IRS Plans More Research on Small Business

January 25, 2011

The Internal Revenue Service (IRS) announced it will conduct more research into the tax needs and preferences of small businesses and self-employed workers. This comes as a result of a report done by the Treasury Inspector General for Tax Administration (TIGTA), who determines whether the services provided by the Small Business/Self-Employed Division to its customers will assist the IRS in achieving its customer service goals.

This report was included in the Treasury Inspector General for Tax Administration’s Fiscal Year 2010 Annual Audit Plan and addresses the major management challenge of providing quality taxpayer service operations.

The report from the TIGTA found that the IRS is already researching the needs of individual taxpayers, but is only really starting to devote sufficient resources to that process with small-business taxpayers. The report goes on to say that more research could be helpful in closing the estimated $345 billion tax gap—the difference between what taxpayers owe the federal government and what they actually pay.

The move to learn more about small-business taxpayers and their needs comes as the IRS estimates that more than 40 percent — $148 billion — of the tax gap is attributed to unreported income earned by unincorporated businesses and the associated unpaid self-employment tax.

Currently, the IRS’s Small Business/Self-Employed Division serves approximately 57 million taxpayers, which represents roughly one-third of the overall taxpayer base and consists mainly of self-employed individuals and small business corporations and partnerships with assets of fewer than $10 million.

This division offers education, and informs these taxpayers of their tax obligations. They also use two databases to track issues and trends in small-business tax collection, however both of those systems came under some criticism from the inspector general.

The Issue Management Resolution System (IMRS), which has a goal of identifying trends in reporting, filing and paying requirements, suffers at times because the database rarely helps the IRS find out which industries are raising concerns. The Outreach Initiative Database (OID), meanwhile, provides summaries of the small-business division’s initiatives. But the audit found that, in May 2010, records for 52 of the division’s 377 initiatives (14 percent) were missing from the database, without an audit trail indicating why.

Ultimately, the audit recommended that the IRS evaluate the effectiveness of the industry codes in the IMRS and make sure that sufficient controls are in place for the OID. The agency agreed with those recommendations.

Finally, the report suggested that the IRS’s website could be made more user-friendly, that its toll-free telephone lines could use more staffing and that the agency could improve its ability to solve problems online.

Please click here for the full report.