Business Regulation and Consumer Protection:

Small Business Tax Compliance Burden

GGD-99-96R: Published: May 5, 1999. Publicly Released: May 5, 1999.

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Pursuant to a congressional request, GAO reviewed the tax compliance burdens of small business taxpayers, focusing on: (1) why the Internal Revenue Service's (IRS) compliance burden estimates are not reliable; (2) why the relationship of the no-change rates to audit rates for small businesses and other individuals is difficult to determine; and (3) why IRS has limited information on its interactions with small businesses.

GAO noted that: (1) IRS' compliance burden estimates are unreliable for several reasons, including the fact that the model used to estimate burden is based on data collected from taxpayers in 1984; (2) given the numerous changes in the tax law and associated requirements that have occurred since the model was developed, it is doubtful that the estimates derived from it provide useful information about burden today; (3) IRS' estimates of burden are also not comprehensive because they do not account for post-filing burden--that is, the burden imposed on taxpayers who are required to respond to IRS notices and audits; (4) IRS does not have estimates of compliance burden that distinguish business taxpayers based on size and type; (5) the data IRS collected in 1984 was classified only according to business and individual taxpayer categories; (6) neither category distinguished small businesses from other taxpayers; (7) IRS is now working with a consultant on a multiyear project to develop better estimates of tax compliance burden; (8) according to IRS officials, the estimates are to be based on a new burden model that better reflects taxpayer experiences, including post-filing requirements; (9) IRS' data on audit rates and no-change rates raises questions as to why IRS has been auditing some small businesses at a higher rate than individuals; (10) the no-change rate in audits of sole proprietorships--the most prevalent form of small business--has been generally similar to the rate for other individuals; (11) however, it is difficult to determine whether the no-change rates for sole proprietorships are a sign that some are being audited unnecessarily; (12) this is because other factors account for why returns are selected and why audits of such returns might not culiminate in the recommendation of additional tax assessments; (13) in general, IRS' numerous information systems do not collect or store data by taxpayer groups, such as small businesses; (14) even if IRS information systems maintained data by taxpayer groups, obtaining complete information for a taxpayer would not be easy because IRS' systems are not linked together; and (15) the limitations in IRS' information prevented GAO from determining the extent to which small businesses actually filed various required forms and schedules and made deposits.

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