Now that the dust has almost settled on the 2009 tax filing season, small business owners who are already hard-pressed by the economy have something else to worry about: a knock on the door from an Internal Revenue Service agent.
More likely the “knock” will come in the form of a letter, but for an increasing number of small business owners, audits and examinations are a growing fact of life. IRS audits of small businesses increased by 41 percent from 2005 to 2007, while large business audits actually declined by 40 percent, according to Rep. Nydia Velazquez, D-N.Y., who chairs the House Small Business Committee.
“At a time when small business audits are up, and big business audits are down, you have to wonder — where are the priorities?,” Velazquez pondered in her opening statement during a recent hearing into the Internal Revenue Service’s policies.
The change in policy has a lot to do with the IRS’s fixation on the so-called tax gap. According to the IRS’s latest estimates, the overall gross tax gap — the difference between what taxpayers should have paid and what they actually pay — was $345 billion in 2001.
Through enforcement activities and late payments, the agency recovered about $55 billion of that amount, leaving a net tax gap of $290 billion. More than 80 percent of the gap is created by under-reported income, and the agency said it thinks small business owners are the most likely culprits.
It’s bad enough that taxpayers as a whole, on average, spent about 3.8 billion hours complying with income tax laws this year, up from 3.6 billion hours last year, according to a study by the National Taxpayer’s Union. The value of this time is worth $110.6 billion.
Corporations as a whole spent 3.8 billion hours complying with the federal tax code amounting to about $159.4 billion in costs, which is equivalent to 54 percent of corporate income taxes collected in FY 2008. These expenses are generally passed along to consumers, employees, and shareholders, the group says.
Americans filing a Form 1040 “long form” with common schedules this year will have to leaf through 161 pages of instructions, more than triple the number in 1985, the year before taxes were “simplified” by the Reagan administration’s landmark tax bill. The 2008 “short form” instructions total 84 pages, equal to those of the long form in 1985.
The average 1040 long-form taxpayer spent about $264 for out-of-pocket filing costs in the 2008 tax year, up from $242 in 2004. The average self-employed taxpayer is shelling out $447 in out-of-pocket costs, up from $408 in 2004.
Eliminating that burden would provide a huge stimulus to the economy. Although tax simplification has long been debated on Capitol Hill, the tax code continues to grow increasingly complex. But both the Obama administration and the IRS are making efforts to assist small businesses with their tax payments in these trying economic times.
IRS Commissioner Doug Shulman, who testified at the House Small Business Committee hearing, outlined a number of steps the IRS is taking to mitigate the impact of federal taxes on small businesses. Many small business owners may not be aware of the various avenues now open to them. So, here is a quick rundown: