The Reputation Small Business Tax Returns Have

If there is one thing that politicians consider sacrosanct it is the narrative that small businesses are the engine of the economy. Actually, it is a very comforting image; hard-working businessmen, with just a few employees, struggle heroically against all odds and give the country the economic foundation it needs. Whether or not small business in America is the engine of its growth, there certainly is one area it leads everyone in – under-declaring revenues on tax returns. While there has been quite an uproar in the press over how GE hasn't paid a dollar in taxes for its billions in revenue through clever manipulation of the rules, it hasn't been accused of cheating. The IRS is very clear about what it thinks about the tax returns small businesses file though - there is a shortfall of about $400 billion through outright fraud. Is that really big considering how much the government collects in taxes? You better believe it - it's close to 20%.

Small businesses cheat on their taxes in one of three popular ways: to begin with, there are many who simply don't file their tax returns; some actually file, but fill their tax returns with untruths; and then there are those who file and declare everything truthfully, but just don't pay up. The most worrying of all these ways that small businesses use to shirk their responsibilities happens to be the one where they just file the returns but lie all through. That accounts for 90% of the tax fraud that comes out of small businesses.

So how does the IRS actually put a number on this statistic? They took up about 45,000 tax returns to audit at random. And were they ever surprised at how much they found they were being stiffed. Before you begin to wonder if the only reason all these businesses are lying on their tax returns is that they have been burned by the recession, the IRS takes its numbers from before the recession in the years 2001 and 2006.. In fact, if you are a small business owner and you try to claim a loss on your tax return to get out of having to pay taxes, you'll find that any tax consultant will advise you that you might as well walk about with a sandwich board that says “audit me”. The IRS has found that three out of four small businesses that claim to have run losses over the past financial year have been lying.

Small business owners know that they stand a good chance of getting away because theirs is usually a cash business; the IRS has no real way of knowing how cash businesses have been doing over the past year. And they only have so much money to spend on audits. The IRS depends a little bit on using third-party credit card transaction verification. But other than this, there is very little they can do. It's just a part of being a free economy.