Report: IRS increasingly targeting small businesses

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The risk of small-business owners being audited by the Internal Revenue Service has increased dramatically.

As unsettling as that might sound, the IRS’ bark may be worse than its bite, because what hasn’t risen dramatically are the number of audits that have yielded any more dollars for the IRS.

Nonetheless, the government has increased the number of audit hours it commits to small and medium businesses by 30 percent over the past five years. Simultaneously, the IRS has decreased the number of hours it spends auditing large corporations by 33 percent.

Small businesses comprise the lion’s share of the nation’s economy and workforce, but those businesses don’t have the resources to battle the IRS in the way large corporations do.

A study by Transactional Records Access Clearinghouse – a nonpartisan service that acts as a business watchdog of government regulatory bodies — showed that audits of large corporations are at an all-time low.

That’s troubling to some of those who have read the study.

“My hope is it will give people a wake-up call,” said Dean Zerbe, former tax counsel to the U.S. Senate Committee on Finance and national managing director of AlliantGroup, a tax firm.

“Tax compliance costs for a small business far outstrip the costs for a large business,” Zerbe said.

The IRS says that every hour spent on auditing small businesses yields $1,025 in underreported taxes, whereas the figure for large businesses is $9,354.

Despite a huge increase in the number of audit hours spent on small and medium businesses, the number of “no-change” audits remained roughly the same, as did the number of dollars generated per audit-hour.

So these additional audits, which place time and cost burdens on small businesses, are not actually increasing the revenue collected by the IRS.

More telling, however, is that while audits of large corporations are decreasing, the dollars per audit-hour for such corporations has jumped from $6,594 in 2006 to $9,354 last year.

“Small-business owners need to know that if they don’t make noise (on Capitol Hill) and get their voices heard, this is what happens,” Zerbe said.

Overwhelmingly, tax credits and incentives are being taken by large corporations. Small businesses are not taking advantage of the tax breaks available.

“Export incentives, research and development, you name it — they qualify for it, but they don’t take it because they’re worried about being audited,” he said.

The Transactional Records report shows there’s a tax-gap issue, which in

Zerbe’s mind is an opportunity to push for changes in Congress.

If small businesses were committing tax “shenanigans,” as suspected, then the audit numbers would show that, Zerbe said. But the reverse is true.

“Rather than a thump on the head, the IRS could (assist) small business owners,” he said.

Typically, large corporations have numerous tax attorneys on staff. However, when a small business is audited, it usually requires the time and efforts of the business owners themselves.

Although politicians tout small businesses as the engines for job growth, revving up IRS audits of small businesses could end up doing the reverse.

“It took the devil to get these (audit) numbers out of the IRS,” Zerbe said. “They’re pretty steamed about it.”

Economy healthier for spring

You’ve read all kinds of economic forecasts, so here’s one more:

A recent BBVA Economic Research Department report said that industrial production activity was expected to increase for the ninth consecutive month in February. Industrial production of high-tech goods has been rising steadily since June 2009.

BBVA economists say this trend indicates that non-residential investment in software and equipment will continue to bolster gross domestic product growth.

Consumer spending will also contribute to GDP growth. Although wage growth is slow and unemployment remains high — albeit stabilizing — consumer confidence has improved partly because of low interest rates and rising household wealth.

As sales are increasing, wholesale inventories have risen in response to demand. Inventory adjustment is expected to positively impact GDP in the first half of this year.

With a little luck, business inventories will also increase.

Rebecca Tonn can be reached at rebecca.tonn@csbj.com or 719-329-5229.

2 Responses to Report: IRS increasingly targeting small businesses

  1. Hi Rebecca,

    I read your article about “Cultural factors key to international business” and it is indeed a good one to treasure and make a good notings. Being a IT person for banking products I can relate these with my current job so much and it is so true as well.

    Above article is equally fantastic. Good luck and would like to see more

    Wilson Mathews
    April 18, 2010 at 8:54 am

  2. Wilson,
    Glad you liked the article.
    Cultural factors in business are fascinating.
    Best wishes to you.
    Rebecca

    Rebecca Tonn
    April 19, 2010 at 2:49 pm