Small employers frustrated by complexity of tax code, poll finds

According to a 2006 poll on tax complexity and the IRS, 88% of small-employer taxpayers had used a tax professional to prepare their most recent federal tax return. For those employers who employ 20 or more people, the percentage who used a tax professional increased to 95%. Further, the two reasons small-employer taxpayers most frequently cited for using tax professionals were to assure compliance and the complexity of tax law.

“The risk of increased errors resulting from an overly complex tax code has forced small-business taxpayers to seek outside help to make decisions about their taxes,” says William J. Dennis, executive director of the National Federation of Independent Business (NFIB) Research Foundation, which conducted the poll. “The complexities in the tax code increase administrative costs and cause enormous frustration for small-business owners.”

Other key findings from the poll include:

Sixty-one percent of small-employer taxpayers typically consult a tax professional before making a major financial decision for the business.

Of the 15 major portions of the federal tax code evaluated, the provisions small-employer taxpayers most frequently rely on their tax professional to understand for them are depreciation, methods of accounting, amounts subject to self-employment tax, capital gains/losses, and the Alternative Minimum Tax (AMT).

Ninety-five percent of small-employer taxpayers think the depreciation provisions of the Internal Revenue Code apply to them, but just 15% think they have a good understanding of depreciation requirements.

Ninety-three percent of small-employer taxpayers think the methods of accounting rules apply to them, but just 16% think they have a good understanding of the method of accounting requirements.

Eighty-two percent of small-employer taxpayers reported that the AMT applied to them, while another 6% did not know.

“Small businesses power our nation’s economy and job growth, and yet high tax burdens and the complexity and inconsistency of the tax code are serious problems,” notes NFIB Executive Vice President Dan Danner. “And the looming threats of the Alternative Minimum Tax and the IRS’ rush to address the so-called tax gap are further cause for alarm.”

(The IRS last June announced that the largest component of the “tax gap” — the difference between taxes due and taxes actually paid — was unreported and underreported income, and that understated net business income accounted for most of the individual underreporting gap. To help businesses understand their tax obligations, the IRS issued two fact sheets: “Business Income and the Tax Gap” and “Cost of Goods Sold and the Tax Gap.”)

“Small-business owners strongly support making permanent the tax relief packages of 2001 and 2003,” Danner says. “These tax reductions greatly helped small business, all taxpayers and the economy, and the failure to make them permanent inhibits planning and growth and leaves the threat of gargantuan tax increases just a few years down the road. Additionally, permanent relief from the death tax, which threatens small businesses and family farms, remains a top priority. Finally, the IRS must fully and accurately examine the scope of the tax gap and carefully weigh the effects of any new regulations on small firms before casting a wider net of audits and scrutiny.”

To view the complete NFIB Research Foundation “Small Business Poll on Tax Complexity and the IRS,” visit nfib.com/object/sbPolls.