Small Business Tax Compliance Linked To Trust in Tax Preparers

Small businesses are more likely to comply with the tax laws if they have more trust in their tax preparer, according to a report prepared by the Taxpayer Advocate Service, a unit of the Internal Revenue Service.

 The report, entitled “Factors Influencing Compliance By Small Businesses: Preliminary Survey Results,” surveyed sole proprietors who file Schedule C with their 1040 tax returns, and was designed to better understand the factors that may affect their income tax reporting compliance.

 “Identifying how to improve compliance among this segment is particularly important because sole proprietor income is generally not subject to information reporting, is difficult for the IRS to detect, and represents the largest portion of the tax gap—tax that is not timely and voluntarily paid,” said the TAS in a section of the annual report to Congress from National Taxpayer Advocate Nina Olson. “Because actual reporting compliance is difficult to measure, TAS used IRS tax compliance estimates to identify sole proprietors most likely to have high or low levels of reporting compliance.”

 The report found that taxpayers in the high-compliance group expressed more trust in government and the IRS. Those in the low-compliance group expressed less trust in tax preparers. Although most used a tax preparer, they were less likely to follow the preparer’s advice.

 Both groups professed a “moral” obligation to report income accurately.

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 Source:  Internal Revenue Service Taxpayer Advocate Service