Do Small Businesses Underpay Taxes?

As a small business operator I look forward to the tax breaks. But do small business tax breaks add up and harm the US economy? Let me begin by discussing how Americans feel about small businesses. Then I will explore briefly how small business may negatively add to the US debt. Finally, I will pose and answer the question - is there anything that can solve the problem?

Most Americans feel strongly in favor of small business. Many of us or those close to us have been involved in starting small businesses, and would like to see that area of the economy grow stronger. According to the Federal Reserve Bank of Kansas City's Economic Review, "economic development experts...are relying on building businesses from the ground up...develop[ing] and support[ing] entrepreneurs and small businesses." (http://www.kc.frb.org/publicat/econrev/PDF/2q07edmi.pdf)


But how much could small businesses be held responsible for the US annual deficit? According to Scott Shane of Businessweek, four times more than large businesses! "The IRS estimates (PDF) that $179 billion annually in unpaid federal taxes comes from individuals underreporting business income on their personal returns from what are known as pass-through entities and underpayment of self-employment tax. We could eliminate 16 percent of the budget deficit if this subset of American taxpayers paid all the taxes they owe. Congress couldn’t raise this kind of money by going after big corporations. The IRS estimates that underreporting by large corporations (those with more than $10 million in assets) amounted to $48 billion in 2006, the latest year for which data are available." (http://www.businessweek.com/articles/2012-10-09/why-small-businesses-wont-stop-underpaying-taxes#r=hpt-ls)

Is there anything we can do to solve this issue? "IRS tax advocate Nina Olson told Congress in 2006 that most underpayment in general comes from taxpayer error. That means underpayment of taxes can’t be cut substantially without fixing our complicated tax system." (http://www.businessweek.com/articles/2012-10-09/why-small-businesses-wont-stop-underpaying-taxes#r=hpt-ls)

In conclusion, Americans favor small business, small business owners could help reduce the deficit by paying taxes fully, but small business owners cannot truly be blamed when the tax system is so complicated and flawed.