To develop a more comprehensive list of federal tax requirements that apply to small businesses, we contacted the Bureau of Alcohol, Tobacco, and Firearms (ATF) in the Department of the Treasury for information on requirements pertaining to the excise taxes that it administers. To determine the actual experience of small businesses in meeting their filing, reporting, and deposit requirements, including their involvement in IRS’ enforcement processes, we (1) interviewed IRS compliance officials specializing in examination, appeals, and collection issues to ascertain how small businesses are affected by the enforcement processes and (2) obtained some computerized information from IRS databases on the filing and enforcement experience of small businesses. Our work was performed in accordance with generally accepted government auditing standards between September 1998 and May 1999 at IRS headquarters in Washington, D.C.

	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. The requirements are designed to implement a variety of tax policies. It is highly unlikely that any business would need to complete all 200 requirements. They reflect the decisions of Congress and the executive branch in keeping with their policy goals and objectives. We identified 10 different federal employment tax deposit 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 the extent of small businesses’ involvement in IRS’ enforcement processes. We were, however, able to obtain and analyze limited data on small businesses’ filing of income tax forms and on some aspects of small businesses’ involvement in IRS’ enforcement processes. 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. Our analysis of 1995 IRS data for approximately 44 forms and 46 related schedules that IRS believes are those most commonly filed showed that small businesses, on average, filed one secondary form in addition to their primary income tax return, with little variation among the different types of business. Recommended Additional Taxes and Penalties

Small business audits often result in recommendations for the assessment of additional taxes and penalties. In considering the information presented, it is important to note that the audit recommendations do not equate to final audit outcomes.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on small business tax requirements, focusing on: (1) the federal filing, reporting, and deposit requirements that apply to small businesses; and (2) the actual experience of small businesses in meeting these requirements, including their involvement in the Internal Revenue Service's (IRS) enforcement process.

What GAO Found

GAO noted that: (1) small businesses, like large businesses, are subject to multiple layers of filing, reporting, and deposit requirements; (2) GAO identified more than 200 different IRS requirements that potentially apply to small businesses; (3) through such requirements, IRS administers a variety of tax policies--notably those associated with income, employment, and excise taxes; (4) in considering the implications of the number of requirements, it is important to recognize that the requirements reflect the many decisions that have been made by Congress and the executive branch to accomplish their policy goals, including those that might benefit small businesses and other taxpayers; (5) it is equally important to recognize that most businesses do not need to comply with all or even most of these requirements; (6) the ones that apply to a particular small business would depend on how the business is organized, whether it has employees, and the nature of its business operations; (7) limitations on 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; (8) IRS has acknowledged that these limitations hinder its ability to effectively manage small business activities and will continue to be a serious impediment until the systems are improved; (9) GAO was able to obtain and analyze limited data on small business filings of income tax forms and on some aspects of their involvement in IRS' enforcement processes; (10) GAO's analysis of IRS' 1995 data on the most commonly filed income tax forms and schedules showed that small businesses, on average, filed one secondary form in addition to their primary income tax return, with little variation among types of businesses; and (11) GAO's analysis of small business audits showed that the audit rate for small businesses is higher than the rate for all taxpayers and that about two-thirds of the audits of small businesses result in recommendations for assessment of additional taxes and penalties.