Business Corner

Small businesses to face more audits due to tax gap

by Small Business Tax News

The nation’s small businesses can expect to face more audits and tax compliance interaction with the IRS if federal officials have their way.

The Senate recently approved a $2.95 trillion budget proposal for 2008 that fully funds President Bush’s $11.1 billion budget request for the IRS, including provisions that will direct $399 million to IRS enforcement activities, substantially higher than the amount the president had requested, $264.4 million.

Much of that activity will be directed to closing the “tax gap,” the difference between what taxpayers owe and what they pay. The tax gap in 2001 was $345 billion, according to the most recent estimates from the IRS, and small businesses and the self employed are widely blamed for a disproportionate share of the shortfall.

“All of us know we cannot collect it all. But over (a) five-year period, the tax gap is probably in the range of $2 trillion to $2.5 trillion,” said Senate Budget Committee Chairman Kent Conrad, D-ND, commenting on the FY 2008 Senate Budget Resolution. “If we just collected 15 percent of it -- that would be over $300 billion. That alone would come close to meeting the revenue needs under our budget resolution.”

There are six specific initiatives proposed in the FY 2008 budget aimed at improving compliance, according to IRS Commissioner Mark Everson. One of these initiatives provides $73.2 million to improve compliance among small business and self-employed taxpayers when it comes to reporting, filing, and payment compliance.

“This funding will be allocated for increasing audits of high-risk tax returns, collecting unpaid taxes from filed and unfiled tax returns, and investigating persons who have evaded taxes for possible criminal referral,” Everson said in testimony before the Subcommittee on Oversight of the House Ways and Means Committee. “It is estimated that this request will produce $144 million in additional annual enforcement revenue per year, once new hires reach full potential in FY 2010.”

Another initiative, the Automated Substitute for Return Refund Hold Program, provides $6.5 million to increase individual filing compliance, in an effort to help address voluntary compliance among taxpayers who are delinquent in filing individual income tax returns and are expected to owe additional taxes. “We estimate that this initiative will result in securing more than 90,000 delinquent returns in FY 2008 and produce $82 million of additional enforcement revenue per year, once the new hires reach full potential in FY 2010,” Everson said.

A third initiative provides $10 million for increased criminal tax investigations. “This will help us to aggressively attack abusive tax schemes, corporate fraud, non-filers, and employment tax fraud,” Everson said.

The commissioner acknowledged some of the proposals will be criticized out of concern about their potential effect on small businesses.

“The challenges that a small business faces are difficult enough without having to compete directly with noncompliant competitors,” Everson said. “We have an obligation to support those compliant small businesses by ensuring that their competitors are also paying their fair share. This is not only a matter of fairness, but also a way of supporting compliant small businesses in their efforts to remain compliant.”

The House was in the middle of general debate on the companion House Budget Resolution for FY 2008, with a vote on three substitute measures pending, when Small Business Tax News went to press on this article. The House bill features $406 million for IRS enforcement.

Should the House pass its measure, both bills would have to be reconciled in conference, kicked back out to their respective legislative chambers for another vote, then gain the signature of the president.

Reprinted from Central Vac Professional, June 2007