Donald T. Williamson, a professor of taxation at American University’s Kogod School of Business in Washington, D.C., believes that the I.R.S. disproportionately targets small business taxpayers for audits.
“Most audits are not random, i.e. the I.R.S. has a secret algorithm for determining how likely each taxpayer is to have unreported income,” Williamson wrote in testimony submitted to the United States House of Representatives’ Committee on Small Business.
The committee is currently investigating issues that small businesses encounter when they are audited by the I.R.S.
“Employing this calculus, the I.R.S. has concluded that small businesses are less likely to be paying their fair share of taxes relative to much larger enterprises, a surprising conclusion in light of frequent press reports of multi-national corporations allocating billions of dollars of profits to no or low tax jurisdictions to avoid U.S. income taxation,” stated Williamson in his testimony.
Williamson believes that small businesses are targeted disproportionately for tax audits because they receive most of their income in cash, which can be both difficult to identify and easily misreported.
Being audited can have a profound effect on small businesses. In his testimony, Williamson cited a National Taxpayer Advocate study that estimates that each year, small businesses spend approximately 2.5 billion hours preparing tax returns or responding to I.R.S. inquiries about the preparation of their returns.
“In meeting these requirements, 70 percent of small businesses employ tax professionals just to prepare their returns and represent their interests before the I.R.S. at a cost of more than $16 billion for the services of attorneys, accountants and other professionals,” wrote Williamson in his testimony.
He further explained that it is impossible for small business owners to be knowledgeable in all aspects of the country’s complex tax laws, which can impede their operations and get in the way of their ability to grow their business and create jobs. Williamson concluded his testimony by urging the I.R.S. to streamline and simplify the small business audit process to reduce the time and cost for owners.