IRS Heavily Scrutinizes Small Businesses. Is it Unfair?

Date: September 21, 2016

It’s not just owners who are saying that the IRS is going out of its way to specifically target small businesses.

Taxes are the bane of many owners’ existence. But that burden might be more undue than is warranted. 

In fact, the IRS is unfairly targeting small businesses when it comes to finding unreported income, according to Donald Williamson, executive director of the Kogod Tax Policy Center at American University. He says that the IRS puts extra scrutiny on small businesses because they receive most of their income in cash, making it difficult to identify and report. 


Williamson submitted testimony to the United States House of Representatives’ Committee on Small Business, which is now investigating concerns and issues small businesses face when the IRS audits them. 

Small and medium-sized businesses continue to be audited at a high rate, despite the fact that the IRS can collect more money by auditing large corporations. “The highest number of audits for 2014 of individual tax returns with business income was in the lowest range of business returns, i.e. $200,000 to $400,000, amounting to 50 percent of all audits of upper income individual returns,” said Williamson. “Indeed, the chances of a Schedule C being audited are almost twice as great as a small corporation being audited.” 

A National Taxpayer Advocate study, cited by Williamson, found that small businesses spend approximately 2.5 billion hours preparing tax returns or responding to IRS inquiries each year, giving owners less time to focus on their business and operations. This is why many owners (over 90 percent) employ CPAs, attorneys, and enrolled agents and other tax specialists to prepare their filed tax returns. 

Williamson isn’t the only one who feels small businesses aren’t given a fair shake. A former IRS employee and Director of IRS Practices and Procedures for Alliantgroup, Kathy Petronchak, agreed that the agency shows “inconsistent treatment” between small businesses and large corporations. 

“We believe there is some inconsistent treatment of small versus large businesses by the IRS, as well as differing procedures being used in audits of these businesses,” she said. “It is vitally important to remember that America’s small businesses do indeed have needs, interests and resources that may differ significantly from those of larger businesses.” 

Williamson ended his testimony by urging the IRS to streamline and simplify the small business audit process. 

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