Small Businesses Never Notified of Tax Refunds

More than 3,600 small businesses may have unnecessarily paid taxes designed to snare companies that use loopholes -- and they never got notices that they might deserve refunds.

Two senators said Thursday that a report describing the oversight, issued by the Treasury Department’s tax inspector general, showed that the Internal Revenue Service may have harmed small businesses at a time they could least afford it.

“Rather than paying this tax for which they were not liable, these taxpayers could have instead reinvested this money into their business in the form of either new equipment or potentially new employees,” Republicans Olympia J. Snowe of Maine and Christopher S. Bond of Missouri said in a letter to IRS Commissioner Mark Everson.

“Indeed, a refund of the overpayment would be particularly helpful to small corporations trying to weather the current economy.”

The companies together may have paid $37 million in taxes they never owed under the alternative minimum tax, a set of laws that prevents taxpayers from using so many credits and deductions that they eliminate their entire tax bill.

In 1997, lawmakers exempted businesses with average gross receipts of $7.5 million or less from the alternative minimum tax, but many continued to pay. Two years ago, lawmakers told the IRS to notify small businesses of the change and tell them they might be owed refunds.

Nearly 9,000 companies got notices and about 1,500 claimed refunds worth $12 million. But the notices missed 3,600 small businesses whose tax returns were filed after November 2000.