The IRS is investigating American Express

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Reliable sources have informed Wall Street Journal (WSJ) that the Internal Revenue Service (IRS) is investigating American Express (AmEx) regarding a controversial tax break it promoted to clients to increase sales. Sources claim that the investigation has been ongoing for several months. Earlier, WSJ had reported that Amex sales were marketing its services, citing a tax break using a questionable interpretation of tax laws. This sales strategy was used to persuade business owners to register for a costly payment service of AmEx.

AmEx had earlier acknowledged in earlier news reports, stating that some of the sales staff in the United States did not uphold the company’s core values and may have misled customers regarding the tax benefits of some services/products.

The company claims it has already changed the policies, staff, and products to prevent similar problems. Also, it confirmed that AmEx is cooperating with the relevant government agencies and regulators. Like it mentioned in November, Amex confirmed that it has hired an external law firm to investigate its sales strategy for small businesses in the United States. Depending on the law firm’s recommendation, further action will be taken.

AmEx confirmed that it had discontinued the services associated with the questionable sales strategy. Insiders claim that these services were available to many companies in different sectors.

In March 2022, employees of AmEx were told that the company was discontinuing the payment services offered to franchises of McDonald Corp. The latter was informed about the tax break to lure them to register.

Typically IRS investigations into tax evasions can take several years. Tax experts claim that AmEx could decide to provide IRS with details of the clients who registered for their payment services. Additionally, these tax experts claim that AmEx may choose to hand over its profits from this sales strategy to IRS.

It was not clear whether the IRS examined the business owners’ tax returns who availed of the Amex services. IRS spokesperson claimed that legally the agency is prohibited from commenting on specific businesses and taxpayers.

Information about the Amex sales pitch, which is being investigated by the IRS, is available to the WSJ from multiple sources. The sales strategy is specified in sales and training documents. Additionally, current and past employees of Amex have also confirmed that it was used.

McDonald’s franchisees, payroll companies, and eye doctors were some of the different businesses and professionals who were encouraged to pay employees and vendors using AmEx cards and wire transactions. The business was told that the transaction charges could be deducted as business expenses, reducing their income and taxes they had to pay.

Additionally, the business owners were told that they would get reward points for using the Amex services, and they could transfer these reward points to a specific Amex card. These points could then be converted into cash, which was not taxed.

Reward points are usually not taxable when the person uses the card to make personal purchases. However, the tax status is less apparent when the business is spending the money to earn the reward points and the business owner is redeeming the reward points for income.

WSJ earlier reported that a whistleblower had complained that AmEx had intentionally persuaded business owners to report lower income and taxes. IRS rewards whistleblowers, paying them a percentage of the taxes it recovers because of their reports. Reliable sources indicated that AmEx had terminated at least a few vice presidents who handled the sales teams which used the questionable sales strategy in the last few weeks.

Other government agencies are already investigating AmEx over its sales strategy for cards, claiming that business owners were misled about the benefits and costs of owning AmEx business cards.

The IRS is also investigating the allegations that AmEx staff used fake Tax identification numbers (TIN) to fill business card applications. Amex claimed that this was done only for a short period until the correct TIN was obtained. This practice was reportedly discontinued in 2018. Other federal agencies investigating the AmEx business card practices are the criminal, and civil fraud division of the justice department, treasury department, federal reserve, and the FDIC.

We urge our clients and readers to think long and hard before applying for any credit application in light of this news. No one wants to find themselves in a similar situation, but it’s important not to let sales pitches influence your decision-making when applying for business credit cards. We certainly don’t want you to encounter any unexpected surprises down the road.

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