Tax Administration

About 40 million small businesses and self-employed taxpayers in the United States are responsible for remitting half of the taxes collected by the Internal Revenue Service (IRS). The IRS Restructuring and Reform Act of 1998 requires IRS to place more emphasis on providing better service to taxpayers. This testimony discusses the factors that complicate small business' efforts to comply with the tax laws and IRS' efforts to provide better service to this important group of taxpayers.

GAO noted that: (1) several factors have complicated the interactions between small businesses and IRS; (2) small businesses are more likely than other taxpayers to have compliance problems, which is not surprising given the complex tax issues and requirements that a small business can face and the fact that small businesses do not always have the kind of resources needed to understand and deal with those issues and requirements; (3) IRS' organizational structure and its focus on correction rather than prevention have hampered its ability to meet the needs of small businesses; (4) small businesses are often reluctant to seek help from IRS, which could be due in part to past negative experiences; (5) although IRS' plans for Small Business and Self-Employed Operating Division address these complicating factors, such things as the diversity of the small business population, IRS' antiquated computer systems, a shortage of staff with needed skills, and the need for an integrated performance management system will challenge IRS as it implements those plans; (6) one aspect of performance management involves development of an appropriate set of performance measures, and one important measure is compliance burden; (7) IRS is pursuing a multi-phased approach in developing new methods for estimating that burden; (8) with the help of a contractor, IRS is developing models that, when compared with IRS' current methodology, are designed to produce more comprehensive estimates of federal income tax compliance burdens and to provide IRS with a greater capacity to analyze the impact of tax law and administrative changes on those burdens; and (9) however, as with all models, the specific capabilities and precision of the new models will depend on the quality of the underlying data.