My remarks today concern (1) the federal filing, reporting, and deposit requirements that apply to small businesses; (2) the actual experience of small businesses in meeting these requirements, including their involvement in IRS’ enforcement processes; (3) the burden small businesses can face in complying; and (4) IRS’ efforts to reduce small businesses’ compliance burden and improve customer service, especially IRS’ planned reorganization. To develop the information, we reviewed IRS forms, publications, manuals, and related Internal Revenue Code (IRC) provisions; collected and analyzed relevant data; and interviewed agency officials who were cognizant of small business tax issues and IRS’ efforts to improve small business customer service and reduce compliance burden. Small Businesses Face Multiple Layers of Tax Requirements

Small businesses, like large businesses, are subject to multiple layers of filing, reporting, and deposit requirements that reflect how the business is organized, whether it has employees, and the nature of its business operations. In contemplating the significance of the total number, it is important to know that many of the requirements apply to businesses generally and that it is highly unlikely that any business would need to complete all 200 requirements. We identified more than 10 different federal employment tax requirements that potentially apply to small businesses. Small Businesses’ Experience in Filing and Enforcement Processes Could Not Be Fully Determined

Limitations in IRS’ information systems prevented us from fully determining the extent to which small businesses actually filed various required forms and schedules and which businesses made deposits, or determine the extent of small businesses’ involvement in IRS’ enforcement processes. As we discuss in detail in the final section of this statement, the data limitations currently hinder IRS’ ability to effectively manage its activities and serve small businesses and, as IRS has acknowledged, will continue to be a serious impediment until the systems are improved. IRS has dozens of discrete databases -- so many that it is difficult to determine what data are in them, what the data mean, how the files are structured, or even how many files there might be. Second, many of the IRS datasets do not allow for a detailed analysis of the information they contain. These processes are basically the same for small businesses as for other taxpayers. Compliance Burden Is Hard to Measure, but Significant

Although IRS does not have a reliable way to measure tax compliance burden or the portion attributable to small business tax requirements, there is common agreement that the burden is significant. By integrating results-oriented management into the day-to-day activities and culture of the organization and holding managers accountable for doing the same, leaders can help to avoid that danger. Success Will Also Depend on Implementation of Information Systems to Support Customer Service and Management Needs

As IRS has recognized, the information systems that it uses to keep records on taxpayers’ accounts are fundamentally deficient and thwart IRS’ ability to provide high-quality customer service. In the interim, the limitations will make it more difficult to manage and improve customer service, even in a reorganized environment. One of the most visible signs that IRS may be changing is its establishment of four new operating units.
Why GAO Did This Study

Pursuant to a congressional request, GAO discussed small business tax issues, focusing on the: (1) federal filing, reporting, and deposit requirements that apply to small businesses; (2) actual experience of small businesses in meeting these requirements, including their involvement in the Internal Revenue Service's (IRS) enforcement processes; (3) burden small businesses can face in complying; and (4) IRS' efforts to reduce small businesses' compliance burden and improve customer service, especially IRS' planned reorganization.

What GAO Found

GAO noted that: (1) small businesses are subject to multiple layers of filing, reporting, and deposit requirements; (2) GAO identified more than 200 different Internal Revenue Code (IRC) requirements that potentially apply to small businesses; (3) the requirements reflect IRS' administration of a variety of tax and other policies; (4) GAO also found that it is highly unlikely that any business would need to comply with all or even most of these requirements; (5) those that apply would depend on how the small business is organized; (6) limitations in IRS information systems prevented GAO from fully determining the extent to which small businesses filed the various forms and schedules or their involvement in key stages of IRS' enforcement processes; (7) IRS has dozens of discrete databases, so many that it is difficult to determine what data are in them; (8) many of the IRS databases do not allow for a detailed analysis of the information they contain; (9) the limitations hinder IRS' ability to effectively manage its activities and serve small businesses and, as IRS has acknowledged, will continue to be a serious impediment until the systems are improved; (10) although IRS does not have a reliable method to measure compliance burden, there is common agreement that the burden is significant for small businesses; (11) past GAO surveys and case studies illustrate that much of the burden can be traced to the IRC itself; (12) IRS has long tried to reduce small businesses' compliance burden and improve customer service to these taxpayers; (13) IRS also has worked to make filing and reporting easier and to increase IRS employees' expertise and understanding of small business tax issues and practices; (14) most recently, IRS has begun an extensive modernization effort that is intended to substantially improve customer service, thereby making it less burdensome for small businesses and other taxpayers to meet their tax obligations; (15) one of the most visible signs of IRS' commitment to improve its services to small businesses is the establishment of a separate operating unit dedicated to this group of taxpayers; (16) IRS will need to consistently follow results-oriented management principles, integrate the principles into its day-to-day activities and culture, and hold managers at every level accountable for doing the same; and (17) IRS must develop and use organizational and individual performance systems that support IRS' new mission statement and implement information systems that support customer service management in a reorganized environment.