October is a witching month. Summer fades; leaves turn golden hues and divine beings and spirits return, if only for one night on Halloween, to haunt us for our past transgressions. At least that’s according to old Celtic folklore.
But ghost and goblins aside, Halloween is good reminder for small business owners to get cracking on organizing tax records and making plans for any last-minute deductions to minimize your taxes. Deductions and such have to be taken before Dec. 31, in most cases, to qualify for the current tax year.
In its quest to close the so-called “tax gap” (the amount of tax collected versus the amount taxpayers really owe), the Internal Revenue Service this year will be stepping up audits and other enforcement actions, aimed principally at small businesses. The best way to avoid a dreaded audit is to make sure your records are organized and your returns are filed on time.
The agency estimates that as much as $197 billion a year goes uncollected from all sources due to underreporting of income. Small businesses, largely sole proprietors and S corporations, are responsible for about half (or $109 billion) of the shortfall, according to a recent IRS report.
While Congress has been pressuring the agency to raise annual tax collections from an average of about 85 percent of what’s owed to 90 percent, lawmakers have also cautioned the agency to avoid relying on audits and other enforcement actions. Instead, they have encouraged the agency to increase voluntary tax compliance through education programs and tax code simplification.
The agency acknowledges that common mistakes and errors involving complicated tax computations are responsible for most of the income that goes unreported every year, and says it has taken several steps to help educate small business owners.
In January, for example, the IRS started an e-newsletter to educate small business owners about their responsibilities. The IRS e-News for Small Businesses is free and you can sign up for it on the agency’s Web site.
The IRS has also set up a tax gap page on its Web site that includes a series of articles and fact sheets. They explain common mistakes small business owners make on their returns. This summer, the IRS also began distributing a series of summertime “tax tips” on areas of the tax code that could be troublesome for taxpayers.
In its FY 2008 budget request, the agency has also proposed expanding its outreach to small businesses through the Service Corps of Retired Executives (SCORE) and Small Business Development Centers (SBDCs).
It’s also developing relationships with more than 1,500 groups representing small businesses and tax professionals, and distributing educational products. They include such things as 10-lesson interactive small business tax workshop on DVD, a CD-ROM of small business resources, and a tax calendar for small businesses and the self-employed.
Sen. Olympia Snowe, R-Maine, the ranking member on the Senate small business committee, recently praised the IRS for its efforts. “While I am still reviewing the IRS’s overall strategy for enhancing tax compliance, I am greatly encouraged that the IRS has made a common-sense proposal to work with the SBA and its programs to assist small businesses,” she said in a statement.