Check It, IRS

Comrades! Before you read the long entry below, read this short blog post by POCA's super-smart CPA, Nola Wilken.

June 23, 2014
Dear IRS,

This letter is in response to letter 5043, dated June 16 2014, which I received from you last week. You contacted me because you reviewed Working Class Acupuncture’s 2012 tax return and noted that credit card payments represent 59% of our gross receipts, whereas “most similar businesses” have credit card payments of  between 26.3% and 51.6%.  This caused you to question whether we are reporting all of our gross receipts, including cash and checks.

You wrote: “If you believe you filed your tax return correctly, provide a written explanation telling us why the amount of your gross receipts from non-card payments, including cash and checks, appears unusually low. When you compose your response, consider why your card receipts to gross receipts ratios may appear higher than that of other businesses of your type.”

When I opened your letter, I admit that I got indignant. I started my business back in 2002 as a sole proprietor because I couldn’t find steady work in my field. Like many small business owners, my goal was to put food on the table,and I was pretty much invisible to the larger world; only the people who were my customers took any note of what I was doing. But a lot has changed in 12 years, and your letter came as the last in a series of recent inquiries from various people who have noticed how different Working Class Acupuncture is, in any number of ways, from “similar businesses”, and they want to know why. Your letter was kind of the last straw, and the more I thought about it and all the straws that came before it, the more upset I got.  I’m not upset anymore but I hope you don’t mind if I take this opportunity to answer your question thoroughly. I’d like to be able to recycle it for the next person who asks: why are you so different?

I know you’re busy so let me give you the short version first. If this satisfies you that WCA reported all its receipts, you don’t need to keep reading.

The Short Answer

We reported our receipts accurately, to the best of our knowledge. (More about that in the long answer.)

We were audited last year, through no fault of our own. (More about that also in the long answer.)

When you refer to “other businesses of your type”, I can only assume that you mean other acupuncture practices. You might mean other kinds of alternative medical practices as well.  I don’t know if you know this, but the alternative medicine industry in general and the acupuncture profession in particular are, economically speaking, a train wreck.

Many acupuncturists (and massage therapists and chiropractors and naturopaths) can’t make a living at what they do. They have to get second jobs in something more economically functional than alternative medicine. I don’t know if your comparison data is drawn from all acupuncturists, or just acupuncturists who do actually take credit cards as well as cash and checks, but I can tell you that many acupuncturists (and massage therapists and chiropractors and naturopaths) have practices that are so small, so poorly organized, and in every way so resembling a hobby rather than a business, that they either have no need to take credit cards or couldn’t afford the associated fees. This would certainly skew the data. Working Class Acupuncture is arguably the largest and most successful acupuncture practice in Oregon.

And as for practices that are not a hobby, that are big enough to be compared with us and  that do take credit cards, most of them got that way by billing insurance. Most acupuncturists (and massage therapists and chiropractors and naturopaths) charge fees that most patients cannot afford to pay out of pocket. If they are going to receive treatment, they have to have insurance cover it. For many busy acupuncture practices, the payment scenario looks like this: the fee for acupuncture is around $100 a treatment; the patient pays a copay of anywhere from $10 to $45 (possibly by credit card) and the practice bills the insurance company for the remainder of $55 to $90. The insurance company (eventually) sends the practice a check, which is usually for more than 50% of the fee.

Working Class Acupuncture doesn’t bill insurance, so we don’t receive any insurance checks. All of our revenue comes to us directly from individuals. We charge $15-$35 per treatment and our patients choose what to pay, no questions asked. If you had told me to estimate the proportions of how people pay, based on the time I cover the front desk so our receptionists can take a break, I would have guessed that 70% of our patients (at least) pay us with a card. The proportion seems to have steadily gone up since we started accepting credit cards. Sometimes people heartbreakingly count out $15 in one dollar bills and coins; sometimes they nonchalantly toss two twenties on the desk and tell us to keep the change, because it’s payday, and sometimes –usually it’s an older person on a fixed income — they show up with a carefully prewritten check. But most of the time, these days, it’s debit or credit. Portland loves the cashless economy and our patients are no exception.

Here is a description of our internal controls and cash receipt procedures:

When a patient comes in for an appointment and pays for acupuncture or products, the payment is logged in two places: (1) associated with the patient's record on our online scheduling and appointment database, and (2) on a paper ledger that is either handwritten or kept electronically and printed out after each shift.  The online scheduling and appointment database provides the ability to look up a previous payment at any point in time. 

The ledger is kept by each receptionist when they work at the desk.  It lists:
the name of the patient,
the amount of money that was paid,
the method of payment: cash, check, or credit/debit, and
the category that describes what the payment was for: acupuncture, herbal products, retail (shirts and tote bags), or books. 

When closing a shift, each receptionist confirms that the totals on the ledger match the actual cash, checks, and credit slips on hand, which are then bundled with each ledger. 

On either a weekly or bi-weekly basis (bi-weekly for our busiest location, weekly for our other two locations), a designated person at each clinic location checks each ledger bundle to verify the cash and checks on hand match the total listed on the ledger for that shift.  The cash and checks from all the ledgers in the deposit period are then combined, counted, recorded on the bank deposit bag, and deposited at the bank. 

After the deposit has been made, our bookkeeping assistant compiles the information from each ledger in the deposit period onto a master spreadsheet.  This spreadsheet captures the information from all the ledgers on one page so as to provide grand totals for cash deposit, check deposit, and a breakdown of the income for each category (as listed above, i.e. acupuncture, herbal products, etc). 

The spreadsheet cash and check total is reconciled with the cash and check total counted by the deposit preparer.  The grand total for cash and checks is entered into Quickbooks, and reconciled by our bookkeeper to ensure that the amount we recorded matches the amount received by our bank.  The spreadsheet is printed and filed in a packet with the ledgers from the deposit period, the bank deposit bag receipt, and the deposit slip.  

The Long Answer

We report all of our receipts, including all of our cash. I’m afraid you won’t believe me, but we do.  Down to the last nickel (yes, we have been paid in nickels).

One of the reasons I was indignant when I got your letter is that we were actually audited by the IRS last year: not because there was any problem with our tax return, but because we were randomly selected for an employment audit. I knew, and our auditor confirmed when he arrived, that this was because “similar businesses” are misclassifying their workers as independent contractors when they should be employees. I can tell you that the root cause of this practice is the aforementioned economic train wreck of the acupuncture profession. There is simply not enough money in what we do to make a profit from having employees. Many acupuncturists, when they have built their business up to a certain point, go looking for a desperate new graduate or two and offer them a “business opportunity” as an independent contractor, and then proceed to treat them like an employee. Working Class Acupuncture doesn’t do this (more about this in a bit) and in fact for years has been haranguing other acupuncturists to stop it, because at best it can be confusing or deceptive to the desperate new graduates in question and at worst, it can be predatory. Anyway, it was ironic that we were being audited — though it certainly gave us some excellent ammunition in our ongoing haranguing. At the end of the audit we owed you a grand total of $34.44. Our auditor’s name was _____ and his contact information is ______. Please check with him about his impression of our business, our practices, our purposes and our level of transparency.

So this is where my answer gets long, because there are a number of questions that keep arising about how we are different from “similar businesses”. (They are not really similar!) Why don’t we bill insurance? Why don’t we have independent contractors? Why do we report all of our receipts when it’s so common to skim off cash? Why do we keep growing our business even though we don’t get paid more for it? And why, oh why, do we charge so little?

There is really just one answer to all of those questions, and that is we are building our own world.  We want a lot of things that “similar businesses” don’t want, and we don’t want a lot of things that they do.

I know this is quaint and old fashioned but one of the main things we want is a world where healthcare is about people, not profits. We charge as little as we possibly can so that as many people as possible can afford to see us.  Many “similar businesses” actually despise us, because they say we’re “devaluing the profession”/ “degrading the medicine”/ “denigrating the traditions” and generally “lowering the bar”.  I can give you a list of people (just have to check the return addresses on my hate mail) who would be disgusted to learn that anyone in any official capacity is comparing the economics of our practice to theirs. This is one major reason we report all our cash: we made a policy quite awhile back of being squeaky-clean in our operations. We get accused of so many ridiculous things by our erstwhile colleagues, we can’t afford to be accused of anything real. As a result, many “similar businesses” think, besides being low life scum, we are also puritanical dorks.

We’re not really puritanical, though; it’s just that Working Class Acupuncture’s operations demand every single nickel. WCA can’t afford for its owners to skim anything off. World-building is an expensive proposition.

The reason that the acupuncture profession is an economic train wreck is, simply, not enough people are getting acupuncture. The major reason is that they can’t afford it. Most people don’t have insurance that covers it. But another big reason is that many acupuncturists don’t have what most people would describe as real jobs. They don’t have consistent hours; they move their offices a lot; their businesses don’t have reliable systems and policies; insurance that covers acupuncture is often limited and confusing; and as a result, it’s hard for patients to access treatment. What we want is the opposite of that: a world where acupuncturists do have real jobs, where patients know they can get acupuncture basically whenever they feel like it, and where the systems that govern the business are so simple and so transparent that anybody can understand them.

We charge our patients as little as we can and we pay our employees as much as we can — which is not much. We pay them as employees and not independent contractors, not only because we’re trying to be legal, but because even though it’s expensive, having real employees creates stability.  We, the owners, calculate our own pay using the same scale we use for our employees. Since none of us are getting paid much, we have to be paid fairly. Our margins are razor thin, and our books are open — because that is the only way this can work. It’s one thing to get a letter from you questioning whether or not we are skimming; it would actually be a lot worse for us if our employees suspected us of that. What we are trying to do, building stability and access and transparency with the train wreck of our profession all around us, is so demanding that we don’t have the energy to lie about anything. What you see with Working Class Acupuncture is exactly what you get.

Apparently we’ve built our world large enough that other people, including you, have noticed us. Our differences stand out. We provide about 1,000 affordable acupuncture treatments a week to our community and we provide 13 real jobs to acupuncturists. I’m writing this letter not just to answer you, but everybody who wonders if all the effort we put in to build our own world is worth it — worth the anxiety of the razor-thin margins, worth the misunderstandings and the questions, worth giving up all the cash we could have skimmed over the years instead of painstakingly reporting it and pouring it back into the business.

It’s worth it.  Completely. It’s like our pearl of great price. We have all kinds of rich relationships with our patients and our employees that people with “similar businesses” never get to have. We get to live in a world that really is about people rather than profits. We never have to wonder whether we are useful or connected or part of something bigger than ourselves. You are welcome to come visit our world and inspect it if you like: it was built to welcome to people in and it was built to be transparent. I would be happy to drive you around in my wheezing 10 year old car to visit our three clinics in their “bad” neighborhoods and meet our wonderful patients and show you how worth it it is. Some people get to take a vacation from capitalism and cynicism every so often, but we get to live there.

You wrote that you estimated that we had $106, 543 to $887,566 in potentially underreported income. I wish we did! If we had, we would have opened two or three more clinics in “bad”neighborhoods AND we would have given everybody a raise. Or if we were doing that well, maybe we would have dropped the low end of our scale so that more people could afford to see us.  The point is, the only thing we will ever do with more money is to keep building our world. And we promise we will tell you and everybody else the truth about it, because that’s the only way we can do it.

Sincerely,

Lisa Rohleder
owner, Working Class Acupuncture

lisafer
Author: lisafer

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  1. Wow Lisa, well said! Of course, I hope a real human being actually reads your letter of reply. I am sure that WCA was ‘chosen’ by a computer merely following some algorithm, and sincerely hope that it is not reviewed by computer as well….

  2. I remember receiving a letter very similar to this from the state of California. This was around 2008 when I was still BA and I think I may have grossed around $2000 for the entire year.

    I got a note that said something to the effect of “based on our average calculations an acupuncturist should be making XXXX amount of money”.

    …I think it was like $40,000 net.

    Fortunately I had a CPA (and patient) sharing my office next door. She said don’t sweat it, here’s exactly what you do. She walked me through the exact wording that sounded rather dry and brief- and frankly I don’t remember verbatim but it basically translated to this:

    “uh dude…? I don’t make that much. See ya.”

    I was honestly rather nervous at the time but my CPA friend said do not even sweat it. They are just sending out things, hoping they get a legitimate bite. If you send them this, they will back down. (This is assuming that they are wrong, of course, which I’m sure in most cases they will be).

    Sure enough, I received a letter shortly thereafter saying it was case closed.

    Of course, this was the state, not the feds- but I notice the similarity in the wording and “strategy”, if you want to call it that.

    It’s pretty funny, you know. It’s like the acupuncture schools have actually managed to brainwash the IRS as well. Go figure.

    Anyways thanks a lot for the heads up.

  3. Thanks for posting your letter to the IRS educating them about a social business and the realities of the acupuncture field.
    Let us know how they respond.

  4. I love so many things about this. Especially this: “many “similar businesses” think, besides being low life scum, we are also puritanical dorks.” (Actually laughed out loud.)

    Thank you, once again, for explaining so painstakingly clearly what you/we are ACTUALLY DOING.

    …Have any of my Canadian counterparts had similar experiences with the CRA?

  5. “Some people get to take a vacation from capitalism and cynicism every so often, but we get to live there.”

    New POCA motto?

  6. As an aside, what century are the bean-counters at the IRS living in? An awful lot of people never carry cash anymore, never mind writing out checks. They need to hire some Millennials there or something.

  7. I recently was doing numbers analysis and came up with the fact that 59% of our fees are on credit cards. I couldn’t believe it when yours was the same. Maybe I should be expecting a letter from the IRS soon.

    If I do, can I just send them a copy of your letter? You have said it so much better than I ever could.

    I know you’re hiding a Maserati with $100k in it somewhere – fess up!

  8. Kerri, wow, that’s interesting, and yes, you can totally send them a copy. And for anybody else who gets one of these letters…you can now tell them what the ratio for truly “similar businesses” is.

    Anybody else do this kind of number crunching? Now I’m really curious.