The self-employed and micro-business communities face an overwhelming regulatory burden in complying with IRS regulations. According to the General Accounting Office, a small business owner faces more than 200 IRS forms and schedules that could apply in a given year. Vague and complex rules and forms can mean the demise of their business. According to a study by the Tax Foundation, individuals, businesses and nonprofits spent an estimated 6 billion hours complying with the federal income tax code, with an estimated compliance cost of over $265.1 billion in 2005. Businesses bear the majority of tax compliance costs, totaling nearly $148 billion or 56 percent of total compliance costs.
Despite the time and cost spent on compliance, according to IRS data from the National Research Program (NRP), the nation’s tax gap, the difference between what taxpayers should pay and what they actually pay on a timely basis, is approximately $353 billion. The tax gap has three key components which include underreporting of income, underpayment of taxes and non-filing of returns. There have been numerous proposals by the Department of Treasury and in Congress regarding how to effectively increase compliance and minimize the tax gap.
Significant tax gap proposals include:
• imposing withholding on non-employee payments, specifically payments made to independent contractors;
• increased information reporting by card companies to the IRS on the credit/debit card transactions of businesses;
• information reporting requirements on all payments of $600 or more to corporations;
It is important to note that in review of current proposals to address the tax gap, we see that they solely focus on business to business transactions. Business to business transactions are already highly regulated and have substantial reporting requirements. A large area of potential non compliance and under reporting stems from business to consumer transactions. These dealings are currently not subject to reporting requirements and the creation of those requirements would likely be prohibitive to consumers and politically unappealing to legislators. However, the NASE feels that it is not possible to have a striking change in the tax gap without addressing business to consumer transactions.
Additionally, the complexity of the IRS tax code is particularly troublesome for the self-employed business owner and is a snare for unintentional noncompliance. Vague rules and poorly defined regulations understandably result in mistakes. We believe efforts to address the tax gap and compliance must focus on overall simplification, eliminating issues of inequity within the tax code, and enhancing taxpayer education and outreach. The majority of small business taxpayers want to comply with existing tax laws, thus making tax regulations easier to understand is the most effective and equitable way to improve compliance and to reduce the tax gap.
The IRS has made positive changes over the past years through enhancement of taxpayer education and outreach efforts, which have had positive effects. The NASE’s concern is with the shifting of resources from taxpayer education and services to enforcement. During the Obama Administration, the IRS reallocated funding for enforcement services and the IRS has shifted manpower from education to enforcement.
Accurate tax reporting and compliance is extremely important to small business. Those who make a good faith effort, yet are inaccurately complying should be assisted through education and tax simplification efforts. Those willfully disregarding their tax liability should be held accountable. The more assistance offered to taxpayers and the simpler it is to understand and comply with tax laws, the more taxpayers will accurately meet their tax obligations. However, increased enforcement at the expense of taxpayer education will not in the long term accomplish sustained, improved compliance.
The NASE supports a strong taxpayer education division within the IRS and the utilization of federal programs such as the Small Business Development Center program, the Women Business Center program and SCORE to assist in taxpayer education services. These programs provide direct assistance to current business owners and future entrepreneurs and could play an invaluable role in efforts to increase tax compliance.
The overall goal of the Administration and Congress is to increase tax compliance and minimize the tax gap. It is not possible to completely close the tax gap. There will always be those who employ tax shelters, willfully non comply or inaccurately report their income. The goal should be to find ways to increase compliance without negatively affecting businesses to the extent that they are unable to manage cost and regulatory burden and must close their doors.
The NASE supports proposals that are fair and reasonable to address the issues of the tax gap and to increase tax compliance. In the fervent drive by Congress to recoup revenues for our fast depleting federal coffers, we must take the necessary steps to make certain the path we choose is balanced and effective, rather than detrimental. The NASE believes that the collective focus should be on supporting efforts for the survival, growth and innovation of micro-businesses and the self-employed as a foundation for long-term economic vitality.