The Continued Cost of Tax Compliance

I show my students a rather dated video from A&E called "IRS Horror Stories."  It recounts the Senate hearings about a decade ago that looked into IRS abuses of tax payers.  Many of the examples used in the documentary were small business owners.  While the video gets their attention, inevitably a student will say, "But that was ten years ago.  Surely things have gotten fixed by now."

Well, according to a 2008 Syracuse University study, the IRS has significantly increased audits of small businesses.  The study found that the smallest companies were 41% more likely to be audited in 2007 than in 2005, and companies with $10 to $50 million in assets were 29% more likely to be investigated. 

Ranking Member Graves of the House Small Business Committee noted the unfairness of this in his opening statement in a hearing yesterday. "Small firms are less able to hire high priced attorneys and accountants to fight back."

The Committee heard testimony from Douglas Shulman, Commissioner of the Internal Revenue Service (IRS) and Mr. Christopher Smith, owner of S.T.O.P -Northland, a small business near Kansas City, Missouri. 

The purpose of the hearing was to examine the cost of tax compliance for small businesses.  According to the most recent estimate I have seen from the SBA Office of Advocacy, the annual cost of compliance for a typical small business with 20 or fewer employees is $1304 per employee. 

Mr. Smith's story began in 2007 when he learned an employee had embezzled nearly $60,000 from his company.  After contact back and forth with the IRS, and uncovering mistakes by the IRS, an employee of Mr. Smith's was able to negotiate a reduction in his tax payment, although he believes he was then paying the tax for the third time.  "How on earth can an employee negotiate with an IRS agent the amount of a tax due when during an audit they ask specific questions to qualify you as the appropriate person to be liable?" asked Mr. Smith.  Mr. Smith stated that he has spent over 150 hours of his personal time solely to comply with the audit and will never be able to get over the losses.

Rep. Graves concluded by saying, "If small firms didn't have enough stress trying to run a small company in a recession, we burden them with countless laws, regulations, reporting requirements, and continue to do so every year.  We must simplify our tax code and require the IRS to do a better job of helping small businesses to comply.  Small businesses deserve better."

I have a better idea -- scrap the tax code and start over with a simple system that we keep insulated from political meddling.  While I favor a consumption tax like the Fair Tax, I will take any system that eliminates the 67,000 pages of the current tax code.