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IRS Targets Small Business Unfairly, SBA Says

Small business owners be warned. As the government tries to close the tax gap, which is the difference between taxes owed and taxes actually paid, small businesses are being disproportionately targeted with audits and increasingly onerous information reporting requirements.

That’s the finding of an Office of Advocacy of the U.S. Small Business Administration (SBA) study researched by Quantria Strategies and released this week, which highlights flaws with the overall tax gap estimates, particularly as they relate to large corporations and international tax transactions.

“The tax gap estimates have led to increased audits and information reporting requirements for small businesses, such as the new 1099 reporting requirement,” said Chief Counsel for Advocacy Winslow Sargeant. “A better strategy for the IRS to increase their compliance would be through outreach and education programs, and a more balanced approach to enforcement.”

The tax gap estimates generated by the National Research Program (NRP) suggest that underreporting of income by small businesses represents $83-$99 billion of the $150-$187 billion individual income tax gap for 2001. The total tax gap was $345 billion, $290 billion after collection activities.

However, most of the underreporting of income that occurs on individual income tax returns is unintentional. IRS auditors conducting NRP examinations found that only 1 percent of all issues examined resulted from deliberate or intentional failures to report income properly.

At the same time, according to the study, large corporation tax gaps are not adequately measured. The research also explores alternative approaches to improving compliance without overly burdening taxpayers. The full study is available online at the SBA’s web site.