Complex Tax Laws, Lack of Help Have Made Small Businesses Wary of IRS

Small businesses are more likely than other taxpayers to run afoul of the nation’s tax code. But an upcoming government report says it has more to do with the complexity of the laws and lack of assistance from the Internal Revenue Service than it does with entrepreneurs intentionally trying to cheat the tax man.

Those are just some of the findings from a report to be released this month by the General Accounting Office examining the relationship between the IRS and the nation’s 40 million small-business taxpayers.

As part of a major agency restructuring, the IRS next month will roll out a new organizational unit to focus on the needs of this diverse group, which includes farmers and other self-employed individuals as well as small corporations and partnerships. But the agency has a long way to go to become a small-business-friendly enterprise, the GAO report said.

In addition to a complicated tax code, the IRS’ traditional emphasis on enforcing the laws, rather than on helping taxpayers prevent errors, has contributed heavily to noncompliance among small-business taxpayers, the GAO said.

The GAO surveyed nearly 550 small businesses and found that most were unaware of services the IRS has developed specifically to aid small businesses. Many that have used IRS services such as toll-free telephone assistance weren’t happy with the experience. That goes a long way toward explaining why about 94% of those surveyed used a paid tax professional to help them do their taxes.

“This report has confirmed what small-business owners have been telling us for years--the tax code is just too difficult for most people to understand,” said Sen. Christopher S. Bond (R-Mo.), chairman of the Senate Committee on Small Business, who requested the study. “And the IRS has not operated in a way to serve small businesses effectively.”

IRS officials are hoping to change that perception when its new Small Business and Self-Employed Division becomes operational next month. But the GAO report predicts that implementing the new operational division won’t be easy, precisely because small-business taxpayers are so diverse and the IRS has a shortage of employees with the skills to serve them. In addition, the GAO says the IRS is saddled with antiquated information systems and a culture that traditionally has rewarded enforcement over customer service.