Statement of Rep. Alma Adams: IRS Puts Small Businesses through Audit Wringer

Thank you Mr. Chairman for holding this valuable hearing which follows up on the Subcommittee on Economic Growth, Tax, and Capital Access hearing held in June.  During that hearing, there was testimony from several witnesses about the difficulties associated with a tax audit.

While tax audits serve an important purpose in the IRS’s role to enforce and collect taxes, the auditing process can be confusing and intimidating for small business owners. As we all know, our tax code is complex – resulting in simple and innocent mistakes - mistakes which should not be met with a time consuming and costly audit.

However, audits do serve an important purpose. They are the primary tool used by the IRS in its effort to reduce the tax gap, which is caused by non-filing, underreporting, and underpayment. In total, the gap is over $450 billion – even with voluntary compliance at 84 percent. This lost revenue is unacceptably high but because of IRS enforcement actions, like audits, an additional $50 billion is recovered.  

The recovery of this amount proves just how important audits can be but it should not come at the expense of our nation’s job creators.  Rather, the IRS should be tasked with doing all they can to improve voluntary compliance before audits are required. Working with a taxpayer to correct mistakes is quintessential to a thriving tax system.

Accordingly, the IRS has made strides to improve its relationship with taxpayers through increased customer service and outreach. Yet, improvements can always be made. Today’s hearing will give us another opportunity to learn what enhancements can be performed and modifications made to auditing techniques to reduce the burden on small business owners.

These recommendations are critical to improving tax compliance and closing the tax gap. They also serve a very important purpose in assisting small firms. We often hear reports of small employers closing their doors due to an audit – they just couldn’t recover from the process or expense.  

In many cases, the owner’s energy is shifted from maintaining or growing the business towards meeting IRS demands to substantiate records. This problem is compounded by that of the great financial costs of hiring an outside professional, which many small businesses do when facing an audit. Such burden makes it essential to understand how the IRS’s primary collection tool – audits – impacts a small business who is attempting to comply with complex rules.

While a small employer has a duty to pay taxes and keep an efficient recordkeeping system, the IRS also owes a duty to that taxpayer – to conduct the audit in a manner which is clear, ensure the employer understands his rights during an audit, and to prevent harming the small business from aggressive tactics.

I look forward to learning more about the auditing process and what we can do to help both the IRS modify and update its practices and small business taxpayers do a better job at complying and recordkeeping.

I’d like to thank the witnesses for taking the time out of their busy schedules to testify today.

Thank you and I yield back.