Tax Complexity and the IRS

1. 1

   The two reasons small-employer taxpayers most frequently cite for using tax professionals are to assure compliance and complexity of tax law and related requirements.
   
   • Sixty-one (61) percent of small-employer taxpayers typically consult a tax professional prior to making a major financial decision for the business.
   
   • Though every portion of the 15 major portions of the Internal Revenue Code (and one of the states’) evaluated does not impact every small-employer taxpayer, 47 percent think that they do not have a good understanding of even one of the 16 portions; another 17 percent think they have a good understanding of only one; and, yet another 8 percent think they have a good understanding of just two.
   
   • Of the 15 major portions the Federal Tax Code (and one of the states’) evaluated, small-employer taxpayers most frequently think that they understand: their state’s sales and use tax rules (29% a good understanding), employment/payroll taxes (29%), and expensing (25%). Those portions they claim to understand least frequently include: passive activity rules (7% a good understanding), the Alternative Minimum Tax (7%), and the R&D tax credit (6%).
   
   • Of the 15 major portions the Federal Tax Code (and one of the states’) evaluated, the provisions small-employer taxpayers most frequently rely on their tax professional to understand for them are: depreciation (59% rely on a tax professional), methods of accounting (59%), amounts subject to self-employment tax (56%), capital gains/losses (54%), and the Alternative Minimum Tax (53%).
   
   • The most frequently applicable parts of the Code to small-employer taxpayers in their judgment are methods of accounting, depreciation, expensing, employment/payroll taxes, and capital gains/losses.
   
   • The least frequently applicable parts of the Code to small-employer taxpayers in their judgment are corporate dividends, pension plans/profit-sharing, R&D tax credit, home-office deduction, estate and gift tax, and independent contractors.
   
   • Over the last three years, 38 percent of small-employer taxpayers visited the IRS Web site to obtain tax-related information. Visitors’ most frequent activity on the site was downloading forms. Of those who visited, 75 percent found the site useful for the intended purpose while 9 percent did not.
   
   • Of the 58 percent who have a basis to judge, 31 percent assess the notices and correspondence they received from the IRS in the last three years to be clear and understandable; 23 percent did not.
   
   • While half of those who have a basis to judge think that IRS penalties levied in the last three years were justified, the other half did not. Still, considering all dealings with the IRS over that time frame, 53 percent of small-employer taxpayers give the IRS a satisfactory or better rating; 9 percent give the agency an unsatisfactory or worse rating.

Volume 6, Issue 6, 2006
ISSN 1534-8326

William J. Dennis, Jr.
NFIB Research Foundation

• 1Did you use a paid preparer or accountant to prepare your most recent federal tax return on business income?
• 1aWhich best describes the principal reason you used a preparer or accountant?
• 2Did you use a paid preparer or accountant to prepare your most recent state tax return on business income?
• 3Do you typically consult a tax professional prior to making a major financial decision for the business to determine its tax implications?
• 4A(tax provisions) Method of tax accounting.
• 4B(tax provisions) Depreciation.
• 4C(tax provisions) Expensing.
• 4D(tax provisions) Alternative Minimum Tax (AMT).
• 4E(tax provisions) Home-office deduction rules.
• 4F(tax provisions) Pension plans/Profit-sharing.
• 4G(tax provisions) Capital gains and losses.
• 4H(tax provisions) Passive activity rules.
• 4I(tax provisions) Employment/Payroll taxes.
• 4J(tax provisions) Independent contractor rules.
• 4K(tax provisions) Estate and gift tax rules.
• 4L(tax provisions) Business entertainment rules.
• 4M(tax provisions) R & D credit.
• 4N(tax provisions) Rules on amounts subject to self-employment tax.
• 4O(tax provisions) Your state’s sales tax rules.
• 4P(tax provisions) Corporate dividends.
• 5Over the last three years, have you attempted to obtain tax-related information from the IRS Web site?
• 5aA(visited IRS Web site) Download tax forms.
• 5aB(visited IRS Web site) Obtain instructions about completing a particular tax form.
• 5aC(visited IRS Web site) Understand a particular part of the federal tax.
• 5aD(visited IRS Web site) Obtain electronic filing instructions.
• 5aE(visited IRS Web site) Learn about filing requirement issues, such as who must file, when, etc.
• 5aF(visited IRS Web site) Locate general information on penalties, notices, discrepancies, etc.
• 5bConsidering the tax-related information you wanted and the tax-related information you found, did you find the IRS Web site very useful, somewhat useful, so-so, not very useful, not at all useful?
• 6Over the last three years, have you used IRS’s toll-free telephone number to request tax-related information?
• 6aConsidering the tax-related information you wanted and the tax-related information you found, did you find the IRS toll-free number very useful, somewhat useful, so-so, not very useful, not at all useful?
• 7As a general rule, would you like to have your business’s tax deposit and payment records on-line to determine if your tax records match the IRS’s? The information would be password protected. Do you hold that view strongly or not so strongly?
• 8Would you strongly agree, agree, neither agree nor disagree, disagree, or strongly disagree that in the last three years IRS notices and other correspondence have been clear and understandable. If you have no basis to judge, just say so.
• 9Would you strongly agree, agree, neither agree nor disagree, disagree, or strongly disagree that in the last three years the IRS distributed refunds in a timely manner. If you have no basis to judge, just say so.
• 10Would you strongly agree, agree, neither agree nor disagree, disagree, or strongly disagree that in the last three years IRS penalties levied were justified. If you have no basis to judge, just say so.
• 11Consider any and all dealings you have had with the IRS over the last three years. Have they been very satisfactory, generally satisfactory, neither satisfactory nor unsatisfactory, generally unsatisfactory, or very unsatisfactory. If you have no basis to judge, just say so.
• 12What is your legal form of business. Is it a:?