A recent article in Forbes Small Business suggests pressure to speed up the resolution of IRS audits may be reducing the amount of money recovered — while increasing the stresses on compliant small businesses.
The IRS recently made an inexplicable decision to increase audits of small companies while easing up on large firms. In fact, the smallest companies saw the taxman 41% more often in 2007 than in 2005, and companies with $10 million to $50 million in assets were 29% more likely to be investigated, according to a new study from the Transactional Records Access Clearinghouse at Syracuse University.
Meanwhile, companies with more than $250 million in assets were almost 40% less likely to be audited than in previous years - even though an average audit hour of large firms earned the IRS about $7,500, the Syracuse study found, while a similar hour directed at smaller companies turned up $474.
Going after more small companies didn't produce that much more revenue, but it did enable the Bush Administration to tell the public it was going after more companies. In fact, the number of non-productive audits of small companies — meaning no change in tax liability was recommended after the audit — is growing. And now the administration is seeking a court order to bar future access to agency statistics that are essential for the Syracuse report that exposed this shift.
In Minnesota, the Department of Revenue compliance initiatives include identifying non-filers and collecting delinquent sales taxes as well as individual and corporate income tax audits, so it's hard to compare directly with the IRS. However, in the report the Department makes to the Legislature, it is clear that Minnesota taxpayers see a pretty good return on the money spent.
Here's a table from the Department's report [pdf] showing the revenue realized from compliance and enforcement. Dollars spent on corporate tax matters show a much higher rate of return, and recovering sales and use taxes produces the most revenue dollars.
Lately, the Department has published a monthly list of businesses that are delinquent in paying sales taxes they've collected. Of the 64 entities listed for June, all appear to be small companies (including one that owned several truck stop-related businesses). Smaller towns outstate accounted for 24 of the companies, with the remainder split between metro/larger outstate cities and suburban addresses.
It's wrong to use tax money to prop up a business's cash flow, of course, but if small businesses around the state do account for the bulk of tax collection problems, it also could be a sign that they need help. Perhaps in the form of simplified tax laws and reporting requirements, but also in developing the management skills that can head off problems that lead a small business down the slippery slope of using tax money to keep a business afloat.
— Charlie Quimby
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