Election season or not, you can always depend on politicians to talk about how important small businesses are to the economy. Ironically, it's these same politicians who often pass legislation that makes it harder and more costly to do business. In New York, for example, businesses are scrambling to comply with the Wage Theft Prevention Act (for more on this insane burden on businesses see this recent article). But what I am about to tell you is despicable because it is hurting small businesses without passing a single law. And it isn't getting media attention either.
Over the past four months, several CPAs have told me (without mentioning names) about their clients going through tax audits. Now tax audits are nothing new and they should have the legitimate purpose of finding omissions, mistakes or fraud by taxpayers; however, these CPAs have told me auditors are not just looking for fraud and mistakes. They are looking for revenue. That revenue will come in the form of fees paid by honest taxpayers who have already paid all taxes that are due.
I am a former CPA and had the experience of assisting some of my clients through the audit process in the early-to-mid-90s. Sure, I saw plenty of auditors that made our lives miserable because they didn't know accounting or tax laws (which resulted in more professional fees for my client while we educated the auditor). I remember only one instance when an auditor hinted that they were looking for a particular dollar amount in the form of taxes, interest and penalties to make the case go away. Auditors know that the process of being audited costs the taxpayers fees from accountants and sometimes attorneys. And they know that ultimately, a taxpayer has to make a decision by weighing a tax assessment against the cost of professional fees, time and aggravation.
The CPAs I spoke with tell me that this is now the norm and it is much worse than it was several years ago. And, I am told, this is not just an IRS issue. The state tax auditors (with New York mentioned in particular), I am told, are equally as abusive.
What does this surge in incidents really mean? These are not just rogue auditors on a power trip. They are being told to shake down taxpayers to generate revenue. My feeling is they are being told to do so by the same people who are always citing the virtues of small business. Big businesses have internal "tax controversies" specialists who can fight unjustified assessments. Small businesses often have no choice but to pay as the cost of fighting, together with the uncertainty of the outcome, is prohibitive. To government, small businesses are an easy target for revenue because of the cost of fighting back.