Small Businesses Targeted by the IRS

Small Businesses Targeted by the IRSThe IRS is enjoying the benefits of recent technological advances. It is reported that 80 percent of all tax returns are filed electronically.  The agency is focusing on completing real-time scoring that will flag returns for audit.  These robo-audits are replacing auditors in the efforts to find tax evasion.

The ability to check return data against third-party records, such as electronic payment and credit card information, will make it easier to identify problems. At the same time, the IRS has the right to use personal information, health information, and private communication with access levels that are higher than local police or even the Federal Bureau of Investigation.

Harry Surden, a University of Colorado–Boulder School of Law associate professor and former fellow at Stanford’s Center for Computers and the Law warns, “Technology has changed things very quickly and not just by degrees, so they become something entirely different.”

Paul Schwartz, University of California law professor and co-director of the BerkeleyCenter for Law & Technology says, “The IRS is working under guidelines that go back to 1960 and the tax return is filed under legal compulsion. But there is so much information on everyone now it makes it harder for people to comply if the IRS uses data not in your return. It can get you into trouble.”

The IRS has come under scrutiny for their use of social media, email, and other online activities.  They insist they will not use this information without a warrant; however, all that is required is IRS administrative approval.  They have gone on record saying that this information will not flag an audit, but that it can and will be used once the audit is flagged by other methods.  The information they will be using and under what circumstances has not been made clear and their refusal to address much of it directly leaves the public uneasy. Michael Knoll, co-director of the Center for Tax Law and Policy at the University of Pennsylvania Law School says, “I would think they would want people to know, as a deterrent. I don’t understand the secrecy.”

Small businesses will be the next focus of the robo-audits. Reports show that corporations account for only 10 percent of tax non- or underpayments. Wage earners filing simple returns account for only a fraction. The estimation is that small businesses are responsible for roughly 60 percent of uncollected taxes.

“For small business, I’m afraid it’s going to be a disaster,” said tax attorney and former IRS revenue officer Elizabeth Atkinson of LeClairRyan in Virginia Beach, VA.  Most small business owners are unaware of these changes.  At the same time, the IRS is not equipped with the agents to deal with the increased amount of data.  In addition, the failure of the US economy to create more jobs is leading more out-of-work citizens to open their own businesses, this increasing the amount of small business data.

Atkinson further warns, “If the taxpayer feels the system if fair, even if they think it is bad for them, they will comply begrudgingly.  But when the perception is that they are the only ones doing so, people are more willing to go underground and hide what they make. And that will hurt everyone.”