Senate Proposal Could Add Costs For Small Business Owners

In 2001, the Internal Revenue Service estimated the tax gap — the difference between the amount of taxes owed and the amount paid — to be about $345 billion.

Today, that amount could be as high as $400 billion, according to an estimate by Eric Toder, of the Urban Institute, a nonpartisan economic and social polity think tank.

One measure to address part of the tax gap is being considered by the Senate Committee on Finance. It would require credit and debit card issuers like Visa and MasterCard to provide both business owners and the IRS with aggregate figures for all card purchases made in a year.

The IRS claims it would primarily use the information obtained to create industry profiles. For instance, the numbers might show that the average frame shop receives 56 percent of its payments by card.

In addition to making card companies collect purchase data, the measure would require the companies to retain 28 percent of the amount of a charge if there is any discrepancy regarding a small business’ taxpayer identification number.

The measure is being strenuously opposed by many small business organizations.

Several of the groups claim the proposal would do little to address the tax gap, while adding another administrative and paperwork burden for small business owners and the IRS, as well as increasing costs for credit card companies — costs that would be passed on to entrepreneurs through higher fees.

They also contend that withholding 28 percent of a purchase amount in the event of a TIN problem could hurt cash-flow.

“The biggest thing is the uncertainty of what will actually happen with the information,” said Keith Hall, national tax advisor for the National Association for the Self-Employed, an advocacy group that represents micro-businesses — those with fewer than 10 employees.

One worry small business groups have about the tax gap proposal is that the information collected would be applied to all business owners in a certain industry.

Depending on a business’s location and clientele, there could be big differences. A tire shop in Gary, Ind., might conceivably get more payments by card than one in Walla Walla, Wash.

Small business advocates are concerned the profiles might cause the Washington tire shop to be flagged or audited if its card purchase percentages deviate much from the average.

While there are some small business owners who don’t report all of their income, the majority are aboveboard when it comes to paying taxes, Hall said.

If a business owner were to knowingly underreport income, it wouldn’t be from card payments, which already create a paper trail, he said.

The NASE wants to address the tax gap and make sure small businesses report all of their income, but Hall isn’t sure the current proposal would address those issues.

Hall isn’t the only one who is doubtful of the proposal’s chance for success.

“With the complexity of the tax code, it’s no surprise there’s a tax gap,” said Jo Buttram, owner of Shirley’s Flowers & Gifts in Rogers.

The proposal would unfairly burden those who do report all their income while doing nothing to those who don’t, she said. “It’s poor policy to punish the law-abiding citizens who want to do the right thing.”

A spokesman from the IRS declined to comment on pending legislation.