The Tax Gap For Small Business Is More Of A Ditch Than A Chasm

Written by on April 20, 2011 in Business Guidance, Tax News - No comments
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Is it time to change the way we look at small businesses and their tax contributions?

The tax gap is defined by the IRS as the gaping maw between what taxpayers should be paying and how much they actually pay in what the IRS charmingly calls  “voluntarily and timely.” That gap can be chalked up to everything from willful non-compliance, such as tax evasion, or forgetting to pay or making an error in your return.

That established, we can dive headfirst into the interesting piece of the article. Small business has long been identified as a major drive for the gap, though the IRS readily admits it cannot determine whether that’s willful or not.

A Small Business Administration study released last month challenges the basic assumption that small businesses play a large role in the tax 16 percent non-compliance rate, estimated by the IRS to be about a third of that entire rate. Instead, they argue, the role of large businesses and international tax non-compliance play an underreported role.

Quoth Small Business Trends:

  • The amount of the tax gap that is supposedly attributable to small businesses is based on results from the IRS National Research Program (NRP). Tax gap estimates are not based on what they found, but on what they did not find, and what the IRS assumed about those non-findings.
  • The IRS applied multipliers to what it found in order to account for the so-called “underground economy.” The numbers attributed to the small business share of the tax gap do not make any attempt to separate legitimate small business owners from said “underground economy.” Thus, by aggregating those numbers, it looks as if small business noncompliance is a much bigger problem than it is.

In essence, the SBA study and Small Business Trends are arguing that the way the IRS arrives at its tax gap conclusions are skewing the results toward small businesses being at fault, something both agencies consider overblown. This study may lead into a larger discussion about whether small businesses, which are widely considered a key piece of the country’s economic engine, are being singled out for a tax gap that might be mostly illusory.

What are your thoughts on this issue, gentle readers?

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About the Author

Dave Choate is the lead writer for BizEngine, longtime blogger and voracious reader of all things business and news. Dedicated to delivering small business news, information and analysis that matters.

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