Self-Reported Wages Increase When Individuals Told IRS Is Watching

Date: January 05, 2016

Small Business Owners Face Challenges In Tax Compliance

The New York Times reported in an analysis of Americans’ tax paying behavior, said that “study after study” reveals tax evasion rates rise “significantly” when there is no outside reporting for wages. IRS commissioner John Koskinen told a conference of accountants in December that if people “think they’re not going to get caught if they cheat, or they’re just fed up because they can’t get the help they need from us to file their taxes…voluntary compliance is likely to suffer.” However, Joel Slemrod, a tax expert at the University of Michigan, found in a study that while low- and middle-income individuals raise their reported income when told their returns would be “closely examined,” wealthy individuals’ reported income goes down. Slemrod suggested this is because the wealthy, with access to “an array of legal and accounting experts,” view early warning of an audit as a form of negotiation from the IRS. Slemrod said, “They talk to their accountant, and he says, ‘Calm down, it’s a negotiation.’”

What This Means For Small Businesses

Small business owners, many of whom file as individual taxpayers, cannot afford to pay accountants to negotiate their tax liability down, unlike wealthy taxpayers and big corporations. The cost of complying with IRS regulations and reporting requirements are onerous, and small business owners would fare better under a simpler tax code that did not penalize them.

Additional Reading

The NFIB has previously addressed tax reform issues.

Note: this article is intended to keep small business owners up on the latest news. It does not necessarily represent the policy stances of NFIB.

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