The small business tax package is back in the news. What we heard yesterday — confirmed by press reports this morning — is that the four top tax writers (Baucus, Rangel, Grassley, and McCrery) have tentatively agreed to a $5 billion package (over 10 years) of provisions to help small and closely held businesses offset the higher labor costs of a minimum wage increase. Staff for those members are busy filling out the details of what will go into the $5 billion pot and how that revenue impact will be offset. According to CongressDaily:

    “Both Rangel and Baucus said Thursday they believe they can resolve differences over the tax provisions in time for them to be included in the supplemental conference report and sent to the president. Democratic leaders are aiming to conclude work on the conference report by the end of next week.”

As S-Corp readers know, the Senate-passed version included an entire title of improvements to the rules governing S corporations. Early reports are the House is pushing hard against including some or all of those provisions. We’ve been working with our friends on the Hill and allies outside the beltway to encourage the House to accept these necessary improvements. Provisions in question include S-Corp priorities like:

  • Sting Tax relief;
  • Allowing Non-Resident Aliens to be S- Corp Shareholders (through a Small Business Trust); and
  • Leveling the treatment of debt for Small Business Trusts.

ALERT! Call your Congressman or Senator and let them know of the critical role S corporations play in the economy and ask them to support the Senate S corporation tax package. These decisions are being made right now, so time is of the essence.

Another Tax Gap Report, Another Tax Gap Hearing

Meanwhile, the GAO released its own “tax gap” study yesterday, and topping their list of sources for the tax gap are “Income and Losses from Partnerships and S Corporations.” This review, requested by Senators Baucus and Grassley, is an analysis of the IRS National Research Program (aka Tax Gap Study) and provides the GAO’s assessment of where enforcement and compliance resources could be best put to use.

In addition, we’re hearing that the House Small Business Committee will be holding a Tax Gap hearing next Thursday, April 26th. While the witness list is still being put together, we expect a representative from the Coalition for Fairness in Tax Compliance will be testifying.

According to the GAO, net misreporting of income and losses from Partnerships and S Corporations is an estimated 18 percent of their total, amounting to $22 billion in annual underpayments, or 11 percent of the total underpayments within individual income.

What is the effect of this report? Hard to say. The Tax Gap issue is already front and center. As we have said previously, the S Corporation Association does support tax avoidance. On the other hand, the focus on the Tax Gap needs to recognize the inherent limitations of our voluntary compliance tax collection system, and the fact that we already have one of the highest compliance rates in the world. As Secretary Paulson testified earlier this week:

    “Some have suggested that far more expansive proposals should be put forward. Most of these proposals would require steps that I would not recommend because they are bad tax policy and would be unnecessarily painful, expensive, and time-consuming for taxpayers - for example, requiring individuals to file 1099’s reporting their transactions with service providers, such as their doctor, auto mechanic, and dry cleaner; eliminating cash transactions in favor of electronic transactions, with card issuers and banks providing statements to the IRS so the payments can be matched with a business’s reported income; or doubling or tripling the number of IRS agents and audits. In theory, each of these measures could bring in some additional revenue, but the cost of compliance for individuals and businesses - most of whom already pay what they owe - would far outweigh the gains. In many cases, such measures would also raise privacy concerns due to the government’s heavier focus on the daily transactions in each of our lives.”