report your full income to the IRS, don’t expect to sell your business for its full value. If you are looking to buy a business, be wary of sellers who claim to have outside income not reflected in the tax returns.