This blog was last updated on June 26, 2021
As tax season becomes more of a discussion than an upcoming event, small businesses exhale a sigh of relief. The complex nature of small business tax compliance has created much frustration and even extensions on their yearly filings. According to the National Small Business Association 2015 Small Business Taxation Survey, which included participation from more than 675 small-business owners between march 13 to March 24, 40 percent of small businesses filed for an extension on their federal tax returns. Additionally, one-third of participants noted spending more than 80 hours a year on tax compliance-related issues.
CFO highlighted areas of the survey most business owners had major problems with, such as the increasing amount of paperwork. The biggest concern was simply administrative burdens, which was ranked the most significant challenge by 59 percent of small-business owners. This number increased from last year, which was 53 percent.
High costs
This increased effort and number of hours on tax compliance are costing small businesses more than just their time, but their business dollars as well. The survey found that over a quarter of participating small businesses spent more than $10,000 on simply internal administrative costs to comply with federal tax responsibilities. These costs are in addition to everyday operations, and for many small businesses, this is too much money to spend just to comply.
But the survey by the NSBA is not the only survey in recent months which reveal complicated tax compliance issues are causing small businesses distress. According to a new study of tax code complexity in the U.S. by the National Taxpayers Union Foundation, it is preventing a great deal of productivity in the business world.
According to the NTUF study, the U.S. economy lost $233.8 billion due to dedicating 6.1 billion hours complying with tax codes. These hours of working through complex tax issues are preventing businesses from being as productive as they should be. Additionally, the survey also found that $31.7 billion in out-of-pocket costs was spent for the same reason. With costs this high, Americans are finding it difficult to comply with tax regulations.
“Americans face a rising tax complexity burden that essentially prevents anyone from being able to comply without assistance,” said Michael Tasselmyer, lead author of the study and NTUF Policy Analyst. “This year’s study gives us indication of future challenges, revealing the additional complications the Affordable Care Act will add to the Tax Code and filing.”
The survey noted that the ACA brought with it the inclusion of an additional 3,322 pages full of legal guidance, on top of the existing 1,865 pages of ACA regulations that went in place with the act.
Continuing to grow
What is concerning to many business owners and individual consumers alike is the fact that tax compliance costs have only risen in recent years. As regulations continue to be put into place to try and simplify the process, the opposite seems to be taking shape. For example, the cost of complying with complex tax issues was at $150 billion in 2009, but by 2011 it had jumped to $200 billion. It has not dropped below that number, and many expect it to only grow.
“The IRS has never had more power over America’s taxpayers, thanks to even greater cost and complexity added to the code by Obamacare and FATCA,” Tasselmyer said. “Without reform there is little reason to expect anything other than a rising time and financial burden, not to mention more invasion of privacy.”
While being compliant is important, it can be burdensome for small businesses or anyone trying to do so on their own, with out-of-pocket costs.
