Tax Administration

Small businesses--a category that includes farmers and sole proprietorships and partnerships, S corporations, and corporations with assets of less than $5 million--are an important segment of taxpayers that are subjective to substantial federal tax requirements. Not only do they account for nearly half of all taxes that the Internal Revenue Service (IRS) collects each year, but they also have extensive interactions with the agency as they try to meet their tax obligations. In response to congressional interest in alleviating the burden that the federal tax system places on small businesses, GAO is issuing a series of reports on the magnitude of the burden that complying with tax obligations imposes on these business. This report determines (1) the federal filing, reporting, and deposit requirements that apply to small businesses and (2) the actual experience of small businesses in meeting these requirements, including their involvement in IRS' enforcement processes.

GAO noted that: (1) small businesses, like large businesses, are subject to multiple layers of filing, reporting, and deposit requirements; (2) GAO identified more than 200 different IRS requirements that potentially apply to small businesses; (3) through such requirements, IRS administers a variety of tax policies--notably those associated with income, employment, and excise taxes; (4) in considering the implications of the number of requirements, it is important to recognize that the requirements reflect the many decisions that have been made by Congress and the executive branch to accomplish their policy goals, including those that might benefit small businesses and other taxpayers; (5) it is equally important to recognize that most businesses do not need to comply with all or even most of these requirements; (6) the ones that apply to a particular small business would depend on how the business is organized, whether it has employees, and the nature of its business operations; (7) limitations on IRS' information systems prevented GAO from fully determining the extent to which small businesses filed the various forms and schedules or their involvement in key stages of IRS' enforcement processes; (8) IRS has acknowledged that these limitations hinder its ability to effectively manage small business activities and will continue to be a serious impediment until the systems are improved; (9) GAO was able to obtain and analyze limited data on small business filings of income tax forms and on some aspects of their involvement in IRS' enforcement processes; (10) GAO's analysis of IRS' 1995 data on the most commonly filed income tax forms and schedules showed that small businesses, on average, filed one secondary form in addition to their primary income tax return, with little variation among types of businesses; and (11) GAO's analysis of small business audits showed that the audit rate for small businesses is higher than the rate for all taxpayers and that about two-thirds of the audits of small businesses result in recommendations for assessment of additional taxes and penalties.