WASHINGTON – Lawmakers accused the Internal Revenue Service on Wednesday of unfairly targeting small businesses with more audits and burdensome rules in its drive to collect unpaid taxes.
The agency plunged "full ahead, pell mell, after the mom and pops," the chairman of the House Small Business, Rep. Donald Manzullo, told IRS Commissioner Mark Everson in a feisty hearing.
Responded Everson: "I would not agree with the characterization that we have focused particularly on small businesses."
Certain small businesses are getting increased scrutiny in the current phase of an IRS research project studying the sources of the tax gap — the annual amount of taxes that goes unpaid. The most recent estimate put the 2001 tax gap at $345 billion.
A random sample of 5,000 returns filed by S-corporations, enterprises that do not pay corporate income tax but instead pass income and taxes through the business to individual shareholders, will be examined.
Manzullo, R-Ill., said the audit rates for small businesses have climbed even while the IRS does research to better understand tax compliance among those businesses. He told Everson the odds of an audit were much higher for small businesses than for others and that the tax collectors should spend their time chasing corporate bad actors such as Enron Corp.
"How much did those clowns gyp the American people out of? How many corporations out there are the Enrons?" Manzullo asked.
Everson said that even with the additional audits by the research project, the overall audit rate for those businesses is far less than those of corporations. Last year, the IRS audited 44 percent of the nation's largest corporations.
"We are not, we are not going after just the little guy," he said.
The IRS should do more to look at small enterprises, Everson said, because evidence from the first phase of the research project shows that a large portion of the annual tax gap can be traced to individuals who understate income from businesses. Unpaid self-employment taxes account for a significant portion, too, he said.
"The question here is whether the income is being reported," Everson told lawmakers.
That is because small businesses are confused about tax laws, said Rep. Sue Kelly, R-N.Y.
Everson said that might be true of complicated issues such as depreciation or vehicle usage, but not business income.
"When somebody pays you, in cash or through credit card, it's not that complicated," he said.
President Bush, in his most recent budget request, proposed several ideas, including requiring credit card companies to report annually to the IRS the payments made to merchants, to reduce the annual tax gap.
The Bush administration also wants credit card companies to withhold taxes from those payments in cases when a merchant fails to provide a valid taxpayer identification number.
Everson said these changes would keep businesses honest and make them more likely to report their income accurately if they know the information will be reported independently to the IRS. But lawmakers said these requirements could impose new burdens and costs on small businesses.
Rep. Nydia Velazquez of New York, the top Democrat on the committee, asked Everson how the IRS could spend $100 million on a national study and not know whether taxpayer mistakes stemmed from confusion or deliberate cheating.
"If we ask you, did you intentionally cheat, what are you going to say? You're going to say no," Everson said.