This paper examines the significant tax compliance challenges faced by small businesses in the United States. While large corporations can afford dedicated compliance staff, small businesses struggle with compliance costs that are 65 percent higher per capita, totaling $18–19 billion annually. The paper discusses IRS regulatory guidelines, the time and expense of tax filing, consumption taxes, and outsourcing as a potential solution. It concludes that frequent regulatory updates exacerbate the burden and proposes limiting regulatory changes to specific times of year to reduce compliance costs and help small businesses remain competitive.
Within tax accounting, many dilemmas can arise. Small businesses carry significant risk and burden, and one of the largest risks is the tax compliance issue. Every business seeks to achieve the best compliance outcome as precisely as possible.
Tax compliance in small businesses is a necessity for the company to stay in business. Every business needs employees to monitor new tax code regulations and ensure that current codes are being applied correctly. Large corporations do not have a problem hiring employees for this specific purpose because their revenue base is large enough to absorb the cost. Small companies, however, struggle to keep up with tax code changes and cannot easily afford dedicated compliance staff. Tax compliance costs are 65 percent higher for small businesses than for large businesses, costing small business owners between $18 billion and $19 billion per year in total. This is a cost companies cannot avoid because regulations are mandatory; there is no way to use alternative accounting methods to circumvent these expenses.
Hiring a dedicated compliance team is essential for small business managers to successfully perform their own jobs. Additionally, small businesses are the driving force in the economy, creating 65 percent of net new jobs, making them vital to the success of the American economy as a whole.
The Internal Revenue Service creates the compliance guidelines for companies. There are over thirty compliance guidelines that the IRS uses to enforce regulations. To keep up with these regulations, small companies must hire staff dedicated to this purpose. For example, the IRS has had three updates to its compliance operations since October 2, 2014. These updates include realigning the primary focus on post-filing compliance and realigning core business operations in its Wage and Investment and Small Business/Self-Employed divisions.
According to the Internal Revenue Service, business returns take an average of 23 hours to file and cost an estimated $420 each. For small companies, these costs make it difficult to keep revenues high.
Businesses and organizations face additional compliance burdens beyond income tax filing. An independent study found that when including labor taxes and consumption taxes with corporate tax filings, the average time for businesses to complete all taxes increases dramatically. Consumption taxes are a type of indirect compliance tax that is hidden during file reporting and are a major reason why so many hours are spent on tax compliance.
According to the Tax Foundation, American citizens as a whole spend 3.24 billion hours on tax compliance. Small businesses suffer disproportionately, spending valuable time maintaining compliance codes. Unfortunately, new compliance codes are added every year, and the time spent filing increases as well. A total of $37 billion is spent annually on federal tax compliance costs alone.
One solution that companies have adopted is outsourcing to overseas countries, such as India. In 2005, Deloitte Consulting LLP relocated two million financial service jobs overseas. This allowed the Certified Public Accountants at the Deloitte accounting firm to focus on helping clients more often instead of being occupied with routine compliance work. Additionally, outsourcing helps increase the speed of tax return processing for large firms with many clients.
However, outsourcing raises concerns in the United States. Many Americans view it as giving jobs to foreigners, while economists see it as "improving world labor market efficiency." A major concern with outsourcing is the risk of client confidentiality breaches. When tax preparers outsource to different countries, they must send client information via the internet, threatening client privacy. Competitors could easily hack into the transfer system and steal records.
Another concern is the reliability of overseas tax return preparation. Even if a company outsources to another country, all documents must still be reviewed when files are completed. Therefore, the company will still have to pay someone in America to complete or review the tax returns. Small businesses are unlikely to outsource because they would not need many people to handle the work. The time spent preparing information for transfer and reviewing completed information upon return might equal the time required for the company to prepare the information themselves.
Tax compliance costs the U.S. economy more than two trillion dollars every year. Big corporations pay $19,564 per employee annually, while small businesses pay three times that amount, averaging $34,671 per employee per year. NAM President and CEO Jay Timmons stated, "With growing regulatory compliance burdens, policy makers should be alarmed that our smallest manufacturers are being put at a competitive disadvantage within the global economy." If regulations were not updated so frequently, companies would not need to spend such large sums on compliance. These resources could instead be directed toward more beneficial uses for the company.
In the end, tax compliance is a burden for large corporations and an even larger burden for small businesses. Regulations should be limited to updates on certain days of the year. If that were to happen, companies would find it easier to keep up with regulations rather than constantly checking for updates. While compliance costs are inevitable, even a modest reduction could be a positive step in helping small businesses remain competitive.
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