Ten years ago, a landmark IRS report claimed that small business owners under-report income by $80-100 billion yearly and account for over half of the U.S. “tax gap” of owed by uncollected taxes. As a result, small business owners have been subjected to increased audits and reporting requirements, including the controversial new 1099 rule.
But now for the truth: A new study just released by the U.S. Small Business Administration (SBA) Office of Advocacy says the IRS crackdown on the backs of small biz has been bogus all along. And that comes from independent research commissioned by the Feds themselves – not some anti-tax business group.
After reviewing 10-years’ worth of IRS small business audits related to the innocuously-named “National Research Program” (NRP), outside researchers found that a mere 1% of all issues examined resulted from intentional failures to report income properly. Yes you read that right – one percent. In other words, 99% of income underreporting is unintentional, and undoubtedly the result of a vast and utterly confusing array of tax rules and regulations.
And here’s the real gut punch for biz owners: While small business was tagged as the tax cheating culprit, the new study says that large corporation tax gaps are scarcely being measured at all, and that the IRS has been using estimates dating back to the 1970s and 80s to calculate corporate noncompliance. What’s more, says the new report released by SBA: “The IRS focused its tax-gap study on individual tax returns, and on returns not subject to withholding or third party reporting, which skewed the study unfairly toward small business.”
Over the last five years, audits of returns typically filed by biz owners have soared, while those for corporations with $10 million or more in assets have actually dropped 13%. These are figures reported by the SBA itself.
But which type of audit pays off the most for taxpayers – small biz or big corporation? No contest. According to the new whistle blowing report, the IRS collects an average of $9,350 per auditor hour spend examining big biz returns, but only $1,034 per auditor hour spend auditing small business.
The new study concludes with this: Unlike large corporations, small businesses lack the resources and expertise to negotiate with the IRS. Indeed, 71% represent themselves in audits. They are overwhelmed by the complexity of the tax code. Only aggressive outreach and education designed to help small businesses understand their tax filing obligations will significantly reduce the tax gap attributed to them.
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About the Author: Daniel Kehrer, Founder and Chief Content Officer of BizBest Media, is a senior-level leader in digital media, content development and online marketing with special expertise in startups, SMB, social media and generating traffic, engagement and leads. He holds an MBA from UCLA/Anderson and is a passionate entrepreneur (started 4 businesses), syndicated columnist, blogger, thought leader and author of 7 business and financial books.